Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
Unlike the 2008 financial crisis, this time we are experiencing a simultaneous shock on global supply and demand. This unusual combination, coupled with huge emergency fiscal funds, suggests that the recovery phase in the economy is unlikely to be V-shaped.
The type of recovery will depend on the length of the economic downturn, the fiscal impacts of the crisis, the financial capacity and conditions of governments and banks, the effects of the crisis on key sectors, the timing of recovery from the pandemic and consumption conditions, among other critical factors.
In fact, there are a number of factors that prompt a slow recovery and the possibility of serious economic and social damage. These include disruption of productive activities, fiscal impact, increased public account financing costs, liquidity constraints, limited effectiveness of monetary policies, potential dysfunctions in logistics chains, foreign trade and essential public services, increased unemployment, falling incomes, and recession in the United States and Europe.
In this context, going back to normal economic activity in China will not help significantly to accelerate the recovery of the global economy, either through foreign trade or fiscally. One main reason is that this economy faces domestic weaknesses that hinder its ability for major fiscal actions.
So, what can we do? As much as it is necessary to put out today’s fire, it is also important to consider the need to preserve resources and the capacity for action for the next stages of this healthcare, social and economic crisis.
While we all recognize that this is a profound, serious emergency, prudent action and planning for the use of scarce resources is necessary, taking into account the future need for financial and non-financial, fiscal and non-fiscal resources. Such planning may prove essential in helping economies sail through the recovery phase, making it less painful, and promoting more effective and orderly actions. We must therefore consider a broader strategy to sequence interventions and the resources and instruments necessary for each phase.
The most important task in the current phase is to support emergency public actions in the social and healthcare areas, as well as micro and small businesses, and to provide liquidity to financial markets. But if economic downtime persists, the second phase will likely require instruments and resources to support continuity of essential activities and services, supply and logistics chains, foreign trade, including imports of inputs and other needs. Appropriate tools and resources will be needed in the recovery phase to rebuild critical economic sectors, markets and systems, perhaps in addition to more macroeconomic and social support.
Thus, an arsenal of articulated instruments will need to be used in the short and medium term. The use of the “water” should be planned, as the “fire” may rage for a long time and have different types of impact. In any case, the use of less conventional instruments should also be considered, if necessary.
Despite the colossal difficulties, the good news is that although we work under great pressure, many authorities are aware of these challenges. The other good news is that the financial systems of many countries are sound, in part because of prudent macroeconomic and regulatory measures taken in recent years. Preserving this condition will make a difference in the recovery phase.
At this point, one thing is certain: The greater the articulation, coordination and planning, the greater the capacity to optimize the use of scarce resources and improve the impact of public and private interventions. This will likely apply both internally in each country and for international cooperation efforts.
