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LAC post COVID-19: Challenges and opportunities for Central America, Haiti, Mexico, Panama and the Dominican Republic

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REGIONAL OVERVIEW

By Arnoldo López and Marta Ruiz Arranz

The global coronavirus (COVID-19) outbreak will have a significant negative impact on health, the economy, and on the social advances made around the world over the last decade. The contraction in economic activity may exceed that of the Great Depression, so it is crucial that policies be implemented to cushion the social impact, protect vulnerable populations, and support robust, dynamic recovery, while at the same time maintaining macroeconomic stability. Furthermore, the pandemic has inevitably led countries to reflect upon how prepared they were to deal with it.

In the countries of the region comprising Mexico, the Central American isthmus, Haiti, and the Dominican Republic (henceforth, the CID region), the data show that their health systems and available resources were very limited. For example, Honduras, Nicaragua, and Guatemala have fewer than one hospital bed per 1,000 inhabitants, while Costa Rica and Mexico fewer than two, compared to three per 1,000 in Uruguay and Spain and eight per 1,000 in Germany.

Meanwhile, some 60 percent of the total workforce of the CID region workers work in the informal sector (though this varies significantly from country to country), which makes it difficult to get financial support to those in need and places both them and their families in an even more precarious position. Compared to people in Latin America and the Caribbean (LAC), those in the CID region are more vulnerable in terms of social welfare, due to the shortcomings of their healthcare systems and the high proportion of the population whose situation is precarious.

With regard to their economies, the countries of the CID region are particularly susceptible to the performance of the economy of the United States, their main trade and investment partner, and source of remittances and tourism. In several countries of the region, annual remittance flows account for anything from 5% to 38% of GDP, depending on the country. These come mostly from workers in the United States who are employed in the most affected sectors of that economy, such as construction and services. According to various estimates, remittances to LAC will decrease by more than 15% this year. Furthermore, in a number of countries, tourism from the United States and Europe represents an important source of income. In contrast, the region is less exposed in terms of the external demand for raw materials, its being an exporter of primary products (e.g., coffee, sugar, and bananas). Moreover, it has benefitted from falling oil prices due to its being a net importer of gasoline. Despite the fact that its fiscal situation is less pressing compared to the LAC average, the downturn in economic activity and the climate of global risk aversion have brought with them more restrictive financing conditions and a tighter fiscal space. The IMF estimates that the CAPARD subregion (Central America, Panama, and the Dominican Republic) will contract by 2.6% in 2020 and Mexico by 6.6%.

In this emergency, the countries of the region have implemented a series of measures, based on the following priorities:

1) Tackling the health emergency and bolstering the health sector, for which purpose spending on the latter was increased, while medical and hygiene products were exempted from import duty.

2) Protecting vulnerable populations, which included a moratorium on mortgage repayments and on other loans. To protect people’s welfare, support was provided for those left jobless, price controls were introduced, the import duty was lowered on products in the market basket of consumer goods, and rent payments were temporarily suspended.

3) Supporting SMEs and protecting jobs, which included postponing the date for paying taxes and contributions, developing ways to support the tourism and retail sectors, and giving priority to domestic agricultural produce in purchases.

4) Maintaining the proper functioning of complementary markets. Countries reduced their monetary policy rates, reserve requirements and the capital/liquidity requirement for banks, held foreign exchange auctions, and allowed their central banks to purchase public debt on the secondary market. In addition, the public procurement process was streamlined.

With the curve of infection stabilizing and healthcare systems becoming better prepared, countries have now started planning how to resume economic activity, introducing new health measures and implementing strategies aimed at gradually unlocking various economic sectors based on their importance within the economic structure and the risk of infection they represent. With this reactivation in mind, albeit slow and gradual, it is important to look at what the priorities are for those most affected, in terms of creating the kinds of opportunities they now urgently need. To this end, we have come up with a series of proposals in three areas: the social safety net, macroeconomic policy, and the system of production.

SOCIAL SAFETY NET

Unfortunately, the main downside of the economic contraction has been the deterioration in social conditions. As a result of the pandemic and its economic impact (e.g., the reduction in remittances), it is estimated that the number of poor in the CAPARD region will increase by 4.3 million people in 2020 (see Fig. 2), placing their food security at risk (see section 4c to see how this could be mitigated by supporting the agricultural sector). The people most affected by the crisis will be those whose social protection net is weakest, as is the case with those engaged in the informal economy. Consequently, it is estimated that income inequality will also increase in the countries of the region (see Fig. 3 for a Gini inequality index estimate for the countries of the Northern Triangle).

All of this shows the importance of having a social safety net in place. Therefore, let us now take a look at the various aspects of that net, such as health, education, employment protection, and social programs to aid in the recovery.

