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By Alison Buckholtz

When economist Laura Alfaro joined Costa Rica’s government after the global financial crisis, she thought she was grappling with the worst fiscal event of her lifetime.  Then came COVID-19.  Now, as the pandemic takes hold in Latin America, the Harvard Business School professor shares her views on what Latin America can do to speed its recovery, how to think about uncertainty, and why the next generation of business leaders will be more adaptable than the last.

Q: You were Minister of National Planning and Economic Policy in Costa Rica from 2010 to 2012, immediately following the global financial crisis. Do you see similarities between that period and today’s COVID-19-induced economic crisis in Latin America?

A: When I joined the government in 2010, the global financial crisis was severe. But in Latin America and Costa Rica in particular, we had a lot more fiscal space in the sense that our debt levels were lower. We had the capacity to react. In fact, most emerging markets had relatively low debt at that time, because of the emerging market crisis of the 1990s and early 2000s.  Sadly, many policies turned out to be permanent and not temporary, hampering the capacity to react now.

This time around, however, many countries, especially in Latin America, are facing this crisis with very little fiscal capacity.  So that’s an important difference that will affect how this plays out.  A second one is that this crisis is affecting all countries: rich, emerging, poor.  During the global financial crisis, emerging markets rebounded quickly. There are no obvious countries that will push the recovery for any subset of countries or regions.


Q: How should Latin American governments care for their vulnerable populations, especially workers in the informal sector, as the crisis continues?

A: We need to pay special attention to Latin America’s vulnerable populations in this crisis and what will follow, because many of these countries have very high informal sectors. Economic policies should reflect that, and spending has to be targeted to be effective. But there is a concern that we may not have a lot of fiscal capacity due to high debt levels and perhaps also a lack of institutional capacity to deliver.

Although the situation in Latin America is very heterogenous, in some of these countries there is some minimum guaranteed income. This is an advantage because institutionally, the channels to deliver income are already established—as in Brazil, where people can get a bank transfer or collect the income somewhere else. I see this as a positive policy, and many countries have expanded these programs.

What is perhaps more complicated and worrisome is the delivery of health services; how governments deliver health services in a time of crisis is a pressing concern. This was a constraint even before COVID-19 and talk of an economic crisis.  There is an especially significant divide between how urban and rural people receive healthcare, all throughout Latin America. This is where we're going to have to pay more attention.

Q: Although Latin America is very diverse, how might COVID-19-induced economic contractions in Latin America be different from those in other emerging markets around the world?

A: Latin America’s diversity presents many different scenarios. In Mexico, which is very intertwined with the U.S. economy, there’s a joke that if the U.S. sneezes, Mexico catches a cold. In this case, severe economic hardship in the U.S. due to the virus will have a forceful direct negative effect on Mexico. It will be challenging for Mexico’s economy to recover quickly if in addition trade, capital flows, and even migration flows are severely curtailed. The implications of a Mexico that is very dependent on the U.S. are also true for most of Central American countries. However, as you go farther south, countries become relatively more diversified in terms of trade partners. Going forward, to insure supply chains are not disrupted by shocks, further attention needs to be paid to diversification of suppliers and markets.

There are opportunities in Latin America right now, too—such as increasing regional integration, a goal that has always been on the agenda, but has not been implemented. Right now, it’s hard to see countries moving toward this goal because governments are so concerned with their own domestic situation. But maybe in the near future, this could be on the agenda along with the infrastructure projects required to materialize further regional integration.

Q: What should Latin American governments be doing to attract more private investment and speed up the recovery?

A: Right now, the priority should be to provide liquidity to firms in order to prevent massive bankruptcies and unemployment and take care of the most vulnerable. No one in Latin America should be allowed to starve due to the pandemic.  The private sector has a key role to play in the production and distribution of basic products like food, cleaning products, health supplies.  The better we deal with the pandemic, in terms of protecting firms and workers and those out of work, the better positioned we will be for recovery.  Latin America does not have the luxury to waste resources.

Q: Does Latin America need the private sector for its recovery more than it did before this crisis? Where are the greatest opportunities for private investment?

A: Latin America has always needed the private sector. But now that the pandemic is fueling fiscal deficits everywhere, there will be even greater need for private investment. Countries will come out of this crisis with heavy debt burdens, even those that entered this period with relatively lower debts levels and higher fiscal space.

One key area for investment will be infrastructure, which was lagging even before the crisis in many countries in the region. Strategic infrastructure projects will not be able to be undertaken quickly and efficiently without the government.  The governments that embrace the private sector and coordinate via partnerships are the ones that are going to be able to emerge stronger from this crisis.

Q: As an economist, how do you grapple with such pervasive uncertainty?

A: We economists tend to think more long-term, and we look at the general equilibrium. Perhaps that approach to this crisis is both a blessing and a curse.  When we connect the dots of this particular situation and its consequences, we can see that this is going to be a very harsh crisis. In the classes I teach, we talk about John Maynard Keynes’ ideas on risk, which is a conversation that’s important when there is great uncertainty. The bottom line is, when people are living in uncertain times, they do less, invest less, and save more. This changes patterns of spending, and it has grave long-term implications on businesses and industries.

Q: You mentioned your students. Is it challenging to teach through the pandemic? What’s the most important lesson you want to convey to your business school classes?

A: At Harvard Business School we use the case method—we put our students in a situation and provide them certain information, then discuss directions to take from there and update decisions as more or better information becomes available. I have found that method is particularly useful for this type of situation. I think we're all taking this one day at a time but trying to find as much information as we can. In that sense, I think our method has helped them.

I have also asked them to think about the role of government and the private sector, where we learn the lesson that leadership matters. I know that's a line that is used a lot. But we see how this is playing out in different countries, states, municipalities [and it’s clear that] leadership matters. I do hope the current crisis also highlights the role of knowledge and science.

Q: How will the pandemic shape the next generation of political and business leaders?

A: I think this generation is going to be creative, ingenious, and flexible. They're going to learn how to adapt, because they have no other choice. But these are great traits….If you look at history, after the Great Depression, or even the global financial crisis, better ideas came out of these periods because there was less cash and resources to invest. We are going to see structural changes and new round of ideas and inventions, and I think this generation of students will be up to the challenge.

Published in April 2020