Recovery represents an opportunity for Latin America and the Caribbean

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Recovery represents an opportunity for Latin America and the Caribbean
Thu April 01, 2021

According to the World Bank, our region suffered more damage than any other, but as it begins to rebound, the opportunity will open for significant transformation in key sectors

Due to the pandemic, the Gross Domestic Product (GDP) in the Latin American and Caribbean region (except Venezuela) fell 6.7% in 2020. A return to growth of 4.4% is expected for 2021. In comparison with the Bank's projections at the end of 2020 of a fall of 7.9% by 2020 and a GDP expansion of 4.0% by 2021.

The enormous shock caused by the pandemic could lay the foundation for higher productivity through economic restructuring and digitization. Other opportunities also arise from innovations in the electricity sector, according to the World Bank's semiannual report for LAC, 'Volver a Crecer'.

"The damage is severe and we are seeing a lot of suffering, particularly among the most vulnerable," said Carlos Felipe Jaramillo, World Bank vice president for the Latin American and Caribbean region. "But we must always look ahead and take advantage of this opportunity to carry out the necessary transformations to ensure a better future."

The sharp contraction caused by the pandemic last year had enormous economic and social costs. The unemployment rate in general increased and poverty soared, although in some countries the massive use of social transfers did much to cushion the social impact of the crisis.

The COVID-19 crisis will have a long-term impact on the economies of the region. Lower levels of learning and employment are likely to reduce future earnings, while high levels of public and private borrowing can strain the financial sector and slow down the recovery.

Despite these challenges, there are positive areas. International trade in goods remained relatively good, despite the sharp decline in trade in services, particularly tourism. Most commodity prices are higher than before the COVID-19 crisis, partly thanks to China's early recovery. This is a good thing for exporters of agricultural and mining products. Remittances to the region rose compared to the pre-pandemic period, a very important issue for several countries in the Caribbean and Central America.

Likewise, capital markets remained open for most of the countries in the region. In fact, debt taking abroad increased, helping to mitigate the economic and social impact of the COVID-19 crisis. Most countries in the region have run significant budget deficits since the beginning of the pandemic. The additional spending was used to strengthen health systems, provide transfers to households, and help businesses. At the same time, the implementation of proactive measures helped debtors and reduced the risk of financial crises.

"As economies rebound this year, some sectors and companies will win and others will lose," said Martín Rama, World Bank chief economist for the Latin America and Caribbean region. "This pandemic gave rise to a process of creative destruction that can result in faster growth but that can also widen inequality within and between countries in the region."

For example, hotel and personal services can suffer long-term damage, although information technology, finance and logistics will expand. In the medium term, the gains may be greater than the losses. The greatest transformation may result from accelerated digitization, which could lead to greater dynamism in financial intermediation, international trade and labor markets.

Technology is also an opportunity to transform the energy sector. Latin America and the Caribbean has the cleanest electricity generation matrix of all developing regions, mainly due to the abundance of hydroelectric energy. The region should have the cheapest electricity in the developing world, but instead has the most expensive, essentially due to inefficiencies.

Businesses and households in the region pay much more for the electricity they consume than it would cost to generate it. These inefficiencies are reflected in frequent blackouts, technical and commercial losses, overstaffed public companies, and abuses of market power by private generators.

With an appropriate institutional framework, technology can increase competition in the sector, thereby reducing the price of electricity and increasing the share of renewable energy. For example, distributed generation can make companies and households depend on their own energy sources, such as solar panels, and buy or sell electricity on the grid depending on the time of day. In addition, an increase in cross-border electricity trade can take advantage of differences in installed capacity, generation costs, and demand seasonality to generate mutual benefits. However, this efficiency improvement will only take place if electricity can be bought and sold at an appropriate price.

While there are signs that the region's economies are recovering and hopes that this upheaval will have some positive outcome, the outlook for this year remains uncertain. Vaccination rollout has progressed slowly in the region and herd immunity could only be reached by the end of 2021. New waves of infections may also occur as new variants of the virus emerge. As we actively prepare to rebuild better, the priority remains protecting human life and livelihoods.


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