On March 19, the Inter-American Dialogue hosted a conference call to discuss the state of Latin America and the Caribbean (LAC) entering the COVID-19 pandemic and ensuing economic crisis. Alicia Bárcena, executive secretary of the UN Economic Commission for Latin America and the Caribbean (ECLAC) and Santiago Levy, non-resident senior fellow at the Brookings Institution and former vice president for sectors and knowledge at the Inter-American Development Bank, joined the president of the Inter-American Dialogue, Michael Shifter, to talk about policy measures that need to be implemented while this region of 620 million people to gets back to “normal”.
While we are amidst a crisis, both agreed there this one is more complex than that of 2008-2009. Mr. Levy explained that in the 2008 financial crisis, two factors put pressure on the LAC region: an external shock that resulted from lower commodity prices, exports, and tourism and the collapse of the financial markets and the economic volatility. Today, we have both layers in addition to the internal demand shock, derived from social isolation and quarantine.
Because this crisis is different from that of 2008, Ms. Bárcena advised the “solutions should also be quite different.” Before we dive into the solutions proposed by both panelists, here is some data on the economic outlook for the region, as projected by ECLAC.
Last year, the region grew 1.3%, on average. This year, we will see a 1.8 contraction of GDP overall. Even worse, the Caribbean islands will see a decrease between 8 and 25 percent of GDP due to the statement in tourism. Together with these GDP decreases, the organization expects that job loss could rise by ten percentage points, which means that 25 million people could become unemployed. As a consequence, poverty and extreme poverty will increase by the millions: from 185 to 220 million and from 67.4 to 90 million, respectively. Finally, by ECLAC estimates, the value of the region’s exports will drop between 4.6 and 10 percent.
For the most part, we have seen a rapid response from LAC governments when addressing the pandemic and ensuring the health of their citizens. Countries throughout the region were quick to apply sanitary measures that cut travel from non-residents into their country, they minimized internal circulation to limit local contagion, and they implemented social containment policies to protect the most vulnerable groups.
However, the biggest problem the region has in front of this crisis is its debilitated health sector. For example, on average, there are 2.2 hospital beds per 1,000 people. In Mexico, the ratio is one bed per 1,000 people, similar to Brazil. Some measures we are seeing include El Salvador’s response to establish a hospital that would only treat patients infected with COVID-19. In this context, Mr. Levy claimed that “governments should pass national emergency laws that allow them to spend more freely and take further measures such as requiring private hospitals to take in patients without health insurance, for example.”
Due to the uncertain length of this pandemic, an economic response must be designed to address the needs of Latin Americans and Caribbeans. Yet, most countries have a substantially higher debt-to-GDP ratio than they did in 2008-2009, so the ability for the region to respond is worse than it was 12 years ago.
First, each country in the region must increase spending for a determinate period and decide on a near-future date (for instance, January 2021) to raise taxes to pay for this response. Levy clarified, “these tax increases should be as progressive as possible, focusing on income taxes and, depending on the country, adding consumer taxes with the correct support in place.” The priority here is to show international capital markets that the increase in government spending is transitory and will eventually cease. Thus, preventing the region’s risk of a sudden stop in capital flows and another layer on top to an already economically-pressured area.
Second, in agreement with Ms. Bárcena, governments must protect employment to ensure the domestic aggregate demand does not collapse.
The executive secretary of ECLAC stressed the need for a multilateral response to the crisis and a special obligation to help the most vulnerable populations of the poorest households. She also addressed the additional burden this situation placed on women, who are the ones that care for the children who are out of school because of the health measures in place.