Author Information

Inter-American Development Bank

Date of Publication

2021 12:00 AM

Security Theme

Economic Stability

Keywords

srhreports, economicstability, Economic stability, financial stability, Latin America, Caribbean, fiscal policy, pandemic recovery, COVID-19, post-COVID economy, sustainable recovery, financial flows

Description

"The COVID-19 shock was a significant and traumatic crisis for Latin America and the Caribbean. The pandemic dealt the region what I previously described as a unprecedented triple sudden stop, with major simultaneous disruptions in human mobility, trade, and capital flows. This was immensely dangerous. As human mobility was paralyzed by lockdowns and fear of contagion, investments fell, and trade was upended, the triple sudden stop challenged the region like few things in the past. Undoing the damage it has caused will require astute policymaking, as well as discipline and creativity, in the months and years ahead. The 2021 edition of the IDB Latin American and Caribbean Macroeconomic Report identifies opportunities for policymakers to lead their economies out of this crisis and toward stronger, inclusive, and sustainable growth. This crisis began to unfold as countries were already facing a complex set of preexisting conditions, including low levels of productivity and simmering social discontent. Perhaps a fitting analogy to describe the situation would be that, in 2019, the region was flying with one broken engine. In 2020, its other engine also took a hit. The challenge we now face is to fly this aircraft to safety, rescue the passengers, and prepare for the necessary repairs. Getting the region back off the ground will require greater spending on healthcare, government transfers to the poor, and loans to struggling firms. Meanwhile, tax revenues have plummeted due to unemployment and a drop in consumption, and fiscal balances and public debt have deteriorated considerably since the 2008/09 global financial crisis. Against this backdrop, public outlays and stimulus will be extremely difficult to achieve. One lesson from previous crises is that this is not the time to turn inward and erect barriers. Instead, the region must seek greater integration through stronger trade agreements and the removal of obstacles such as excessive customs controls at borders, which harm the free flow of goods and services just when it is most needed. It is time to tap the opportunities provided by a better, smarter integration into global and regional value chains. It is also time to consider how Latin America and the Caribbean can leverage 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. Countries will have to become a lot more efficient, making cuts in public spending and eliminating the inefficiencies that account for an average of more than 4% of GDP in the region. Further down the road, they will have to find ways to increase resilience through wise capital spending that boosts productivity and spurs growth. Governments must implement policies to make the recovery much more inclusive, which will mean raising taxes to improve income distribution through social safety nets and better provision of public services such as education and healthcare. At the same time, many small and medium-sized enterprises that entered hibernation must be supported so they can join the recovery and contribute to stronger growth in the aftermath of the pandemic. This year’s Macroeconomic Report covers more than the standard issues because the dangers of triple sudden stops make it imperative to act on multiple fronts. We are going to emerge from this crisis poorer, more indebted, and with economies that will look very different in terms of their productive structures. Enforcing key health measures is essential to saving lives until vaccines are rolled out to everyone and we can leave the public health crisis in the rearview mirror. But equally important is getting economies back on track to ward off crises and their crippling effects. COVID-19 is a wake-up call to reform and change the status quo so we can arrive not at the old normal, but a new and better normal. I hope this report will help policymakers in this endeavor."

Comments

Coordinated by Eduardo Cavalloand Andrew Powell

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Jan 1st, 12:00 AM

Opportunities for Stronger and Sustainable Postpademic Growth: 2021 Latin American and Caribbean Macroeconomic Report

"The COVID-19 shock was a significant and traumatic crisis for Latin America and the Caribbean. The pandemic dealt the region what I previously described as a unprecedented triple sudden stop, with major simultaneous disruptions in human mobility, trade, and capital flows. This was immensely dangerous. As human mobility was paralyzed by lockdowns and fear of contagion, investments fell, and trade was upended, the triple sudden stop challenged the region like few things in the past. Undoing the damage it has caused will require astute policymaking, as well as discipline and creativity, in the months and years ahead. The 2021 edition of the IDB Latin American and Caribbean Macroeconomic Report identifies opportunities for policymakers to lead their economies out of this crisis and toward stronger, inclusive, and sustainable growth. This crisis began to unfold as countries were already facing a complex set of preexisting conditions, including low levels of productivity and simmering social discontent. Perhaps a fitting analogy to describe the situation would be that, in 2019, the region was flying with one broken engine. In 2020, its other engine also took a hit. The challenge we now face is to fly this aircraft to safety, rescue the passengers, and prepare for the necessary repairs. Getting the region back off the ground will require greater spending on healthcare, government transfers to the poor, and loans to struggling firms. Meanwhile, tax revenues have plummeted due to unemployment and a drop in consumption, and fiscal balances and public debt have deteriorated considerably since the 2008/09 global financial crisis. Against this backdrop, public outlays and stimulus will be extremely difficult to achieve. One lesson from previous crises is that this is not the time to turn inward and erect barriers. Instead, the region must seek greater integration through stronger trade agreements and the removal of obstacles such as excessive customs controls at borders, which harm the free flow of goods and services just when it is most needed. It is time to tap the opportunities provided by a better, smarter integration into global and regional value chains. It is also time to consider how Latin America and the Caribbean can leverage 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. Countries will have to become a lot more efficient, making cuts in public spending and eliminating the inefficiencies that account for an average of more than 4% of GDP in the region. Further down the road, they will have to find ways to increase resilience through wise capital spending that boosts productivity and spurs growth. Governments must implement policies to make the recovery much more inclusive, which will mean raising taxes to improve income distribution through social safety nets and better provision of public services such as education and healthcare. At the same time, many small and medium-sized enterprises that entered hibernation must be supported so they can join the recovery and contribute to stronger growth in the aftermath of the pandemic. This year’s Macroeconomic Report covers more than the standard issues because the dangers of triple sudden stops make it imperative to act on multiple fronts. We are going to emerge from this crisis poorer, more indebted, and with economies that will look very different in terms of their productive structures. Enforcing key health measures is essential to saving lives until vaccines are rolled out to everyone and we can leave the public health crisis in the rearview mirror. But equally important is getting economies back on track to ward off crises and their crippling effects. COVID-19 is a wake-up call to reform and change the status quo so we can arrive not at the old normal, but a new and better normal. I hope this report will help policymakers in this endeavor."

 
 

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