From Devastation to an Anemic Recovery Path

CHAPTER 1 FROM DEVASTATION TO AN ANEMIC RECOVERY PATH

Latin America and the Caribbean (LAC) is recovering from the COVID-19 crisis. Vaccination rates have steadily risen, and mortality rates are progressively under control after a tragic loss of life at a scale incomparable in memory, and among the most heartbreaking in the world. The pressure on health facilities is slowly relaxing, and school doors are reopening. Matching the health impact, the 2020 economic downturn in the region was the deepest in this century and globally notable for its severity, especially afflicting the lower strata of society. But here, too, gross domestic product (GDP) forecasts have been revised steadily upward over the summer with favorable tailwinds offering opportunities for full recovery of 2020 losses.

But recovery to what? Even if a new variant does not threaten gains to date, the scars left on the economy and society are deep: unsustainable fiscal accounts; a private sector with unclear indebtedness and health; and up to a year-and a half of lost human capital accumulation to name only a few. Taking a longer view, these blows are layered on what might be called the “second lost decade” of the 2010s. While the world grew at 3.1 percent, LAC grew at 2.2 percent, a rate too low to pull LAC populations to prosperity and calm social unease- and this was before the arrival of COVID-19. The weak performance was partly driven by erosion of commodity prices, the sensitivity to which only underscores how undiversified the economies of the region remain. Of more concern, given the strong favorable tailwinds from external factors —continued low global interest rates, strong recovery in principal trade partners, a potential new commodity super-cycle— is the recovery has been unexpectedly weak, and growth forecasts for 2022 and 2023 are back to the lackluster pre-COVID-19 rates. The recovery is anemic for internal reasons, and the analysis here confirms the urgent need to address a list of long recognized growth-impeding internal shortfalls in infrastructure, firm capabilities and innovation, education, energy policy, andgovernance, while confronting some new climate change challenges.

Chapter 1 first lays out how the pandemic brought us here, and what the economic and social implications have been. We then discuss the conjunctural macroeconomic challenges going forward: the possible downsides of another outbreak; a possible tightening of international and domestic liquidity to restrain inflation; the rise in corporate debt and the de-transparentization of the banking sector that could undermine future stability; and the disappearing fiscal space.

This last issue is especially critical as it occurs precisely at a time of new urgency to address more structural factors in our economies. The large countercyclical policies put in place during the pandemic were successful in protecting at risk populations during the worst of the pandemic, but fiscal space in the region has been almost depleted and continued deficits may become unsustainable, thus creating their own drag on the economy.

Hence the second chapter of this report argues that faced with an unforgiving fiscal panorama over the foreseeable horizon, it is time to precisely intensify the focus on how efficiently and wisely we raise and spend public resources to lay the foundation for dynamic and inclusive growth going forward. We focus on growth neutral revenue mobilization, potential savings through reduced waste and leakages, and reallocation of existing resources. Though a thorough discussion of all candidate areas is not possible in the span of this document, the goal is to put several ideas on the policy table and highlight recurring principles of reform, including increasing transparency and information; increasing public sector accountability and employing private sector discipline; working toward consistency and coherence across programs; and maintaining an equity lens throughout.