This Monday on March 29, the World Bank (WB) increased its growth forecast for the Peruvian economy for 2021 from 8.1% to 7.6%, according to the most recent semi-annual report for Latin America and the Caribbean, “Resume Growth.”
The World Bank’s forecast for the Peruvian Gross Domestic Product (GDP) shows the second highest growth in the region this year, only behind Guyana (20.9%) and ahead of Argentina with 6.4% and Chile with 5.5%.
Latin America and the Caribbean suffered more damage to the health and economy caused by the COVID-19 pandemic than any other region, but as the region economy begins to recover, new opportunities for significant transformation in key sectors arise, according to the new World Bank report.
Due to the pandemic, the GDP in Latin American and Caribbean region (except in Venezuela) fell 6.7% in 2020. A recovery of 4.4% is expected by 2021, compared to the Bank’s forecast at the end of 2020 from a decrease of 7.9% by 2020 and a GDP growth of 4% by 2021.
The enormous shock caused by the pandemic could lay the basis for increased productivity through economic restructuring and digitization. Other opportunities also arise from innovations in the electricity sector, according to the World Bank’s semiannual report for the LAC region, “Resume Growth.”
“The damage is severe, and we have witnessed a lot of suffering, particularly among the most vulnerable ones,” said Carlos Felipe Jaramillo, World Bank Vice President for the Latin American and Caribbean region. “However, we must always look ahead and make the most of this opportunity to carry out the necessary transformations to ensure a better future.”
The sharp contraction caused by the pandemic last year had enormous economic and social costs. In general, the unemployment rate increased and poverty skyrocketed, although in some countries the massive use of social transfers softened the social impact of the crisis.
The COVID-19 crisis will have a long-term impact on the economies of the region. Lower levels of education and employment are likely to reduce future revenue, while high levels of public and private debt can cause tension in the financial sector and slow down the recovery.
Despite these challenges, there are positive areas. International trade in goods remained relatively good, despite the sharp fall in trade in services, particularly tourism. Most commodity prices are higher than the prices before the COVID-19 crisis, partly thanks to China’s early recovery.
This is a good thing for exporters of agricultural and mining products. Remittances to the region increased compared to the pre-pandemic period, a very important issue for several countries in the Caribbean and Central America region.
Likewise, capital markets remained open for most of the countries in the region. In fact, international indebtedness increased, contributing to the mitigation of the economic and social impact of the COVID-19 crisis. Most countries in the region incurred in significant budget deficits since the beginning of the pandemic.
The additional expenditure was used to strengthen health systems, provide transfers to households, and help businesses. At the same time, the implementation of proactive measures helped debtors and reduced the risk of financial crises.
“As economies recover this year, some sectors and companies will win and others will lose,” said Martín Rama, World Bank Chief Economist for the Latin America and Caribbean region. “This pandemic gave rise to a creative destruction process that may result in faster growth but can also widen inequality within and between countries in the region.”
For example, hotel and personal services may suffer long-term damage, although information technology, finance and logistics will expand. In the medium term, the profits may be greater than the losses. The greatest transformation may result from accelerated digitization, which could lead to greater dynamism in financial intermediation, international trade and labor markets.
Technology is also an opportunity to transform the energy sector. Latin America and the Caribbean region have the cleanest power generation matrix of all developing regions, mainly due to the abundance of hydroelectric energy. The region should have the cheapest electricity in the developing world, but instead it has the most expensive one, essentially due to inefficiencies.
Businesses and households in the region pay much more for the electricity they consume than it would cost to generate it. These inefficiencies are reflected in frequent blackouts, technical and business losses, overstaffed public companies, and abuses of market power by private generators.
With an appropriate institutional framework, technology may increase competence in the sector, thus reducing the price of electricity and increasing the share of renewable energy. For example, distributed generation may make companies and households depend on their own energy sources, such as solar panels, and buy or sell electricity to the grid depending on the time of day.
In addition, an increase in cross-border trade in electricity may capitalize differences in installed capacity, generation costs, and seasonal factors of demand to generate mutual benefits. However, this efficiency improvement will only take place if electricity is bought and sold at an appropriate price.
While there are signs that the region’s economies are recovering and hopes that this disruption will have some positive outcome, the outlook for this year remains uncertain. The deployment of the vaccines has slowly progressed in the region, and herd immunity could only be achieved by the end of 2021.
Likewise, new waves of infections could occur as new variants of the virus emerge. As we actively prepare to recover better, the priority is still the protection of human life and livelihoods.