Rare Macroeconomic Disasters and Lost Decades in Latin America: The COVID-19 Experience in a Historical Context

Abstract

COVID-19 led to the single largest year-over-year decline in Latin America’s GDP per capita in more than 100 years. Although the region has endured several macroeconomic shocks before, mostly related to financial dislocations, none has been so deep and synchronized. The authors' analysis of the COVID-19 experience for the region and eight economies with available historical data reveals the extent of the damage. Through 2020, four economies suffered “rare disasters” (cumulative contractions by 10 percent or more): Argentina, Mexico, Peru, and Venezuela. Tragically, Venezuela’s macroeconomic collapse matches the largest contraction registered by any country in modern history. In addition, Argentina, Brazil, Mexico, and Venezuela, together with the Latin America regional aggregate, are undergoing “lost decades” (prolonged periods of stagnation), which are unlikely to end soon. While Brazil, Chile, Colombia, and Uruguay did relatively better with COVID-19, they still suffered significant recessions, and their economic performance has lost steam compared with prior decades. Overall, COVID-19 will cast a long shadow in Latin America even as economic growth rebounds. The shock also offers opportunities for a reset, with the appropriate set of macroeconomic policies, advances on microeconomic reforms, and the strengthening of institutions. Whether this set of policies will materialize in the midst of challenging political contexts remains an open question.

Keywords: Rare macroeconomic disasters, economic history of Latin America, COVID-19, lost decades, long-run growth

JEL Classification: F43, O47, N16