Covid-19 is rapidly turning Latin America irrelevant to Global Value Chains. First, because the region -with the notable exception of Mexico- did not enter into the productivity and technology competition vis-à-vis Asian economies early on. Second, structural limitations in infrastructure, institutional enabling conditions and human capital lingering since the early 1990s have worsened under the pandemic. Simply put, Latin American participation in GVCs is uneven and domestic creation of value added for this GVCs are meagre to say the least. The region continues to participate in global supply chains being an effective supplier of raw materials upstream in the line, but few countries in the region have become global innovators within the network. And this is the central concern about the future of Latin American production post Covid-19. In the midst of acrimonious pressures to reinstate protectionism and nationalize production and value chains, economic analysis have demonstrated that Just in Time (JIT) networks are not only more efficient but can build resilient economies in a future plagued with uncertainty and the threat of other black swan events, not only health-related like pandemics but also natural disasters resulted from climate change.
However, the difficult economic realities of the region pale in comparison to the tumultuous political environment. Saving Uruguay, Costa Rica and possibly Panama, there is no country in the subcontinent not waging a legitimacy crisis of sorts. Colombia and Chile -the two most tightly integrated to GVCs besides Mexico- are still struggling with pre-Covid-19 unsolved issues. Colombia is still debating the transitional justice scheme settled by the peace accords that ended the war against the guerrilla signed three years ago. Chile has not found peace after the national riots and protest against economic inequality that forced the conservative government of Sebastian Piñera to accept a Constitutional Assembly as the only way to calm social distress. However, the process has not yet started because of the pandemic so social unrest continues to be a Damocles sword over the current administration.
The two most important economies in the region have also followed different paths. In Mexico, the most leftist and progressive president in the last 50 years, Andrés López-Obrador, caved to Donald Trump’s ambitions not only about a new free trade agreement for North America but also on his demands to militarize Mexico’s southern border to stop Central American migration to the United States. It was his way of preventing a deeper slump in the economy during the pandemic that would had directly affected its production networks closely dependent on the United States, its main trading partner. On the other hand, Brazil´s lack of a coherent and early response to the pandemic had dire consequences for social welfare and directly impacted production recovery. President Jair Bolsonaro keeps flirting with Trumpist nationalist rhetoric which has created even more uncertainty for domestic and foreign investment alike.
The midyear assessment of the Economic Commission for Latin America (ECLAC) announced that more than 2.7 million formal companies will go bankrupt in the region because of Covid-19, leaving more than eight million people without formal employment. What is worse, high-tech manufacturing is among the sectors hardly hit by the crisis. For instance, the backbone of industrial manufacturing development in Latin America, the Automotive sector, registered a decrease of more than 30% of production across the board and in Argentina is as much as 40%. It is not difficult to anticipate repercussions for the future of manufacturing will be significant. Fewer demand means fewer factories and therefore, fewer creation of domestic value added that boost productivity and job creation in Latin America.
All in all, Latin America has three main challenges to reassert its participation in Global Value Chains after the pandemic.
- Economic policy coordination with businesses and productive stakeholders to build a smooth recovery path. There have been different indexes to evaluate the size and extent of the economic stimulus package provided by governments to boost economic recovery. The most cited to date, the Elgin, Basbug & Yalaman’s Economic Stimulus Index shows a scattered response across the region. In a rage from -4.5 to +4-5, Chile and Honduras show the best set of policies so far. But even so, their indexes barely reach 0.78 and 0.46 respectively when the average for most developed economies surpasses the 2.50 in general.
Source: Elgin, C., Basbug, G., Yalaman, A. (2020) Dataset
There are significant differences in the capacity of states to provide either fiscal or monetary support to their beleaguered business sector and little coordination with them on what to do next. Any successful reinsertion into world production networks needs coordination to create economies of scale that make the best of scarce resources and redistribute rents where it is mostly needed. Unless there is an intensive dialogue between entrepreneurs (large, medium, small), workers and organized civil society, governments will lack necessary information to adjust policies on the go. Unilateral decisions, fiscal straightjackets would only made recovery last longer and less competitive vis-à-vis countries that chose public-private coordination.
- Prioritize social investment to sustain human capital formation that provides a resilient and highly qualified labour force. The pandemic only highlighted the staggering level of inequality across the region. The countries that sailed unscathed by this reality were only the ones with a universal and somewhat equal social safety network, Uruguay, Costa Rica, Argentina. Most countries, however, did not have the minimum universal health coverage to guarantee equal access to attention and much less Intensive Care Units for the most affected by the infectious disease. Even the most macroeconomic prudent governments in Latin America that had the financial liquidity to wind the crisis could deliver appropriate services to the people in need in the absence of facilities, infrastructure and coverage in neglected neighbourhoods, villages and rural areas. Moreover, children remain destitute from basic education, early childhood education in the absence of internet penetration in vulnerable zones and lack of minimum technologies to maintain contact and support while the lockdown is in place.
- Innovation and investment attraction policies that capture all reshoring forces moving out of China or the United States, seizing the moment to create opportunities for regionalizing domestic value creation, missing from the first wave of global production networks that mainly concentrated around East and Southeast Asia. The reshoring of Global Value Chains has been trending for at least two years now, not only because of the tensions between China and the US. Risks like climate change and political instability have pressured companies to diversify their supply chain. Latin America has missed most of the opportunities in the last two years. According to the Asian Development Bank, 98% investment redirecting and most manufacturing reshoring went to Southeast Asia not to Latin America, even when the U.S. was the end market. Only Mexico got some of the new investments and a tiny fraction of that. The pandemic could be the last opportunity for Latin America to capture some of the investing that is looking for new places. Vietnam, Malaysia and Thailand are the countries that most benefit from the reshoring in the past months. Public-private efforts to attract companies divesting production have been successful. However, the key elements to click a country to GVCs is investment in human capital and logistical and digital infrastructure are keys. And, after the pandemic, investment attraction efforts could be futile in the absence of a proper national health system that can weather cathartic events like the novel coronavirus. Regional associations like the Pacific Alliance have the best chance to fight for a sizeable portion of the reshoring efforts, especially Peru and Chile that started the pandemic with a comfortable cushion of savings and international reserves.
Latin America could take the Covid-19 pandemic as an opportunity to re-think its development strategy and reassess its (dis)connection to Global Value Chains as a strategy for development and innovation of the future. The current pandemic has been a lesson to the risk of neglecting the environment, equitable development and linkages to global production networks. Latin America cannot miss the chance to correct its path to the future.