Covid scenarios for LatAm & the Caribbean and their valuable wider lessons
- In a major new scenario exercise, the IDB and Atlantic Council set out three plausible futures for LatAm in 2025
- Aspects of the scenarios, like ‘smouldering Covid’, wider local government roles, regional trade, are relevant across EM
- They also show that Covid’s lasting impact may come more from how it transforms society, than from the virus itself
Latin America and the Caribbean (or LAC) has suffered terribly from Covid. Not only has the health impact been tragic, but the pandemic has also exposed serious weaknesses in the already fragile growth models of many countries in the region, leaving it with the most extreme economic growth impact from Covid of any part of the world in 2020. Indeed, as of January 2021, 63% of IMF Covid Response lending went to LAC.
Figure 1: Latin America and the Caribbean suffered more economically in 2020 than any other region
LAC also lags in the Tellimer Readiness for Reopening Index, which identifies those countries that are best, and worst, placed for reopening.
Figure 2: LAC stands out as particularly ill-prepared for economic reopening (Note: This data was last updated on 16 April 2021, so India's readiness score will have declined substantially)
Against this backdrop, the Inter-American Development Bank (IDB) and the Atlantic Council, with methodology support from my consulting colleagues at NormannPartners, has developed a set of three scenarios for LAC’s post-Covid future in 2025. Or, rather, three scenarios for 2025, only two of which are really a post-Covid future. Not only do these scenarios explore how Covid may transform LAC, but they also highlight important factors, both risks and opportunities, that will shape the post-Covid future of other regions.
A brief introduction to scenario planning
In a scenario planning context, scenarios are not forecasts or predictions with probabilities attached. Rather than try to determine what will happen, in the certainty that the future will in some way be different to the forecast, scenario planning seeks to use a set of scenarios to map the range of plausible futures, capturing many of the things that may happen to inform present choice.
Using scenarios as a basis for strategy or planning helps to ensure that the strategy is more robust against a range of possible futures, rather than highly optimised against a single, supposedly most probable future. Consider a mountaineer heading off for an expedition. Although she will use a weather forecast to plan her route, many of the things in her backpack will be chosen to guard against the range of conditions that she may (but is by no means certain to) encounter in the mountains. When one strategizes, whether as an investor, a corporate planner or a policymaker, one’s strategy is the backpack, and scenarios help us to understand what one might encounter and thereby choose what to bring. In this sense, scenarios work as a set of possible alternatives for which it is wise to prepare. When packing your backpack, it’s not useful just to know that there might be rain and crags, you need to know the full range of weather and terrain that you might encounter and bring the relevant gear.
To be useful, the scenarios have memorable names, here Covid’s Lasting Toll, Regionalisms on the Rise and The Great Divide.
Scenario 1: Covid’s Lasting Toll
The first of the three scenarios shows us a world in 2025 where Covid has left a lasting toll on LAC, as much for its socio-political impacts as its impact on health. In this world, the virus is contained, but slow and uneven vaccine rollouts mean that many countries are only able to lift social distancing measures in 2023 and 2024. This prolonged period of economic distress and social dislocation drives a rise in both migration and crime, particularly evident in the proliferating activities of criminal gangs. In some cases, especially in slums and remote rural areas, criminal gangs have usurped the government to provide services directly, enabling them to build popular legitimacy. In others, local governments, lacking adequate resources to cope with the virus, feel that they have no choice but to enter into Faustian bargains with criminal gangs, which they find difficult to exit as the virus wanes.
This tacit acceptance of criminal gangs, combined with corruption surrounding the government’s role responding to the pandemic and supporting the recovery, initially leads to widespread protests. These are stopped as the public loses interest and many governments realise that digital tools of surveillance to control the virus and avoid disinformation about Covid could also be used to monitor the population and censor both traditional and social media.
There are economic bright spots, however. The region benefits from reshoring and nearshoring, and FDI recovers as countries are able to declare themselves Covid-free. After the sharp economic contraction, LAC economies seek, and receive, investment from both the US and China, although Chinese efforts to support some governments to digitise health systems, including building digital identities, are met with concerns about privacy and control.
Scenario 2: Regionalisms on the Rise
This is the story of two regionalisms, domestic and international. Within countries, some regional and local governments shine, responding faster and more dynamically to Covid than central governments, including by leveraging relationships with business and civil society. Internationally, Covid accelerates an inward turn in the US and China, leading LAC countries to focus on regional markets and regional trade. This a world in which LAC falls down the agenda of a “neglectful” US and China, leading to a focus on local actors working together to find solutions in an increasingly “frugal” economy. Local stakeholder engagement becomes a necessity for successfully delivering public policy goals, and digital tools allow communities to organise at a local level. Some highly skilled emigres return to LAC, presumably settling in the most effectively run and prosperous localities, while telecommuting back to North America during working hours.
International neglect drives interregional integration. While vaccines ultimately arrive in LAC, the rollout of vaccines is highly unequal. LAC countries work together to develop regional manufacturing capacity for vaccines and other critical medical supplies, a step towards the vaccine self-sufficiency that I expect many EMs to pursue. Governments work together to facilitate interregional trade. Some LAC producers focus on moving into higher-value products and services, while others concentrate on low-value import substitution. Meanwhile, nearshoring supports manufacturing in the region, benefiting LAC markets as well as North America.
