Upholding the Social Contract in Latin America and the Caribbean

September 30, 2020

By Andrés Cadena

Latin America has been one of the most impacted regions by the COVID-19 pandemic in the world. According to recent McKinsey estimates, Latin America and the Caribbean accounted for almost a third of global COVID-19 cases, followed closely by the United States and Canada.

COVID-19 is first and foremost a global humanitarian crisis that threatens both our lives and our livelihoods. More than 33 million cases and 1 million deaths have been confirmed so far, while the global economy will likely face its toughest challenges since World War II. This outlook could be especially severe for regions like Latin America, where economies are characterized by high levels of inequality and informality (could this be explained a bit better - what do we mean by informality). Informality means that approximately 90% of microenterprises in Latin America are “part of the informal economy.”

According to the United Nations Economic Commission for Latin America and the Caribbean ECLAC (or CEPAL in Spanish) the region might face a -9.1 percent fall in its GDP in 2020 due to the stagnation of economic activity (-9.4 percent in South America, -8.4 percent in Central America and México and -5.4 percent in the Caribbean). ECLAC forecasts that the unemployment rate in the region could reach 13 percent by the end of the current year, up from 8.1 percent in 2019, and that the number of people living in poverty could reach 230.9 million in 2020 (37 percent of the regional population). In other words, the continent could lose decades of progress in terms of income level and the wellbeing of its citizens.

Conditional Cash Transfer (CCT) Programs as a Solution

Poverty reduction is precisely one area where the region had achieved significant progress prior to COVID-19. A recent study highlights the steep reduction of absolute poverty as one of the big success stories in Latin America over the past two decades. This was achieved in large part due to an economic boom fueled by high commodity prices and the implementation of conditional cash transfer programs (CCT) across the region. Programs such as Oportunidades (later Progresa) in México, Bolsa Familia in Brazil and Familias in Acción in Colombia provided families with small cash transfers tied to preventive healthcare visits or school enrollment, among other programs. Ten years after Bolsa Familia started in Brazil, extreme poverty was reduced by half.

However, momentum has slowed in recent years, as the commodity boom faded and was replaced by sluggish growth. Many citizens remain in a fragile socioeconomic limbo - living just above the poverty line but struggling to meet basic household needs. Social mobility is still limited throughout the region and inequality remains high: Latin America is the most unequal region in the world, as defined by the Economic Commission for Latin America and the Caribbean. In other words, the region did far better in alleviating extreme poverty than in moving people into a solid middle class position. This vulnerability has made the pandemic particularly damaging for the region. The combined negative impact on public health and the economy is pushing many back to below the poverty line.

Today, as the region and the world face unparalleled economic duress, influential voices have made the case for rethinking social programs. Pope Francis hinted in this direction in his 2020 Easter address, in which he beckoned world leaders “to provide the means and resources needed to enable everyone to lead a dignified life.” Already many countries are experimenting with both temporary and permanent solutions to help mitigate the pandemic’s effects on the most vulnerable populations. One example is Ingreso Solidario in Colombia, a temporary program which was created in April 2020 to provide a basic income for more than 2.6 million homes during the pandemic and has now been extended through June 2021.

Lessons learned from the first generation of CCTs could help governments fine-tune and update these programs in terms of time-span, beneficiary requirements, program evaluation and an exit strategy that permits citizens to graduate from these programs, solidify their middle class position and continue their journey towards growth and development. Governments across the continent could also consider new, forward-thinking programs with specific deadlines that tie these cash transfers to new jobs focused on rebuilding and restarting national economies (in sectors like construction, infrastructure, housing, healthcare, and education, just to name a few). History provides some relevant examples, like the Works Program Administration created by U.S. President Franklin Roosevelt in 1935 to ease unemployment by creating jobs for workers in sectors like infrastructure, especially in public housing, hospitals, roads and bridges.

Citizens could also apply for temporary grants or unemployment insurance for a limited period of time. This could alleviate the pandemic’s effects on those who need it most, boost consumption and help energize national economies.

During the pandemic, most countries have promised stimulus packages of all shapes and sizes. To create the greatest long-term impact, the packages that are strategically targeted will likely prove most successful in upholding the social contract - the implicit relationship between individuals and institutions. Cash transfers are no silver bullet. Recovery will prove more sustainable if it includes a stronger focus and investment in digital capabilities and infrastructure that builds long-term productivity potential while also breaking down the digital divide. Investing in education and apprenticeship programs that expand future work force potential by providing learning to support the development of baseline competencies will likely be crucial.

Incredible sacrifices have been made and hardships endured during the COVID-19 pandemic. It is, to say the least, a global tragedy, both in terms of public health and economic development. However, crises shape human existence and can catalyze innovation. Now, leaders can seek to make sure their decisions help accelerate growth and bridge the gaps of inequality. The CCT programs have a strong legacy in the region and a renewed approach may open the door to broad-based prosperity and sustained progress through education and reskilling alternatives. There may be no better time than the present to upgrade these programs. If Latin America misses this opportunity, it could lose much more than a decade in terms of socioeconomic progress.


About the Author:


Andrés Cadena is Senior Partner at McKinsey Colombia. Andrés leads ESG/Reputation in the region and is also a senior member of the PUSH practice. He is a member of the MGI (McKinsey Global Institute) Board.




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