Reforms Needed in Latin America to Avert Damage from Pandemic

Latin America

BARRANQUILLA, Colombia – The nations of Latin America and the Caribbean “urgently need” fiscal reforms to lay the basis for a sustainable recovery from the COVID-19 pandemic, the Inter-American Development Bank (IDB) says in a report presented on Saturday.

“We will come out of this crisis poorer, more indebted and with economies that will have a very different format in terms of their productive structures,” IDB Chief Economist Eric Parrado said during the annual meeting of the institution’s board of governors, being held virtually in the Colombian city of Barranquilla.

In its macroeconomic report, the IDB lays out a baseline scenario that calls for growth of 4.1 percent in 2021 following last year’s worst-in-two-centuries contraction of 7.4 percent.

The rate of expansion is expected to revert to 2.5 percent in 2022 and to remain at that level going forward, absent significant structural change in the region.

Under the IDB’s negative scenario, which assumes slower growth in the United States and Europe and a protracted health crisis due to COVID-19, Latin America and Caribbean could see growth of just 0.8 percent this year, followed by a decline of 1.1 percent in 2022.

The report also envisions a positive with growth at a comparably torrid pace of 5.2 percent in 2021 and 3.9 percent next year.

“Latin America and the Caribbean has a narrow but clear path to emerge stronger from the pandemic and social shocks of recent years,” Parrado said.

“Healthy fiscal systems can help us unlock our potential, by leveraging the reallocation of resources across sectors to drive productivity growth, promote formal employment, and achieve a greener future that defies the false dichotomy of economic growth and environmental sustainability,” the IDB’s top economist said.

The report mentions a number of ideas that have been discussed in various roundtables during the five-day annual meeting, which began on Wednesday.

“To grow more vigorously the region needs to enact a series of reforms to improve productivity, help connect firms to global value chains, embrace the digital economy and promote job creation in an inclusive, sustainable, and resilient way,” the report says.

The pandemic is far from over in Latin America, where coronavirus has claimed 700,000 lives – 290,000 in Brazil alone – and infected more than 22 million people.

Several countries in the region are struggling with a second wave of contagion and with the notable exception of Chile, the pace of vaccination is slow.

The vast outlays of public money to address the pandemic and its economic impact caused the overall regional fiscal deficit to more than double, from 3 percent of gross domestic product in 2019 to 8.3 percent last year, the IDB report notes.

Total public debt climbed from 58 percent of GDP to 72 percent.

“Given the fiscal challenges and high debt levels, improving fiscal institutions should be a high priority,” IDB Principal Adviser Andrew Powell said. “Stronger institutions would enhance credibility and allow for a more gradual adjustment with lower interest rates to ensure debt sustainability.”

Latin American and Caribbean governments spent roughly 8.5 percent of GDP on pandemic response, while advanced economies laid out more than 19 percent on average.

Employment across 12 countries in the region remained down by 15 million positions last month compared with the pre-pandemic level.

And IDB estimates that the proportion of the region’s more than 650 million people living in extreme poverty has grown from 12.1 percent to 14.6 percent.

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