Scenario 3: The Great Divide
The Great Divide paints a future that is entirely plausible and, in my view, does not receive the attention it deserves among investors or policymakers. In this scenario, we are in 2025, but not in a post-Covid world. The combination of uneven vaccine rollouts and rapid mutation of the virus means that Covid remains a global epidemic, if not the pandemic that it was in 2021. In LAC, the unevenness of the vaccine roll-out can be attributed to financing and government capacity problems, but one can easily imagine that reticence among certain groups (even in developed markets) also hampers the roll-out. Countries that have successfully contained the virus bolt the door. Those that are on the cusp of containing it channel all their resources into their own economies, reducing resources available for international cooperation. Meanwhile, as Covid continues to smoulder and occasionally catch alight in emerging markets, the wealthy retreat into enclaves of the vaccinated: the ubiquitous gated communities become gated bubbles, aggravating socioeconomic division.
Failure to contain the virus leads to another global recession in 2021-22, in which many emerging markets, especially in LAC, fare particularly poorly. Sovereign defaults and restructurings accelerate as public finances deteriorate. Governments are forced to prematurely withdraw fiscal support, exacerbating inequality and driving defaults in the corporate sector. Without adequate economic resources, the economies of LAC are forced to look for outside support, with a dichotomy emerging between South America, which gravitates into China’s orbit, and Mexico, Central America and the Caribbean, which look to the US. Vaccine and health “diplomacy” play a crucial role in building China’s influence, while the US doubles down on supporting regional prosperity, which also helps to counter rising migration.
Themes for the post-Covid world
These scenarios paint three very different pictures of LAC in 2025, and they also highlight several themes with global relevance. I’d like to highlight five.
1. Governments will be challenged to cede power, and how they respond is key
As an experienced scenario practitioner – I started my career in the scenario planning team at Shell and now do scenario-based strategy projects with public and private sector clients globally – I know methodologically that it is problematic to favour a particular scenario: they all are valuable, and they work together as a set to map the future. Any future has aspects of light and shadow, and my perspective will be different from that of a farmer in Mexico, a banker in Argentina, a gang member in Tegucigalpa or a government minister in Brazil. Nevertheless, there is no question that I personally feel that a world, like Regionalisms on the Rise, where governments are open to new actors solving problems in new ways, is worth striving for. So how do we get there?
The key seems to be in how countries choose to respond to the inevitable challenges that governments face, and will continue to face, in responding to Covid. Will those challenges fundamentally overwhelm them, as in The Great Divide? If not, will they have the courage to allow society to explore multiple solutions, as in Regionalisms on the Rise? Or will they see a diffusion of power as a loss of power and crack down, as in Covid’s Lasting Toll? LAC is not the only region facing these challenges: Africa faces many of the same dilemmas.
2. ‘Smouldering Covid’ in emerging markets is a real risk, and it may come to some developed markets, too
Investors (and policymakers) need to give serious attention to the possibility that we could end up in The Great Divide scenario. Indeed, Dr Matshidiso Moeti, the WHO Regional Director for Africa, expects smouldering Covid for the next several years. So far, these multiple speeds of controlling the virus have led to a fragmented travel landscape, but if fears of vaccine-resistant strains prove justified, more and more countries will follow the lead of Australia and New Zealand and cut themselves off completely from the wider world. Imagine the political ramifications if the UK were forced into another national lockdown because the government was too slow to stop new variants being imported from India.
As the IDB’s scenarios show, in this world migration will accelerate as doors are closing, leading to tremendous international tension. Moreover, we need to be conscious of the possibility that even some developed markets may not be able to control the virus and close the doors in time, leaving them perpetually exposed to smouldering Covid.
3. Self-reliance, both collective and individual, will have new value
In all of these scenarios, self-reliance in the face of central governments that fail to deliver gains new salience. Self-reliance can drive positive change, as in Regionalisms on the Rise where it takes the form of greater local autonomy and regional partners working together to develop vaccines. But self-reliance plays a major, and darker, role in the other two scenarios, as the wealthy insulate themselves from wider society and many youths, lacking economic prospects and seeking health, choose to migrate.
4. The global trade rebound may not last
Global trade has recovered much faster than many expected, with container rates spiking. While Ever Given, the ship stuck in the Suez Canal, played a short-term role, the economic recovery is the real driver. These scenarios show that may not last, and perhaps not for the reasons that many would expect. Another recession, as in The Great Divide, would clobber trade, but the more intriguing possibility is a refiguring of global trade patterns, continuing the fall in global value chains as a share of total trade that we have seen over the last decade. We see this in both COVID’s Lasting Toll, where nearshoring by US multinationals shifts production from Asia to LAC, and in Regionalisms on the Rise, where nearshoring is complemented by intra-regional and sub-regional economic integration.
5. Data gathering and surveillance, not masks and lockdowns, are the Covid threat to civil liberties
Being from the fiercely libertarian state of Texas, I am unsurprised by the backlash against masks and lockdowns, even though I personally disagree. But this concern is misguided – the real risk to civil liberty comes from the tremendous proliferation of digital tools, both for tracking the virus and for living our private and professional lives. Not only has Covid expanded the role of state-backed digital tools, with the opportunity for enhanced surveillance and control that we see in Covid’s Lasting Toll, but it has also driven digitisation of existing public services that mean that the most vulnerable, like the unbanked trying to access social benefits in The Great Divide must move online. Unfortunately, the most vulnerable can find themselves forced into using the least protected digital services.
Finally, in many countries, infrastructure will be a core part of post-Covid stimulus, whether domestically funded as in the US or donor-driven as in LAC, and 5G will be a major element of that infrastructure push. With tech as the primary battlefield of US-China conflict, questions will be raised not only about the power that ubiquitous 5G and data tracking gives governments, but also the power that it gives the US or Chinese sponsors of that infrastructure.
Disclosure: Although I did not work on this project, in addition to my role as a Senior Associate at Tellimer and my independent strategy and growth consulting, I am also a Senior Associate at NormannPartners, in which capacity I have worked on other scenario planning projects for the Inter-American Development Bank. This report is based entirely on publicly available information.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...