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The Economic Commission for Latin America and the Caribbean (ECLAC) raised its average growth estimate for the region in 2021 to 5.2%, a figure that reflects a rebound from the deep contraction of 6.8% registered in 2020 as a consequence of the adverse effects of the COVID-19 pandemic.
This expansion, however, will not manage to ensure sustained growth, because the social impacts of the crisis and the structural problems in the region have deepened and will continue to do so during the recovery, according to the UN organisation in a new special report presented on Friday.
The document entitled The recovery paradox in Latin America and the Caribbean. Growth amid persisting structural problems: inequality, poverty and low investment and productivity was presented by ECLAC’s Executive Secretary, Alicia Bárcena, in a virtual press conference in which she urged governments to keep emergency transfer policies in place to bolster an economic recovery that is sustainable over time, more just, egalitarian and environmentally-friendly.
“We need policies for a transformative recovery with an emphasis on investment. Industrial policies and technologies to drive growth in sectors that are more technology intensive and that generate quality jobs. Restructure health and education systems. Sustain the transfers, universalize basic emergency income, implement bonds to fight hunger, ensure access to a basic digital basket, strengthen support for MSMEs. Push cross-cutting and sectoral policies to move toward a new model of development,” she stated.
According to new projections by ECLAC, in 2022 LAC will grow 2.9% on average, meaning a slowdown compared to the rebound in 2021. There is nothing to indicate that the low growth dynamic prior to 2020 is going to change. The structural problems that held back growth in the region before the pandemic have become more acute and this will have negative repercussions on the economic and labor market recovery despite the uptick in growth in 2021 and 2022. In terms of per capita income, the region continues on a path toward a lost decade, the report warns.
The document explains that the current growth rate is unsustainable and there exists a risk of returning to mediocre trajectories, with insufficient investment and employment, and major environmental deterioration. The crisis brought on by the pandemic has increased inequality and poverty, mainly affecting women, school children and older people. Furthermore, it came at a moment when the regional economy was stagnating, unable to tackle the long-term investment crisis, employment and sustainable productive diversification. It also recognizes at the same time that fiscal measures adopted by the countries have been significant, but insufficient in terms of amount and duration.
As of June 30, the region had a death toll of more than 1.26 million due to COVID-19 (32% of the world total, despite the fact that the region’s population represents just 8.4% of the world total) and presents major gaps in vaccination rates compared to developed countries. To close them will require cooperation and integration. In Latin America and the Caribbean (30 countries), the percentage of fully vaccinated out of the total population amounts to just 13.6%, while in the European Union it is at 34.9% and 46.3% in North America.
In the past year, the rate of extreme poverty has reached 12.5% and poverty is at 33.7%. Emergency transfers to the most vulnerable sectors served to offset the rise in poverty in the region in 2020 (going from 189 million in 2019 to 209 million, when it could have been 230 million, and in the case of extreme poverty, from 70 million in 2019 to 78 million, when it could have been 98 million). These transfers benefited 326 million people, or 49.4% of the population. However, inequality in income distribution increased (2.9% of the Gini coefficient). Meanwhile, moderate or severe food insecurity reached 40.4% of the population in 2020, 6.5 percentage points more than in 2019. This means there were 44 million more people experiencing moderate or severe food insecurity in the region, with 21 million suffering severe food insecurity.
The report indicates that for the period January-April 2021, 20 countries announced or extended emergency transfers of 10 billion dollars (0.26% of GDP for 2020). If this level of spending is maintained for the remaining months of 2021, annual expenditures in transfers would be only 0.78% of 2020 GDP, i.e. half of 2020 expenditure: 1.55% of GDP. Coverage would thus be much lower and reach only 60 million homes (231 million people and 29% of the population, compared to 326 million and 49.4% of the population reached in 2020.)
In addition, ECLAC indicates that the pandemic is leaving 2021 in a much worse environmental state that will be difficult to reverse. Even though there were temporary improvements in air quality and a reduction in greenhouse gas emissions, emissions will increase by 5% this year, while in 11 countries of the region a 35% drop was observed in budget or spending for environmental protection in 2019-2020.
The outlook for foreign trade is more favorable, given that regional exports are expected to increase 22% in 2021 (after experiencing a 10% decline in 2020), attributable to the increase in raw material prices, the recovery of demand in China, the United States and the European Union, and the return of economic activity in the region. Meanwhile, for the period January-April 2021, the value of intra-regional trade expanded by 19% in comparison to the same period in 2020, meaning a recovery of values close to those of 2019 (which were already quite low).
With regard to financing, the ECLAC report warns that Latin America is the region with the greatest external debt burden on GDP (56.3%) and with the highest external debt service in terms of exportations of goods and services (59%). These levels of debt reduce fiscal space and put recovery and future growth at risk. In the case of the Small Island Developing States (SIDS) of the Caribbean, the situation is even more unsustainable, since in some countries the level of public debt is over 100% of GDP.
“In light of all these challenges, we need a new international financial architecture to respond to the emergency and development in the region,” emphasized Alicia Bárcena. She indicated that a multilateral forum is needed to debate the conditions for issuing new debt and restructuring current debt, a multilateral agency of credit qualification, the inclusion of middle-income countries in all relief initiatives and access to both concessional and non-concessional liquidity, the implementation of innovative financing instruments, such as green bonds and SDG bonds, the capitalization and strengthening of development banking at all levels, access to multilateral mechanisms for the application of global taxes, elimination of elusion, evasion and illicit cash flows, and rethinking the system of cooperation to achieve a multidimensional form of measure beyond per capita GDP.
In fiscal matters, the ECLAC study reaffirms that it is essential to maintain fiscal policies that support social emergency transfers, support productive sectors and reverse the persistent fall in investment in order to continue mitigating the effects of the pandemic and advance toward transformative recovery with equality. Furthermore, fiscal policies must have a gender focus throughout the entire fiscal cycle. “Fiscal space must increase through growth in tax revenue and reduction of unnecessary expenses. We must also consolidate income taxes, extend the reach of property and wealth taxes, review and update progressively the royalties drawn from the exploitation of non-renewable resources, and consider taxes on the digital and environmental economy and those related to public health,” says the report.
“Efforts to achieve a transformative recovery must learn from the environmental crisis: the other windows of opportunity will also begin to close if we don’t act now,” said Bárcena.