Latin America faces risks as its economy rebounds from the worst downturn in two centuries, with better fiscal policy needed to ensure a sustained recovery, according to the region’s development lender.
Output will grow 4.1% this year as vaccine rollouts proceed and businesses continue to open, the Inter-American Development Bank said in forecasts released Saturday at its annual meetings. The bank estimates that the 2020 contraction was 7.4%, the most for any single year since 1821, when some of Latin American nations were fighting for their independence from Spain.
The region remains at risk for a more muted rebound where weaker growth in the U.S. and Europe, slower vaccine application and new virus strains limit the 2021 expansion to 0.8%, according to the Washington-based institution. That scenario would see a return to recession in 2022 before growth in 2023 –- a “W” shaped recovery.
Latin America faces high unemployment, which is set to increase extreme poverty, and health systems stretched to the breaking point. With just 8% of the world’s population, the region has accounted for about a quarter of all coronavirus deaths.
“In 2019, the region was flying with one broken engine,” said Eric Parrado, the IDB’s chief economist. “In 2020, its other engine also took a hit. The challenge we now face is to fly this aircraft to safety, rescue the passengers, and prepare for the necessary repairs.”
Governments in the region provided almost a half trillion dollars in fiscal support during the pandemic, with packages averaging about 8.5% of gross domestic product, compared with 19% in advanced economies. That helped drive up public debt to 72% of gross domestic product in 2020 from 58% a year earlier. The IDB forecasts public debt to rise to 76% by 2023.
Countries should pursue fiscal overhauls, with nations that have both high tax takes and high spending benefiting from greater efficiency and better targeted social transfer programs. Countries should spend on projects with high social and growth benefits, build infrastructure for a digital economy and invest in a more environmentally sustainable future, the IDB said.
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