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Publication | 2023

From Infection to Inflation: Global crises hit hard poor households in Latin America and the Caribbean

Highlights:

Latin America and the Caribbean (LAC) have faced extraordinary challenges over the last three years that reverted the social gains of the previous two decades.

The COVID-19 pandemic resulted in severe health impacts and a reversal in many of its socio-economic gains.

A year after the onset of COVID-19, the region is bouncing back, yet not sufficiently fast to put the worst effects of the pandemic behind it.

Fiscal constraints have reduced ’governments’ capacity for public transfers (which helped mitigate some of the pandemic’s worst effects, especially in Brazil), while private remittances have also fallen. As a result, many poor households are struggling to meet their basic needs. Even though poverty was reduced in 2021, around ten million additional people remained impoverished. Moreover, the pandemic eroded their financial assets, leaving them less able to cope with shocks in the future – figure III-14. This situation contrasts with the experience of the richest quintile, who have bounced back quickly, enlarging the region’s already sizeable economic divide.

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The knock-on effects of global events have stymied LAC’s recovery in the early stages of the post-pandemic period. Russia’s invasion of Ukraine in early 2022 and its impact on international fuel and food prices have caused average inflation in the region to reach 8.9 percent (excluding Argentina) – figure IV-1.

This sharp rise in prices is hampering households’ purchasing power and causing employment quality (but not quantity) to remain below previously projected levels.

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Poor households are especially vulnerable in light of their experience of food insecurity and reduced savings during the pandemic – figure IV-2. While some benefit has come to net food-producer households from higher commodity prices, this has been offset (in part or in total) by higher input costs, notably fertilizers.

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At the same time, LAC countries have limited fiscal room for additional social programs. Poverty levels are subsequently forecast to hit 31.0 percent in 2022 (excluding Brazil), a rise of 1.3 percentage points on 2019 levels (equivalent to around eight million individuals) – figure IV-4. Inequality is also expected to grow, with a projected half-point rise in the Gini coefficient compared to the period prior to the Ukraine conflict.

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The weak economic outlook for 2023 will slightly improve employment and labor incomes, but poverty will remain above pre-pandemic levels (1.1 percentage points excluding Brazil and 0.1 percentage points including Brazil).

The rise of food and fuel prices is projected to have a disproportional impact on households at the bottom of the income distribution – figure IV-7.

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Despite the challenges ahead, the LAC region has the potential to overcome them in its traditional areas of comparative advantage and the opportunities arising from resilient green growth.