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IDB report urges new social compact to spur growth, tackle pandemic and inequity
  • Careful sequencing of fiscal policies is key to growing sustainably and equitably after the pandemic

Latin America and the Caribbean needs a new social compact of economic policies to ensure more inclusive growth following the pandemic, according to a new report by the Inter-American Development Bank (IDB).

The report—Leaving the pandemic tunnel with growth and equity: a strategy for a new social compact in Latin America and the Caribbean (in Spanish)—presents a sequencing of policies to generate the necessary confidence for solid and equitable growth. It is the IDB's third and final report on public policies to address the COVID-19 pandemic.

"We are in a difficult dilemma," said Philip Keefer, senior economic advisor for the IDB’s department for Institutions for Development and the report’s co-author. "We're going to emerge from the pandemic with more poverty, more inequality, and with a hard-hit financial and business sector. We have to think of big ambitious reforms, because ambition responds to necessity."

The report advocates for fiscal policies that, given tight budgetary constraints, begin with allocating resources toward the health sector and to limit losses. Once the most urgent needs related to the pandemic are addressed, governments should aim to reallocate spending from areas that do little to promote growth and equity to those such as infrastructure, that will have a greater impact to promote inclusive and sustainable growth -- within a new institutional framework that ensures the spending is done efficiently.

For a region that has historically raised less tax revenue than more developed economies, the new social compact includes more efficient public spending options and tax reforms. It proposes lowering entry costs for firms, lowering job creation costs, and capital costs, and taking steps to improve human capital. The report urges governments to review programs that protect workers from shocks with the objective of reaching the most vulnerable populations.

The report organizes the reform options to be incorporated into the social compact into two phases: inside and outside the tunnel. The priorities of the first phase, in the tunnel:

  • To avoid systemic crises, both fiscal and financial, with measures that preserve the productive fabric of the economy and prevent liquidity problems from becoming solvency crises;
  • To limit losses that will slow recovery—both in terms of health and the economy; and
  • To begin the construction of the social compact, establishing a clear path of reforms through credible announcements that will lay the foundations for inclusive growth when leaving the tunnel.

When leaving the tunnel, after acquiring a vaccine or learning to live with COVID-19, there are three priorities:

  • To remedy unavoidable losses of human and intangible capital;
  • From the options of fundamental reforms, implement those that can be implemented quickly and with immediate impact: reallocating public spending to sectors that stimulate recovery more quickly, and encouraging measures that will promptly stimulate greater employment through reductions in non-wage labour costs and other operating costs of enterprises; and
  • To follow the path of reform, advancing with the inclusive growth agenda so that, unlike previous crises, countries can begin to close the gap with advanced economies and address pending challenges such as inequality and environmental sustainability.

"The compact is not a utopian dream,” said IDB senior economic advisor for the Research Department and report co-editor Alejandro Izquierdo. "Starting reforms within the pandemic tunnel can open the door to a virtuous cycle, in which it is more attractive to finance those countries that have done the reforms today in order to have the best results in the future. This increased immediate funding will allow more resources to counter the pandemic and preserve more firms, jobs and households. Moreover, a compact that opens more opportunities while shoring up social protection will open the political space to carry out the reforms."

About the IDB

The Inter-American Development Bank's mission is to improve lives. Founded in 1959, the IDB is one of the main sources of long-term financing for the economic, social, and institutional development of Latin America and the Caribbean. The IDB also conducts cutting-edge research projects and offers policy advice, technical assistance, and training to public and private clients throughout the region.

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More Information

Alejandro Izquierdo
Senior Economic Advisor
Research Department -- Office of the Chief Economist
Inter-American Development Bank
alejandroi@iadb.org

Philip Keefer
Senior Economic Advisor
Department of Institutions for Development
Inter-American Development Bank
pkeefer@iadb.org