The title is that of the World Bank’s semi-annual report for the Latin America and Caribbean region, which was released on April 12. There is much for South Africa’s policymakers to learn from this report.
Do you know how many countries there are in Latin America and in the Caribbean? There are, in fact, 26 Latin American countries, 13 independent Caribbean countries and a further 21 Caribbean territories and other statuses.
Thirty-three of the 39 countries in the region are members of the Community of Latin American and Caribbean States, a regional bloc that aims to unite, strengthen and promote the interests of the region. The 33 member countries are Antigua and Barbuda, Argentina, Bahamas, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, the Dominican Republic, Dominica, Ecuador, El Salvador, Grenada, Guatemala, the Cooperative Republic of Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Santa Lucia, the Federation of Saint Kitts and Nevis, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago, Uruguay and Venezuela.
The report states: “Recent developments, including a new oil price shock and the outbreak of the [Covid-19] epidemic, will push the region into recession. Many countries are struggling to contain the spread of the Covid-19 epidemic while avoiding a dramatic decline in economic activity.” If there was any doubt that the Third World, South Africa included, would be flung into a Covid-19-induced recession, the World Bank has dispelled that.
Before considering the lesson that South Africa can take from the Latin America and Caribbean region, South African business should consider the countries of this region to be its competitors, particularly in the European Union, where it could expect a contracted market and increased competition.
The key lesson that businesses in this country can learn relates to the protection of jobs and firms. Covid-19 is placing human capital at risk. Human capital is defined as the skills, knowledge and experience possessed by an individual or population, viewed in terms of their value or cost to an organisation or country. The other lesson is that falling incomes and disrupted supply chains raise the prospect of food insecurity.
The World Bank states that the standard advice in the presence of adverse shocks is to protect workers, not jobs. This advice is predicated on the grounds that most shocks affect specific firms, sectors or locations, and allowing sectoral or spatial restructuring is bound to increase efficiency. In normal circumstances, protecting jobs slows down firms’ entry and exit and results in slower productivity growth. Protecting jobs through transfers may facilitate rent-seeking and further undermine economic dynamism.
However, the World Bank believes that the standard advice does not hold when an economic shock affects basically everybody at once. The job-specific human capital that may be lost, if it is not protected, would be very difficult to recover later.
Support for jobs and firms must be based on a dual approach. The first should be aimed at important employers or exporters – those with significant backward and forward linkages or those in sectors such as logistics and utilities, which enable other economic activities. The second should be focused on smaller firms that cannot be efficiently reached through tailored approaches. The goal in this instance must be to ensure the availability of finance for their mounting working capital needs.
It is critical that South Africa’s policymakers urgently identify and prioritise the country’s important economic sectors and conceptualise and make available financial support instruments for small, medium-sized and microenterprises.