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Políticas apoyo empresas trabajadores América Latina Caribe

Avoiding Economic Long-COVID: Policies to Support Firms and Workers in Latin America and the Caribbean

August 3, 2022 by Andrew Powell - Liliana Rojas-Suarez Leave a Comment


During the peak of the COVID-19 crisis, governments in Latin America and the Caribbean aided firms and households with support packages coordinated with central bank monetary policy. For many, liquidity injections and flexible financial sector supervision helped ease the pain.   

While many small firms closed their doors during the crisis, surprisingly few larger firms failed. Instead, they survived by cutting costs and forgoing investment, depleting their productive capital in the process. Debt levels are as high now as they were before the pandemic. At the same time, the persistent impacts of the virus and new strains, Russia’s war in Ukraine, monetary tightening in advanced economies, volatile international markets, and fears of global stagflation (low growth and high inflation) together create a highly challenging environment.

The Center for Global Development (CGD) and the Inter-American Development Bank (IDB) joined forces on a report released today that examines the challenges firms faced during the COVID-19 crisis and recommends potential solutions. The report is based on the deliberations of an expert working group of top economists and lawyers from countries in the region. We hope its recommendations will assist policymakers and international financial institutions in identifying and implementing actions to spur renewed investment by productive firms, support the growth of new ones, and improve labor market performance.

Investment and Informality: A Dual Problem

Investment in the region fell sharply during the darkest days of the pandemic. While the flow of investment—especially in mining, oil and gas, agriculture, and manufacturing—has since recovered, firms’ fixed assets (their productive capital stock) have fallen across the board. Corporate debt levels soared but, to finance additional liquidity and survive the crisis, very little of that was invested. Debt has now fallen, but only to pre-pandemic levels.

With their future output threatened, will firms be able to finance investments and rebuild their capital stock to at least pre-pandemic levels? An uncertain global financial outcome makes it improbable that firm revenues will continue to rise well above pre-pandemic levels or that firms will be strongly positioned to raise more debt or attract more direct investment in the form of equity.

Productivity in the region has long been stagnant, and the large proportion of smaller firms relative to larger firms in the wake of the pandemic is unwelcome news. Smaller firms tend to be less productive and less able to take advantage of the transformative, productivity-enhancing capacities of digital technology.

In addition, while more informal jobs than formal jobs were lost during the pandemic, informality has come back strongly and is now more prevalent than ever. Informal workers tend to be less productive than their formal counterparts, and many work in micro firms with very little capital. Higher informality will put a further drag on productivity and growth.

Combatting Structural Problems During the Recovery

How can policymakers support productive firms and improve the functioning of formal labor markets? The CGD-IDB report offers suggestions for addressing these problems.

Countries should consider creating a public-private institution with a time-limited mandate and a professional staff hired largely from the private sector to support firms with strong growth potential. This institution—which could take various forms, such as a fiduciary fund—would evaluate and develop techniques for identifying firms with good business prospects and provide support through a range of instruments, including equity injections. 

Countries in the region should also reform their insolvency codes to make them more flexible, transparent, and efficient. Such reforms could help ensure that investment flows from untenable, lower-productivity firms to larger, more innovative, and productive ones. Along these lines, a new forum to provides technical support for national resolution processes, including for smaller countries that lack expertise, could make a considerable difference while assisting in cross-border insolvency issues. Investment protection should be strengthened, including through mechanisms that facilitate consultations between countries and investors to advance common aims and avoid disputes.

There should be a strong push to advance the transition to digital technologies, including through potential new investment in digital infrastructure and incentives for firms to digitalize. And short-cycle programs for technical training should be introduced, possibly including scholarships for students from poorer households.

Labor market reforms are critical, given the persistence of informality and its recent growth at the expense of formal employment. Reforms could include, among other features, financing social security and health benefits from more general taxation to reduce hiring costs for formal labor; lowering labor taxes; and introducing well-designed savings and insurance schemes that would support workers through periods of unemployment rather than protecting their jobs.

Latin America and the Caribbean faces long-standing structural problems, with a poor allocation of resources contributing to low productivity and low growth. The pandemic has aggravated these problems. We hope this report and its recommendations will help policymakers and international financial institutions take the needed steps to enhance firm recovery, economic growth, and employment and put the region on a prosperous and sustainable track.


Filed Under: Macroeconomics and Finance Tagged With: #firms, #labormarket

Andrew Powell

Andrew Powell is the Principal Advisor in the Research Department (RES). He holds a Ba, MPhil. and DPhil. (PhD) from the University of Oxford. Through 1994 he dedicated himself to academia in the United Kingdom as Prize Research Fellow at Nuffield College, Oxford and Associate Professor (Lecturer) at London University and the University of Warwick. In 1995, he joined the Central Bank of Argentina and was named Chief Economist in 1996. He represented Argentina as a G20/G22 deputy and as member of three G22 working groups (on crisis resolution, financial system strengthening and transparency) in the late 1990’s. In 2001, he returned to academia, joining the Universidad Torcuato Di Tella in Buenos Aires as Professor and Director of Graduate Programs in Finance. He has been a Visiting Scholar at the World Bank, IMF and Harvard University. He joined the IDB Research Department in 2005 as Lead Research Economist and in 2008 served as Regional Economic Advisor for the Caribbean Region until returning to the Research Department as the Principal Advisor. He has published numerous academic papers in leading economic journals in areas including commodity markets, risk management, the role of multilaterals, regulation, banking and international finance. Current projects include new papers on capital flows and corporate balance sheets, on sovereign debt restructuring and on the preferred creditor status of multilateral development banks.

Liliana Rojas-Suarez

Liliana Rojas-Suarez is the director of the Latin America Initiative and a senior fellow at the Center for Global Development. She is also an adjunct faculty member and senior research scholar at the School of International and Public Affairs at Columbia University and the chair of the Latin American Committee on Macroeconomic and Financial Issues (CLAAF). Previously, she served as managing director and chief economist for Latin America at Deutsche Bank and held senior positions at the Inter-American Development Bank and the International Monetary Fund. Ms. Rojas-Suarez holds a Ph.D. in economics from the University of Western Ontario.

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