IDB report urges multidimensional approach to improve inclusive and sustainable growth

Latin America and the Caribbean will need a multidimensional approach to boost inclusive growth in the midst of the pandemic, taking into account factors that range from fiscal and monetary policy to climate change, among others, according to a new report by Inter-American Development Bank.

Inclusion in Times of Covid-19 estimates that economic growth is crucial to reduce poverty and contributed about 60 percent of the reduction in pre-Covid-19 poverty. But advances in poverty reduction and reducing inequality stalled after 2013.

Now poverty and inequality are increasing due to the health emergency. Recent evidence on the pandemic shock suggest 60 percent of business closures and job losses impact low income families while only 20 percent affect the wealthiest. “Unfortunately, if we continue with the trend, our region will be poorer, more indebted and with worse disparities after the pandemic. Inclusive and sustainable growth will be more needed than ever,” said the IDB’s Chief Economist, Eric Parrado.

In this context, the report provides policymakers with recommendations to multiple fronts such as reforms to tax systems and enhancing trust in institutions. The report complements the Macroeconomic Report issued in April, Policies to Fight the Pandemic.

“Our message is straightforward and urgent: for the sake of the wellbeing for all, countries must move aggressively to address some of the root causes of the region’s inequality that is worsening under the pandemic,” said the IDB’s Principal Advisor, Andrew Powell. “Our report tries to identify the sweet spots in selected areas or in other words pro-growth policies that would particularly help poorer households.”

The challenges ahead

The report looks at six angles that have bearing on inclusive growth: trust, climate change, regional inequality, monetary policy, financial policy, and fiscal policies.

On regional disparities, the gaps between the richest and poorest subregions within countries are narrowing, the data shows, but slowly. The report estimates it would take 27 years to reduce regional disparities by 50 percent. It recommends carefully targeted fiscal programs to accelerate the reduction.

Latin America and the Caribbean individuals displaying less trust in each other as well as in institutions such as the judiciary, political parties and the police, when compared to other regions. The report recommends greater transparency on the part of governments, strengthening corporate governance and creditor rights, and stronger judiciaries and law enforcement, among other policies.

The region is especially vulnerable to rising temperatures and more natural disasters, impacting income levels in many countries. The report notes that major climate events cause a 2.2 percent loss of GDP, which is not recovered, and fiscal impacts such as higher deficits. The study recommends further mitigation and adaptation measures, which have big payoffs in helping the most vulnerable populations.

On the fiscal front, Latin America and the Caribbean’s tax and social policies have proven surprisingly ineffective in achieving inclusive growth. The report urges governments to rethink tax systems and public spending, aiming for more progressive taxation and finding sweet-spot policies – that boost economic activity and incomes, especially for poorer households.

Inflation is under control in most of the Latin America and the Caribbean countries. “New evidence on the region suggests that low and stable inflation is pro-poor, as is appropriate expansionary monetary policy in bad times,” says IDB Senior Economist Victoria Nuguer, co-author of the report. “These results underline the need for strong, independent central banks that can operate outside of the political process, regardless of the monetary policy regime.”

Financial systems are stable, but penetration of banking services is low and access to financial services remains a work in progress. Greater financial inclusion is associated with inclusive growth.  The report recommends increasing access without jeopardizing financial stability, with financial education providing an easy win for governments.