Latin American economy stagnates and faces a “significant risk” of social unrest, warns the IMF

Ensuring economic growth that takes into account inequities will be one of the main challenges for the countries of Latin America and the Caribbean this year, according to the International Monetary Fund (IMF), which assures that they are facing a “significant risk” of social unrest due to the impact of the pandemic on their already stagnant economies.

Economists from the entity assure that in the region “with the intense electoral calendar that is approaching (general elections in Costa Rica, Colombia), social unrest continues to be a significant risk and that it will be necessary to address inequality.”

For the IMF, the search for policies to reactivate economic expansion with an emphasis on social inclusion must go hand in hand with the fight against inflation, since it underlines that 2021 was marked by the strong increase in prices in the region.

Three big challenges

The Fund says that the three great challenges that the countries of the region must face simultaneously are: guaranteeing the sustainability of public finances, increasing potential growth and doing so by promoting social cohesion and resolving social inequalities.

“Policymakers must immediately begin to develop a comprehensive strategy to address these challenges and create a social consensus around this strategy,” says the IMF.

Ilan Goldfajn, who took over this month as director of the IMF’s Americas Department, refers in a post on the entity’s blog that the COVID-19 pandemic, declared in 2020, hit Latin America and the Caribbean “after a year of widespread social unrest, accumulated during the years of economic stagnation that followed the end of the commodity boom”, recorded for a decade until 2013.

The article analyzes the slowdown in growth in the region forecast last week by the Fund, to 2.4% in 2022 (-0.6 percentage points compared to what was forecast last October).

Larry Yumibandaeconomist and president of the Circle of Economy of Guayaquil, expresses that the slowdown will be present in the region for this 2022 and for 2023 and that the IMF recommendations seek to counteract it.

The IMF considers that a slowdown “is inevitable” as economies return to their pre-pandemic GDP levels, it refers UN News.

The entity says that this decrease responds to other challenges, such as the slowdown in growth in China and the United States, the continuous interruptions in supply, the tightening of financial and financing conditions and the appearance of the omicron variant of COVID-19.

Goldfajn, together with the deputy director of the Department of the Americas, Jorge Roldós, and the deputy head of regional studies, Anna Ivanova, pointed out that the strong recovery of the region in 2021, of 6.8% after the dramatic contraction of 7% in 2020 -driven due to strong growth in its trading partners, rising commodity prices and favorable external financing conditions – is losing momentum and reforms are needed.

Economic growth with a social approach is possible

Gonzalo Albana consultant in Public Management and Public Policies, mentions that in the case of Ecuador, the State already has a portfolio in charge of promoting this social inclusion that goes hand in hand with economic reactivation.

He highlights that there are already efforts to counteract the effects for the coming years of the recession, a product of the pandemic, such as loans at 1% interest, a rate that was achieved for the first time, although he considers that technical support is necessary so that funds are used properly.

“It should not only be access to credit and die there, but rather the person can become a user of public or private banking and can increasingly have an opportunity for growth… there must be a comprehensive policy that motivates this development”, he points out.

The challenge of reducing inflation

However, meeting these challenges, which have been dragging on even before the health emergency, also involves the challenge of lowering inflation, according to the IMF.

In 2021, prices increased by 8.3% in some of the large regional economies (Brazil, Chile, Colombia, Mexico and Peru), “the largest jump in 15 years and higher than in other emerging markets”, highlighted the experts. experts.

The rapid increase in costs was partially due to rising food and energy prices. Core inflation excluding food and energy prices was lower at 6.3% but still above pre-pandemic trends.

Among the main factors that contributed to the increase in inflation were: the increase in the prices of raw materials and imports (in part due to global supply disruptions), exchange rate depreciations and the displacement of spending on goods rather than services.

Yumibanda refers that in the case of Ecuador, inflation is controlled despite not having activated the Central Bank. “It is still low, we closed at 2% in December of last year, it is relatively low and therefore guarantees price stability,” he says.

“The IMF is worried because the developed economies are having bouts of inflation, that in the long run is going to affect our exports, because they are going to buy less,” he points out.

To deal with this inflation, the analyst believes that trade agreements are an intelligent way to encourage imports and cushion the effects. At the same time, he says that it is necessary, at home in Ecuador, to lower production and electricity costs.

He refers that these actions are viable for the entire region as well, although he emphasizes that the other economies have an advantage over Ecuador because since they are not dollarized they can enter a devaluation process.

Other prominent risks that cast a shadow over the regional recovery include inflationary pressures in the United States and throughout the region, the possible change in investors’ perception of risk, and the consequent tightening of global and domestic financial conditions.

Meanwhile, the IMF assures that uncertainty about the evolution of the pandemic persists in the region, which continues to overshadow the recovery both globally and regionally.

However, a global survey by the consulting firm PwC revealed that there is greater optimism among businessmen, including some Ecuadorians, for the economic performance in 2022 compared to the expectations they had at the beginning of last year.

The survey report indicates that “at the beginning of 2022 there are hopeful signs of economic recovery.” Factors such as environmental commitment, growth prospects, the fight against social inequality and investment approaches are some of the points addressed.

Other policies with a social focus

For his part, to reduce this uncertainty and work under the IMF’s suggestions, Albán says that other policies that may be consistent are strengthening entrepreneurship incubators and guaranteeing access to training.

“An interesting way of investing in coming is to enhance people’s technical skills… not traditional academic training, but technical training. Unfortunately, this offer is considered the poorest offer in education… rather, this training allows one to gain skills that make it easier to start a business”, he says.

He mentions that they are all viable to be implemented at the regional level due to the similarities of the social realities of each country and also through alliances between countries.

“Regional action would be very important for this… under agreements that encourage development at the regional level, that not only come with the conditions of free trade agreements, let’s imagine an agreement for training technical capacities, it would be very valuable and innovative,” underlines.

The analyst says that “it depends a lot on what planning, what public policy and how much importance governments give to this, since everything starts from a political will.

“At the end of the day, it is public spending that would be reflected in better living conditions for citizens… that is to say that it is not money delivered as a kind of universal basic income, but rather that resources are delivered and channeled. .. and it is not simply an effort that tomorrow represents a vote, but the development of citizenship”, he points out. (I)