HEALTH

The governments of the region have made significant efforts to address the fragile state of their health systems so as to ensure these are better prepared to deal with the pandemic and flatten the curve of infection, and also to be able to attend to new cases during the gradual opening-up stage and prepare for a second wave. For this purpose, the public health sector has been allocated a bigger budget with which to purchase medical supplies, hire more staff, and make improvements in infrastructure, as well as operational and administrative improvements.

Given the low proportion of public spending allocated to the public health sector in the region (see Fig. 4), the risk of new epidemics and the fact that health is among the public services that most benefit low-income households, it would be wise for the countries of the region to take a closer look at their healthcare systems and to develop a clear vision of what they hope to achieve in the medium term, including the possibility of maintaining the level of spending required to provide a more robust public health system for the future.

In terms of the efficiency of the healthcare system, there is a clear need to implement data intelligence to ensure better administration and provision of hospital services (e.g., a hospital bed management information system), along with the training needed for its management (e.g., in health informatics). It is also vital that a close relationship be forged between health science (e.g., diagnosis and vaccines) and service provision, and to establish formal mechanisms for public-private coordination.

Along with public education, the health sector is one of the public services that most benefits low-income households. For example, in the cases of El Salvador and Mexico, despite the significant limitations in the provision of these services, thanks to them over 40% of the population are net beneficiaries of public spending (see Fig. 5). Moreover, both education and health enhance human capital, which in turn contributes to medium-term economic growth. At the same time, the provision of in-kind public services may be efficient in more than just monetary terms, given the difficulty of delivering them due to the high proportion of people who work in the informal economy, decreased exposure to theft in remote, unbanked areas, and the lower risk of corruption and clientelism.

EDUCATION

In the education sector, a need for distance learning has arisen, which in turn has highlighted its benefits, such as lower costs and greater access. Nevertheless, the current situation has also laid bare the lack of infrastructure and digital skills required to engage in this form of learning successfully. Work is therefore needed to develop innovative teaching techniques, including adapting curricula and teaching methods, incorporating useful information from the web and technology platforms. At the same time, this would help children and young people to join in the fourth industrial revolution.

Making progress in these programs requires closing the connectivity gap in the region, so it is important to invest in broadband infrastructure and digital skills. While investment in broadband infrastructure is beginning to materialize, support is needed for distance learning via television and radio. These are currently the only information networks that reach the entire region.

EMPLOYMENT

It is estimated that between 7% and 21% of formal employment will be lost in the CID region, depending on whether the second half of the year sees the start of a recovery or continued recession.

Once measures have been taken to protect the jobs and income of workers during the pandemic, the question of what actions are required to ensure a return to work needs to be addressed. Some sectors will be back in operation very soon, albeit below their normal capacity, meaning some jobs will be recovered (e.g., in restaurants, construction, and industry); meanwhile, other employment sectors may take much longer to recover (e.g., tourism). In the case of the first, it will be important to provide liquidity during the resumption of activities (see section 4d on protecting the productive framework).

Meanwhile, in sectors where people have been inactive for a long period or find themselves in a vulnerable position, the following measures could be implemented to help make the return to work more effective:

  • Promoting job brokering (matching jobseekers with vacancies).

  • Job training to increase employability, with special emphasis on the adoption of new skills to increase the productivity and retraining of those who have been out of work.

  • Active policies to facilitate the redeployment of workers among the most affected sectors and those in recovery.

Lastly, it would be a good idea to create incentives for formalization and increased use of banking services, particularly targeting the beneficiaries of the social programs implemented during the crisis.

OTHER SOCIAL PROGRAMS

Given the increased number of social programs and the sums involved, it is important to combine the data from the various programs and strengthen the registration of beneficiaries in order to make it easier to target them. Furthermore, as they have been introduced in an attempt to mitigate the effects of the crisis, their countercyclical and temporary nature needs to be reflected in the design of such programs.

It is important to recognize that the current pandemic has highlighted the urgent need to rethink the model of social protection, in particular, the need for a system based on mitigating the effects when threats to workers’ income and consumption—and those of their families—become a reality; threats that range anywhere from epidemics and climate phenomena to illness, disability, and so on. Currently most elements of the social safety net (e.g., the health service, disability and life insurance, pensions, childcare, and subsidized mortgage loans) are dependent upon a person’s being formally employed, so the scale of the informal economy is an indication that the system of protection is insufficient by design. Looking to the future, society in the region needs to reflect upon the system of protection it requires.

Finally, the pandemic has shown that support programs need to be designed with people in mind rather than the institutions that provide the service. A situation of this nature calls for the creation of comprehensive support programs that are coordinated inter-institutionally.