As a result of the impact of the COVID-19 pandemic, two of the world’s leading economists have claimed that the recovery period for the Caribbean and Latin American region would be very protracted as compared to rest of the globe.
Commenting on if recovery would be long for Latin America and the Caribbean the Vice President for Development Economics and Chief Economist for World Bank Carmen Reinhart said: “I think the recovery will be long, period. I think it will be particularly long for Latin America.”
Reinhart, who was speaking at the 24th Annual CAF (Development Bank of Latin America) conference, noted that the region has been hit especially hard, but expressed that this sentiment does not imply that a V-shape (or anything resembling a V-shape) is in the making for the global economy at large.
Referencing an article she wrote, Reinhart expressed that a “rebound” in the global economy should not be confused with “recovery.” For a lot of indicators, Reinhart said that the numbers would quickly increase because of massive collapses but noted that when it comes to per capita income - it would take upwards of five years to return to pre-COVID levels.
Reinhart said that she is worried about the global economic outlook but she is especially worried about the outlook for Latin America and the Caribbean. She said: “Latin America continues to be as commodity-dependent today as probably as it was in the 19th century.”
This means that the global commodity cycle, Reinhart said, has played a role in shaping the fate of the region. Moreover, she added that the 2008-2009 global financial crisis levelled advanced economies and although emerging economies (like Latin America and the Caribbean) were hit hard, they rebounded sharply because China was growing at double digits and this influenced the growth of commodity markets.
The World Bank’s chief economist said this triggered a lot of optimism within the region and as a result, during that time inequality and poverty saw some alleviation. However, she noted that those gains were short-lived.
Not only has Latin America and the Caribbean continued to be dependent on commodities, Reinhart contended that it has also consistently leaned on external finance. As a result, there have been “volatile capital flows within the region and expensive foreign finance.”
She added, “What worries me even more about all of this, is that we could have had this conversation 20 years ago and all these factors would have been listed; and we could have maybe had them 40 years ago.”
Reinhart contended that it is very troubling to note that the challenges faced by the region span decades. She added that the region should be prepared to properly manage a potential credit crunch.
Understandably, Reinhart said that the region is worried about the health crisis, the output collapses and the surge in unemployment and poverty. However, she asserted: “Behind there’s a quieter financial crisis lurking—meaning, the banks are being hit.”
According to Reinhart, this is because it is questionable whether many small businesses or households experience longer road in order to be able to repay their loans. She added that this problem cuts across regions and income levels.
“I’m worried about the frailty of the banking system because I think we’re in for another credit crunch,” said Reinhart. She explained that a credit crunch is a hindrance to recovery. Therefore, Reinhart noted that policymakers in the region would do well to begin thinking about how to restructure non-performing assets coming out of the current crisis.
Currently, the World Bank economist noted that many small businesses and households have grace periods on the repayment of loans, thus, payments are not being made.
As a result, she contended that it is hard to distinguish between what is illiquid and insolvent. Reinhart indicated that her concern is that this shapes into another financial crisis in 2021 that would be yet another headwind to recovery. This period is critical, said Reinhart, because it would be marked as a time where international resources (upon which the region depends) would be scarce.
Also speaking at the virtual conference, American economist and Nobel Prize winner for Economics Joseph Stiglitz said the impact of the pandemic has been enormous on national budgets and deficits.
He asserted that the debt to gross domestic product (GDP) and deficit to GDP numbers for advanced economies are at numbers unheard of before, and for developing economies like those in the region, the characteristics of these metrics are “a real challenge”.
Making mention of the US$3 trillion stimulus programme in the US, Stiglitz added: “The cost of not doing anything is far greater than the cost of doing something.”
He said that the countries in Latin America that following the US’ approach by facilitating stimulates programmes are “doing the right thing.”
However, as the pandemic is causing many budgetary implications, Stiglitz postulated that there are two consequences. He posited: “The first is, we have to be very careful in the design, and when I say ‘we’—every country—has to be very careful in the design of the programmes.”
Stiglitz argued that these programmes have to be targeted, timely and very sensitive to the differences across individuals, business and sectors. According to the Nobel laureate, countries in the region and around the globe have to be very careful as to how the money is allocated in these programmes.
He said that, despite spending around US$3 trillion, the US has not done a very a good job; and this is evidenced by the soaring unemployment rate and the number of people that are left vulnerable because of the existing inequalities.
The other implication “for the fact that money so tight”, is that countries must use the finances that are available to accomplish dual or triple purposes, Stiglitz said.
According to Stiglitz, this means that economies must be “built back better”, as the crisis has exposed many problems, which includes the lack of resilience within markets and the deep, persistent inequalities.
The American economist noted that the issue of climate change must also be addressed, or else the economies of the world, including Latin America and the Caribbean, could be facing another crisis in the future.