Politics, Economics, and Social and Labor-Related Strategies Vis-À-Vis Covid-19 in Latin America

On March 11, 2020, the World Health Organization declared Covid-19 to be a pandemic. Almost immediately, an unprecedented shock to both supply and demand began to sweep the planet, hitting first Europe and the developed countries, with Latin America not far behind. The novelty of Covid-19 and the nature of the virus (its transmissibility and the difficulty of detecting it) meant that prolonged lockdowns, border closures, and the shutting down of social, service, and industrial activities were governments’ main forms of response to the pandemic at all levels. In just a short time, global value chains collapsed, and household incomes and production inputs were reduced to a minimum. At almost exactly the same time, tourism in Spain and Italy ground to a halt, the shutters came down on coffee shops in London and theaters on Broadway, and silence fell on Germany’s powerful industries, maquilas in Mexico, and the factories that still surround large Latin American cities such as São Paulo and Buenos Aires.

Covid-19 brought tragedy, but its spread also makes it an exceptional social science laboratory for testing government responses to international phenomena that strike different parts of the world in tandem. Indeed, not since the Great Depression of the 1930s has the world experienced such a concentrated shock with such profound global consequences. As Peter Gourevitch (1986) argued in “The Second Image Reversed: The International Sources of Domestic Politics” (and later in his classic Politics in Hard Times), global events of this sort allow us to examine not so much how the international order is a consequence of the power play between particular nations, but rather how shared external shocks are refracted differently and affect domestic governance and distributive struggles in countries around the world to differing degrees.

The way in which international organizations and governments addressed (or refracted) the international spread of Covid-19 is being analyzed in three major interrelated areas of study within the social sciences: public health (Kavanagh et al., 2021; Dal et al., 2021; Bouey, 2020); governance (Testa et al., 2021; Bennouna et al., 2021; Calvo and Ventura, 2021; Nelson, 2021; Levy Yeyati and Sartorio, 2020), and from a socio-economic perspective (Cavallino and De Fiore, 2020; Blofield et al., 2021; Hancké et al., 2021; Beland et al., 2021; Lustig et al., 2021). Governments first had to instigate a health response that included trying to expand hospital infrastructure, source respirators, and later procure vaccines. Second, they had to find the institutional means for implementing social distancing and shutting down economic activity through decrees, parliamentary laws, or various kinds of negotiation between the executive power and different subnational levels of government. Finally, they had to counteract plummeting output through socioeconomic policies, be they broad-reaching monetary and fiscal stimulus packages or initiatives that specifically aimed to stabilize the labor market and the incomes of the most vulnerable.

This study focuses on the latter, that is, the public social and labor policies that essentially targeted individuals and companies to sustain employment and compensate for the income losses that were caused by the two-fold shock to supply and demand. Contemporary comparative political economy identifies two overall models of capitalism that operate in the core countries (Hall and Soskice, 2001; Thelen, 2014). In liberal market economies (LMEs) such as the US or Great Britain, firms, workers, financing, and job training operate within a competitive system marked by greater inequality. In the more egalitarian coordinated market economies (CMEs) of Continental Europe (e.g., Germany, Austria, and the Netherlands) and the Nordic countries, the principle of stable, collaborative coordination between companies, their representative associations, trade unions, and the financial and labor training systems prevails.

At first glance, the menu of social and labor policies to combat the effects of the pandemic in developed countries was similar in both of these types of economies and basically consisted of wage subsidies for employed workers, subsidized credit to companies, the strengthening of unemployment funds, and direct monetary transfers to the most vulnerable sectors. The crisis was on such a scale that even liberal countries that have traditionally been averse to direct intervention in the labor market, such as the US or Britain, implemented some type of direct wage subsidy, provided direct aid to companies (an approach that is patently anti-competitive, in theory), and increased innovative transfer policies to families. All the same, a particular type of labor strategy or approach to the COVID-19 crisis has predominated in each of the two models (Hassel and Thelen, 2020; Hancké et al., 2021). LMEs have opted to protect firms with preferential loans or direct subsidies, facilitating worker layoffs. At the same time, they strengthened unemployment benefits for the newly unemployed. CMEs, on the other hand, provided much greater protection for employed workers than firms themselves, essentially by regulating layoffs and subsidizing wages for existing jobs. However, despite these important differences, the overall repertoire of social and labor policies to combat the effects of the pandemic has been fairly similar among developed democracies.

Latin America’s models of capitalist organization are not as polarized as the coordinated and egalitarian models of the central countries. Instead, what predominates is a widespread capitalist model of a “hierarchical” type, in Schneider’s (2013) terms, based on the vertical organization of local and multinational economic groups, labor markets that are fragmented into a formal sector and a broader informal universe, and very narrow systems of entrepreneurial financing and technical/job training. However, despite the landscape in Latin America being more homogeneous (and unequal), our study argues that, paradoxically, the social and labor-related responses to the Covid-19 crisis in the region have been much more varied and diverse than in the core countries. There is no general policy framework that emphasizes one approach or the other, or how these should be implemented. Mexico, for example, has implemented almost no compensatory social and labor policies. It did not implement wage subsidy mechanisms or new programs for the informal sector and did not even make any significant changes to social programs that were already in place. At the other end of the spectrum, Argentina established a very comprehensive wage subsidy program for formal employment, made temporary adjustments to the cash transfer programs for the most vulnerable sectors of society that were established in the 2000s, and innovated through a new program to help the self-employed and informal workers. The countries between these two extremes devised various mechanisms to support both formal and informal employment.

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