Remarks by Angel Gurría
Paris, OECD - 22 May 2020
(As prepared for delivery)
Dear Michael, Ladies and Gentlemen,
It is a pleasure to participate in this virtual meeting of the Inter-American Dialogue. I would like to thank Michael Shifter and the Inter-American Dialogue for organising this meeting at such a crucial moment for our economies, our societies and for humanity. Today, we will discuss the economic and social effects of the COVID-19 pandemic for Latin America and the Caribbean, and how to ensure an inclusive and sustainable recovery in the region. Let me provide some context of where we currently stand.
First, on the health front: the pandemic has cost almost 320 000 lives worldwide so far, and the number of confirmed cases amounts to 4.8 million. While the infection rate is now slowly decreasing in some countries, the virus keeps spreading rapidly in Latin America and the Caribbean. By today, the LAC region has registered more than 30 thousand deaths and more than half a million confirmed cases . However, it is important to take into account the levels of underreporting of the official figures, which are quite high in the LAC region. As countries slowly start to undertake deconfinement measures, the priority must remain to test and to strengthen healthcare capacity in a region where, despite improvements, health expenditure per person is still less than one fourth of what is spent in the OECD.
On the economic front, the crisis has arrived at an already difficult time for the global economy, which was grappling with very high levels of corporate and public indebtedness; serious trade, investment and geopolitical tensions; and pressure on multilateral organisations. The broader context of persistently weak productivity growth, increasing inequalities, as well as climate change, makes for a perfect storm.
It is almost impossible to quantify the exact economic impact that COVID-19 will have, but our current assessment is that many economies will face their strongest recession since the Great Depression in 1929. We are currently working on new economic projections, including for six major Latin American economies. These will be published in the next OECD Economic Outlook on 10 June. Preliminary estimates, however, suggest that for each month of confinement, we will see a reduction of around 2% in annual GDP growth in OECD countries. We have also seen an unprecedented collapse in Composite Leading Indicators (CLIs) in most major economies in April, as containment measures for Covid-19 continued to have a severe impact on production, consumption and confidence. Brazil, for instance, is in the midst of a sharp slowdown, with its CLI indicator decreasing by 7.8%.
Unemployment is also soaring in the major economies. For example, more than 30 million Americans have submitted new unemployment benefits claims in the past 6 weeks. We are also likely to face significantly higher public debt levels, a possible wave of insolvencies among private firms, and significant changes in global value chains.
In Latin America, this crisis also comes against a challenging backdrop:
First, at the economic level. Growth in Latin America was already very low in 2019, with a regional average of 0.1%, according to ECLAC . COVID-19 and the confinement measures are affecting both production and domestic demand, while trade flows (especially towards the region’s main partners - the United States and China), remittances, tourism and foreign direct investment flows keep declining. Our latest estimates show that, even under the most optimistic scenario, FDI could fall by more than 30% in OECD countries in 2020. And the impact could be even larger for developing economies . The simultaneous decline of commodity and oil prices will create additional challenges for fiscal and external accounts in several countries of the region.
Moreover, many LAC countries have limited policy space to react. On average, fiscal deficits have risen from 0.4% of GDP in 2008 to 3% in 2019, while gross public debt has risen from 40% to 62% of GDP over the same period. This leaves much less fiscal space than after the global financial crisis. Our recent report Revenue Statistics in Latin America and the Caribbean highlights that tax revenues are also limited on average across the region. Despite reaching a historic peak of 23.1% of GDP in 2018, they remain 10 percentage points below the average for the OECD, at 34.3% of GDP . The foreign debt issue will also be a major burden to growth in many LAC countries, especially as for the majority it is denominated in dollars.
Second, at the social level. The global recession is hitting the region in a context of already high rates of unemployment, inequalities, social discontent and a “vulnerable middle class”. One of the main challenges of this crisis is to protect the most vulnerable and avoid a rise in poverty, which already affected 30% of the population in 2019. ECLAC estimates that this number could rise to almost 35% by the end of this year.
Among micro, small and medium enterprises, which represent 99% of firms and 60% of employment in LAC, micro and small businesses are particularly at risk of falling into bankruptcy. This increase in unemployment could have a severe impact on the “vulnerable middle class” (37% of the population), which, in its majority, does not have access to social protection.
The crisis can also disproportionately affect women, who typically bear a larger burden of domestic tasks. Women are also more likely to be in informal employment and are more exposed to domestic violence during lockdowns.
Last but not least, the pandemic will also have serious consequences for informal workers who represent more than half of the workforce in the region. Supporting them will require creativity and innovation.
The good news is that the majority of countries in Latin America have taken swift action to limit the spread of the virus and to address the challenges associated with the pandemic. Social distancing measures are indeed common to all countries in the region, with some countries having implemented very strict national lockdowns, such as Argentina, Colombia, Ecuador and Panama . Strengthening health systems has also been a priority in many countries. Colombia, for example, has envisioned an increased capacity of 371% in Intensive Care Units , to be implemented in four expansion phases. Many countries in the region have also built successful cash transfer programmes to support low-income households, especially Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, and Uruguay.
However, more must be done to ensure an inclusive recovery in the long-term. Let me briefly outline four key areas where efforts can be bolstered:
First, spending well and effectively. In some countries, temporary spending increases could be combined with reforms that underline a commitment to fiscal sustainability after the pandemic. Governments can also help by improving the conditions for investment and entrepreneurship, given that much of the recovery efforts will fall on the private sector and stronger public-private co-operation. Supporting firms with their wage bills, reducing work hours and providing financing with public loan guarantees can also help to limit the damage.
Second, this crisis has hit Latin America at a time when trust and satisfaction among citizens are low, with close to 64% of LAC citizens expressing no trust in their governments. This presents an opportunity to address one of the key policy priorities: strengthening social protection and inclusion while rethinking the social pact. The response to the crisis should promote innovative options to move towards stronger social protection systems, protect the most vulnerable, promote quality jobs and improve the quality and universality of healthcare. This is an ambitious endeavour, which we will address in our next Latin American Economic Outlook, as well as in our upcoming virtual Ministerial Meeting on Informality and Social Inclusion in the context of our Latin America regional programme in July.
Third, international co-operation is more important than ever. To effectively tackle the pandemic, we need an ambition similar to that of the Marshall Plan, but at a global level. This will require increased financial relief to low and middle-income countries, where this crisis comes at a time of rising concern for the sustainability of public debt, and especially external public debt. I had the opportunity to be part of the coordination efforts among several international organisations and fora, including with the Organisation of American States Joint Summit Working Group Meetings, the SEGIB and the CAF, as well as with the G20.
Finally, this crisis has underlined the need to increase the resilience of our systems, of our economies. This will not be the last shock to our societies, and we must reflect on and implement policies that strengthen our resilience. Yet, as we forge ahead, we cannot lose sight of the very real, ongoing and urgent threat: climate change. Aligning our recovery and economic stimulus policies with our efforts to protect biodiversity and the environment – while increasing our resilience to natural disasters – remains vital.
Dear Michael, dear friends,
This COVID19 pandemic is an unprecedented shock to out economies and societies with catastrophic consequences. However, it is also an opportunity to reinvent our societies, our resilience, our regional and multilateral co-operation, and to win back confidence in national, as well as international institutions. It is also an opportunity to learn from each other and share best practices.
We are well equipped to coordinate such policy efforts, and we stand ready to work with and for the region’s economies to promote better policies for better lives, just like we recently did with Colombia and Brazil, and through our OECD digital hub on COVID19, where we publish our policy briefs, data, analysis and recommendations to support policymakers. Thank you very much.