A new study by the Centre for Global Development and the InterAmerican Development Bank (IDB) finds many companies in Latin America and the Caribbean survived the pandemic by slashing investment, but this decline now threatens to constrain the region’s economic recovery.
To reverse the situation and prevent it from leading to a type of “economic long COVID,” where a weak private sector fails to create jobs and stimulate economic growth, governments in the region should actively pursue a series of policies to help companies boost investment and hire new employees.
These are among the key findings of the report, which examined the balance sheets from a large number of companies across the region and discovered that, despite an economic recovery in 2020 and 2021, capital levels at companies are still 20 per cent lower than they were before the pandemic began.
The study was written following discussions of economists and lawyers from the region and led by Andrew Powell, Principal Advisor of the Research Department at the IDB and Liliana Rojas-Suarez, director of the Latin America Initiative and senior fellow at the Centre for Global Development.
“While it is good news that relatively few larger firms failed, the drop in their productive capital implies significant scarring and threatens the region’s economic growth,” Powell said.
The study sampled balance sheet data from larger businesses across the region and found that investment fell sharply while debt levels remain high, especially in sectors hit the hardest by the COVID-19 pandemic. In addition, the demand for formal workers diminished and informal employment rose steeply during the recovery.
The report also analysed companies across a large swathe of the region’s economy.
“Although revenues at companies in sectors like logging, mining, and other extractive industries have mostly recovered, in many sectors—including construction, retail, and most white-collar industries—revenues remain significantly depressed,” it noted.
The report also found that small firms, which often have limited access to credit, were punished the most severely by the crisis.
It added smaller companies still face more financial challenges and are more likely to fall behind on debt payments, with a significant portion shutting down.
According to the report, while overall economic growth has recovered significantly in many countries across the region, the stalled recovery for companies in key sectors has had knock-on effects for workers, especially for women and younger people.
It also noted the number of workers in informal businesses has increased from its already-very-high pre-pandemic levels.
Higher informality, the researchers said, will further constrain the region’s productivity and growth, largely because informal companies tend to be much less productive.
The report recommends several ways governments could kick-start investment and economic recovery for the region including establishing a new, independent, and temporary public-private institution to identify and support firms that suffered during the pandemic but are still viable and need investment.
This institution needs to be staffed by the private sector to avoid political interference, the report added.
It also suggested digitalisation strategies in each country, focused on proven cost-effective and growth-enhancing policies like the prioritisation of investment in digital infrastructure.
Additionally, the report advised policies to boost and incubate promising young firms and improve access to venture capital, through both international networks and local markets.