The recession that’s on the way poses a formidable challenge: the scale of fiscal and monetary support required to soften the blow to personal incomes and ensure the survival of companies bereft of revenues has no precedent in recent times. Public debt levels, and probably also private debt levels, are going to soar. And no matter what the duration of the slump, once people find their footing again, they will ask their governments to think anew about the priorities with which public money is spent or the safety of global supply chains, at least for essential goods.
The pandemic is almost guaranteed to cause more pain to emerging countries, where more people are economically vulnerable, social safety nets are smaller, governments have fewer fiscal resources, health services are less developed. The Economic Commission for Latin America and the Caribbean (ECLAC) is now estimating a recession in the region that could lead to 35 million people falling into poverty, on a total population of 620 million. The IMF’s top official for the Western Hemisphere, Alejandro Werner, wrote that a 2020 with negative growth is not an unlikely scenario in the LAC region (IMFBlog, March 19, 2020). The ECLAC is estimating a contraction of -1.8 per cent in regional Gross Domestic Product (GDP). The risk is that the recession will be deeper, not smaller.
As ever, emerging economies are likely to be on the receiving end of the processes set off by advanced countries: the shortening of supply chains will probably entail the relocation of some production processes, particularly those considered to be priorities for national security. Demand for commodities, sent reeling by China’s lockdown, still has to feel the punch from the economic slowdown that is just getting under way in Europe and the US. For the oil-producing countries this adds to the damage caused by the rift between Saudi Arabia and Russia that has sent the price of oil to the lowest levels in decades. Tourism, that for many Latin America and Caribbean economies has been a growing source of employment and foreign currency, is unlikely to recover for good in the near future. It is not just a matter of damaged personal incomes in the rich world: people will have to regain confidence in the safety of travelling to countries that, by their level of development, cannot guarantee the same levels of sanitary conditions or medical assistance as a rich country.
So, once the pandemic is over, re-starting growth in Latin America will pose unique challenges. Some of the avenues used in these past years are likely to be disrupted, in some cases severely so. Despite the extraordinary levels of monetary expansion under way in the advanced world, the prevailing view is that the recession will be deflationary. The terms of trade of many economies in Latin America, which tend to rely in significant part on the export of commodities, are unlikely to be of much help. High levels of debt in advanced economies, and raised sensibilities for national interest, might dim their interest for international cooperation, at least temporarily. And in middle-income economies good health is likely to become a higher priority, with the associated demand for economic resources. Even when the global public-health emergency slows, a negative sentiment about the future will probably continue to depress domestic consumption and private investment.
Amidst all of these obstacles, infrastructure spending remains a valid policy option to restore economic growth – in advanced as well as in emerging economies. The multiplying effect of infrastructure spending in Latin America is likely to be many times larger because of the bad state of transport, telecommunications, energy, and water infrastructures in the region. Better infrastructures are vital to meet the requirements for sustainable and inclusive economic growth.
Latin American governments need to pour additional resources into their healthcare systems to contain the spread of Covid-19. This greater government expenditure decreases available resources for other sectors, including infrastructure. Governments should introduce reforms and legislation to improve the business environment and mobilize more private funds, both domestic and foreign. International financial institutions, such as the Inter-American Development Bank and the Caribbean Development Bank, should play a major role in co-funding infrastructural projects with the private sector.
In the world after the pandemic, the greatest challenge might be how to fund infrastructure expenditures: clever financing might thus be key to the realization of these policies.