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Snail-pace politics: The difficult road for reforms in Latin America | Analyst Picks| RiskMap 2021

Latin America

Snail-pace politics: The difficult road for reforms in Latin America

Nicolas Urrutia | Senior Analyst

2021 will not be a year of major, business-friendly reforms in Latin America, even as countries attempt to attract new investments and accelerate economic recovery in the wake of the COVID-19 pandemic. The institutional limitations of weak governments that predated the global health crisis will be exacerbated by the continuing need to address the pandemic’s social and economic impacts. This does not mean that regulatory improvements enacted in recent years will be rolled back, or that no progress will be made across the region. But it will highlight, once again, the region’s difficulty in enacting reforms on key issues, such as streamlining social licensing or passing significant reductions to corporate tax rates.

The slow pace of reform has characterised the region’s regulatory environment in recent years. According to the World Bank, the Ease of Doing Business Index across Latin America’s six largest economies has made modest progress between 2018 and 2020. Chile's index has only risen by 0.6 points, while Mexico has regressed by 0.1. Colombia and Peru have made modest progress (1.1-point increase), and Argentina has fared slightly better (1.7). Brazil’s index rose by 3.5 points, yet it remains well below other countries in the overall index. In the meantime, China’s index rose by 12.7 points, the Philippines by 3.5 and Israel by 2.4.

Two political factors are likely to sustain this trend of slow reforms in 2021. First, most Latin American presidents find themselves struggling with low approval ratings and limited congressional support, which reduces their ability to pursue ambitious changes. In Brazil President Jair Bolsonaro´s confrontational style has alienated a large share of the public, and his handling of the COVID-19 crisis has exposed him to increasing criticism. Colombia’s Iván Duque is perceived as a lame duck despite having 19 months left in his term. Low levels of public and political support are also found in Chile and Argentina, and transition President Francisco Sagasti in Peru has stated that he lacks the time and mandate to purse major reforms prior to the end of his term in July 2021.

Second, the pandemic’s impact on Latin American economies has been devastating, which will absorb government resources and attention through most of next year. Perú’s GDP is projected to shrink by 12% in 2020, Colombia’s unemployment rate reached 20% in July, and Mexico’s limited response to contain the virus has fuelled growing criticism of President Manuel López Obrador. The region’s governments will have to devote the lion’s share of their efforts in 2021 to facilitate economic recovery without angering their constituents, in a delicate balancing act that is likely to exclude necessary but unpopular reforms on issues such as labour flexibility, entitlement reductions and prior consultations for extractive projects.

 

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