How to promote a more sustained recovery?

The economies of Latin America and the Caribbean are losing momentum after a strong recovery last year. Driven by the recovery of major trading partners, rising commodity prices, and favorable external financing conditions, growth in the region is estimated to close around 7% in 2021. Progress in vaccination and fiscal support measures also help explain that growth.

But recent estimates show that growth in 2022 will drop back to 2.5% or less, upon the loss of strength of the Chinese economy, disruptions in supply chains, rising inflation, the emergence of the Omicron variant, new uncertainties about the end of the pandemic, the eventual tightening of monetary policy in the United States, among other—including country-specific—factors.

In view of this, and considering the increase in poverty and inequality in the region in recent years, authorities should design economic recovery strategies that promote a rapid return to the path of growth. But what types of public policies should governments implement?

At a time when fiscal room is already quite limited in several countries in the region due to countercyclical policies, the key will be to target private activities that combine high economic returns with high social returns and that are capable of yielding results in relatively short timeframes, and in relatively low terms and costs, in order to pave the way to a virtuous circle of growth.

For this purpose, policies could target relatively new markets, which have fewer typical constraints and rigidities than mature markets, new business models and innovative and fast-growing activities, as well as activities with potentially long, more resilient local value chains. Indeed, economic recovery programs are an opportunity for governments and the private sector to refocus efforts in favor of sectors with high growth potential with a pragmatic vision and a sustainability approach.

The range of activities varies by country, but we can mention some with a regional or sub-regional scope. For starters, let’s consider the carbon market. The region has the greatest potential to offer nature-based solutions in a trillion-dollar market. The countries of the Amazon region, for instance, have tremendous opportunities to tap into these markets with a leading role, promoting countless projects, participating in the development of new solutions and technologies, and attracting high-quality and long-term resources and investments. Moving forward will require ensuring credit integrity, strengthening internal value chains, and ensuring a project portfolio.

Think now of the opportunities of e-commerce and digitalization. E-commerce has already been growing rapidly, and could grow further with legal and regulatory reforms that streamline and facilitate cross-border trade and systematize and harmonize procedures and promote physical and non-physical infrastructures that facilitate greater trade and attract investment. The digitalization of companies will enable greater access to markets, cost reduction and the use of advanced technological tools that will help explore the immense potential associated with the “half-empty glass” of low productivity.

Think also about nearshoring opportunities, i.e., moving to countries in the region with low labor costs and other favorable conditions for U.S. companies that operate especially out of Asia and target North American markets, a move that would greatly benefit the countries of Central America and the United States and the Caribbean. But to take advantage of the immense potential tapping into the largest market in the world, we will need special regimes for investment and export promotion, bureaucratic streamlining, regulatory harmonization, logistics investments, regulatory adaptations to rules of origin, regulation of the relationship between free zones and the national customs territory.

Another opportunity is the formation and strengthening of value chains for processed foods​and for minerals such as lithium for use in the growing battery market. It is about industrializing commodities based on comparative and competitive advantages already existing in the region. This would require regulatory and tax adjustments, logistical investments, support for the provision of specialized technical services, among other links in the value chain.

Lastly, consider activities associated with the creative economy, such as entertainment, art, and design, as well as self-care activities, such as health, wellness, and lifestyle services. These are sectors that demand a lot of qualification and professional talent, which is abundant in the region, personalized and little or non-automatable and, therefore, with a high potential impact on the creation of jobs and income. To this end, it is necessary to develop and improve the institutionality of aspects directly or indirectly related to markets, a better governance and coordination of policies and stakeholders, so that the activities and the formation and expansion of these markets are given free rein.

While each of the above examples requires specific policies and measures, some have a cross-cutting scope, such as capacity building, support for entrepreneurship and the internationalization of companies, and measures that support investment and the strengthening of new companies with high competitive and market potential, including accelerators and business-oriented financial programs. The countries that best know how to optimize and enhance economic revival actions with a forward-looking perspective will emerge from the crisis in a better position, will create more jobs and, most likely, will grow more sustainably.