More than one third of formal employment and one fourth of the Gross Domestic Product (GDP) of Latin America and the Caribbean are generated by sectors that the economic crisis stemming from the coronavirus disease (COVID-19) has hit hard, ECLAC revealed today in a new study on the pandemic’s effects in the region. Furthermore, less than one fifth of all employment and of GDP is generated in sectors forecast to be only moderately affected.
The Economic Commission for Latin America and the Caribbean (ECLAC) released this Thursday, July 2 its Special Report COVID-19 No. 4 entitled Sectors and businesses facing COVID-19: emergency and reactivation, which was presented by the organization’s Executive Secretary, Alicia Bárcena, in a virtual press conference transmitted from its central headquarters in Santiago, Chile.
The economic crisis growing out of the pandemic has led to the total or partial suspension of production activities. ECLAC’s latest report identifies three groups of sectors, based on the magnitude of the effects of the crisis (strong, significant and moderate). The most affected sectors are wholesale and retail commerce; social and personal community activities; hotels and restaurants; real estate activities (commercial and rental); and manufacturing.
“The crisis is hitting industrial sectors with potentially greater technological dynamism the hardest and, therefore, it will deepen the structural problems of the region’s economies. This means that if the proper policies are not implemented to strengthen these branches of production, it is highly probable that a regressive structural change will be set in motion that would lead to the re-primarization of the region’s economies,” Alicia Bárcena warned during the presentation of the report.
According to the study, the vast majority of companies in the region have seen significant declines in their revenue and are struggling to maintain their activities, since they face serious problems in fulfilling their wage and financial obligations and difficulties to access financing for working capital. According to information compiled through the first week of June 2020, the impact will be much greater for Micro, Small and Medium-sized Enterprises (MSMEs). ECLAC estimates that more than 2.7 million formal companies are likely to close in the region – of which 2.6 million are microenterprises – entailing a loss of 8.5 million jobs, without including the employment cuts made by companies that will continue to operate.
The impact will be very different depending on the sector and the type of company. Several of the highly affected sectors, such as commerce and hotels and restaurants, have a large quantity of microenterprises and small companies, which will be hit the hardest. For example, commerce will lose 1.4 million companies and 4 million formal jobs while tourism will lose at least 290,000 companies and 1 million jobs.
Starting in March 2020, governments announced a broad set of measures to sustain the production structure and avert job losses and the destruction of capacity in companies. ECLAC has identified 351 actions, grouped into six categories based on their goals: liquidity, credit, direct assistance, employment protection, production support, and exports. Details on all of these are available at the COVID-19 Observatory, which the Commission has implemented to meet the needs of its member countries.
The deferment of payments and improved access to credit have been the most common actions taken to confront the emergency caused by the current crisis. These measures assume that companies will earn profits to be able to pay back loans, pay taxes and make deferred payments, but the outlook does not indicate that this will happen by itself in the next couple of years since it is very likely that the business sector recovery will be slow and gradual, the United Nations organization warns.
In light of this situation, ECLAC stresses the need to provide large-scale responses to avert the destruction of production capacities. To this end, it proposes four sets of measures:
1. Extend the timeframes and scope of intervention related to liquidity and company financing.
2. Co-finance company payrolls for six months to avert the destruction of capacities.
3. Make direct cash transfers to independent workers.
4. Support big companies in strategic sectors that are seriously harmed by the crisis.
More specifically, ECLAC promotes the deferment or cancellation of tax payments, pension contributions and property taxes, or early payout of tax refunds until at least the end of 2020, along with the suspension of payments for basic services (electricity, Internet and natural gas) without incurring fines, until the end of 2020. In addition, it proposes making credit conditions more flexible by extending grace periods to at least one year and repayment periods to five years or more, while also strengthening credit operations through development banks.
The co-financing of payrolls would be provided in distinct proportions, depending on company size, ranging from 30% for big businesses to 80% for microenterprises. It is estimated that this measure would cost the equivalent of 2.7% of regional GDP. Meanwhile, cash contributions to 15 million workers would cost 0.8% of GDP.
Furthermore, the Commission highlights that the important role played by big companies must be taken into account since they provide 39% of formal employment and more than 90% of exports. Among the measures for reactivation, ECLAC includes (in addition to co-financing the payroll and better conditions for accessing credit) the possibility that the State participate in the recapitalization of big companies in strategic sectors. In this area, it would also be relevant to increase the efficiency, transparency and regulation of capital markets.
These proposals complement those announced previously by ECLAC: the granting of an Emergency Basic Income (EBI) equivalent to the value of one regional poverty line for six months to the entire population living in poverty in Latin America and the Caribbean, along with the provision of an anti-hunger grant equivalent to 70% of the regional extreme poverty line.
The EBI, the anti-hunger grant, and support for companies and employment are an articulated set of measures. The EBI and the anti-hunger grant seek to protect vulnerable sectors and reduce the decline in demand, which would lead to fewer negative impacts on companies and employment. Meanwhile, the measures to support companies will help preserve jobs, which prevents an increase in poverty and extreme poverty, thereby reducing the cost of the social measures.
According to the report, the crisis will produce changes within companies and in the organization of production chains. New technologies will be key in the model for company operations.
“The quest for greater productivity and efficiency must move towards a sustainable and inclusive transformation. Active industrial policies will be essential to preventing the crisis from leading to company closures, job losses and costs for the environment,” Alicia Bárcena emphasized.
In this sense, ECLAC underscores that production chains will undergo a profound reorganization. Big companies will seek to increase resilience in production networks by diversifying suppliers in terms of countries and companies to reduce their vulnerability, prioritizing suppliers that are closer (nearshoring) and relocating strategic production and technological processes (reshoring). In addition, the rupture of international networks of suppliers creates opportunities for the development of national and regional capacities, the report indicates.
ECLAC’s Executive Secretary emphasized that the COVID-19 crisis highlights the need to move towards a new development model. To achieve that, it is necessary to execute “policies that would allow for addressing the emergency and implementing a strategy to overcome the structural weaknesses of our economies and societies,” she concluded.