Extreme poverty in Latin America could reach 1990 levels after the pandemic

The Economic Commission for Latin America and the Caribbean (ECLAC) has released its 72nd annual report entitled "Economic Survey of Latin America and the Caribbean 2020". This report provides discouraging figures regarding the economic development of the region which, following the coronavirus pandemic, is experiencing a major recession that will not be recovered until 2024.

During the presentation of the report, the Executive Secretary of ECLAC, Alicia Bárcena, announced the main conclusion of the study: "International cooperation, through a better distribution of global liquidity, should support the expansion of policy space in the region".

ECLAC is part of the United Nations and is responsible for promoting economic and social development in Latin America and the Caribbean. The institution was created in 1948 and since then has produced annual economic research reports.

The coronavirus pandemic has changed everything this year. "What was about to go forward has gone backwards and we are going to have a hard time getting it back," Bárcena repeated. Maintaining and deepening active macroeconomic policies will be essential for recovery and economic and social transformation after the crisis triggered by the pandemic.

In this new edition, the report presents an analysis of the economic effects caused by the pandemic in each country of the region and provides policy recommendations to address them. These include fiscal and monetary issues, along with the importance of highlighting international cooperation.

The first part of the report reviews the regional economy in 2019, the second part focuses on the financial vulnerability left behind by the coronavirus pandemic and, finally, the third part includes a country-by-country annex for specific consultation on each nation's economic development.

"The COVID-19 pandemic is having historically negative economic, productive and social impacts, with medium-term effects on growth, increases in inequality, poverty and unemployment. For this reason, the process of recovery of economic activity (GDP) to its pre-crisis levels will be slower than that observed in the 'subprime' crisis (of 2007-2008)," Alicia Bárcena said when the document was released.

According to the report, Latin America and the Caribbean is experiencing its worst economic crisis in a century, with an estimated contraction of its regional Gross Domestic Product (GDP) of -9.1%. As a result, by the end of 2020 the level of per capita GDP would equal that of 2010, i.e. there would be a 10-year decline with a sharp increase in inequality and poverty.

In addition, 2.7 million formal businesses are expected to close in 2020, while unemployment would reach 44 million people (an increase of 18 million people from the 2019 level, the largest increase since the global financial crisis). For this reason, during the presentation, ECLAC encouraged governments to support small and medium-sized enterprises, "liquidity is not balanced," said Bárcena.

Furthermore, poverty would reach the same levels observed in 2005, that is, it would mark a 15-year decline, reaching 231 million people, while extreme poverty would reach 1990 levels, which implies a 30-year decline, reaching 96 million people.

"In this scenario, active macroeconomic policies will be necessary to resume growth and promote an agenda of structural transformation. We must strengthen public revenues, maintain conventional and non-conventional expansionary monetary policies, and strengthen prudential macro-regulation along with regulation of capital flows to preserve macro-financial stability in the short and medium term," explained Bárcena during the presentation.

In terms of fiscal policy, the Economic Survey 2020 indicates that countries have made various fiscal efforts to mitigate the effects of the pandemic, averaging 4.1% of GDP, accompanied by state guarantees of credit of up to 10% of GDP. These fiscal efforts, in addition to falls in public revenues, have contributed to higher fiscal deficits and increases in public debt.

In this regard, the document indicates that the challenge is to maintain an active fiscal policy in a context of higher indebtedness.  This requires fiscal policy within a revenue-centred framework of fiscal sustainability. 

Latin America and the Caribbean needs to increase its tax collection, which currently averages 23.1% of GDP for general governments in the region, compared to 34.3% in the Organisation for Economic Co-operation and Development (OECD). 

This requires combating tax evasion and avoidance, which amounts to 6.1% of regional GDP, consolidating income tax for individuals and corporations, extending the scope of heritage and property taxes, and establishing taxes on the digital economy and corrective taxes such as environmental and public health taxes.

"Active fiscal policy must link the short (emergency) with the medium and long term, in order to change the development model towards productive transformation with sustainability and equality," said the ECLAC secretary. 

The report recommends that Latin American countries direct public spending towards economic reactivation and transformation by strengthening public investment in sectors that promote employment, gender parity, social inclusion, productive transformation and an egalitarian transition towards environmental sustainability.
 

To expand policy space, ECLAC is considering better distribution of global liquidity through international cooperation. In this field, multilateral credit institutions should be capitalized on to expand their financing and liquidity capacity both in the short term and in the longer term. 

ECLAC also recommends institutionalising cooperation between central banks to support both expansionary monetary policies and those dedicated to preserving macro-financial stability, along with expanding the global and regional financial safety net to counteract the negative effects of volatile financial flows in times of systemic crisis.

In this area, the Fund to Alleviate the Economy COVID-19 Economics (FACE) initiative, presented by the Government of Costa Rica recently "is an example of an international cooperation mechanism to improve the distribution of global liquidity to developing countries," explained Bárcena.
 

The report also highlights that debt relief and restructuring for countries with vulnerabilities and high interest payment burdens is needed to expand policy space.

Currently, middle-income countries account for 96% of total developing country debt (excluding China and India), so there is an urgent need for the international financial community to expand liquidity conditions to meet global financing needs.

"Relieving interest payments on debt would increase the availability of resources for development," said Alicia Barcena. "In this area, there is an urgent need for Caribbean debt relief. ECLAC has advocated financial support for vulnerable Caribbean economies to build resilience through a debt reduction initiative and the creation of a Caribbean Resilience Fund," she said.

During the conference, ECLAC announced that next November they will publish another report on the measures adopted by Latin American governments to alleviate the pandemic. This report will show the structural changes that will give one direction or another to the region's economy.