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Latin American economy faces painful road back from coronavirus slump

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Latin America is the world’s worst-hit region by the coronavirus pandemic and its economy faces a slow and painful recovery, with a growing risk that worsening poverty and inequality will trigger political upheaval, economists have warned.

By the end of this year, the region’s output will still be 4.8 per cent below its pre-pandemic level, the worst performance in the world, according to IMF forecasts. Carlos Felipe Jaramillo, World Bank head for Latin America and the Caribbean, believes it will not recover its pre-pandemic gross domestic product level until at least 2023.

“2020 was a disastrous year . . . and we’re very concerned for what that means for poverty and inequality,” Mr Jaramillo told the Financial Times. “2021 should be better but it will only be a very gradual recovery, I don’t think we’re expecting anywhere a quick bounceback.”

The sluggish recovery is largely a problem of Latin America’s own making; global economic dynamics are favourable as central banks in advanced economies continue to pump huge volumes of stimulus into financial markets and China’s speedy recovery boosts commodity prices.

Latin America was already the world’s slowest-growing region before the pandemic, and economists identify three main challenges in the coming year: the continuing spread of the virus, constraints on the amount of fiscal stimulus the region can afford, and a lack of political support for structural reforms that could help boost growth.

Bar chart of Forecast change in GDP from pre-pandemic level to end-2021 (%) showing Latin America faces worst economic legacy of coronavirus pandemic

Latin America is home to just over 8 per cent of the world’s population but it has suffered more than a quarter of all coronavirus deaths, despite lockdowns in countries such as Peru and Argentina which crippled their economies.

Yet there is little chance vaccines will be rolled out speedily enough to help boost growth this year. Chile is the only nation in the region that has so far secured enough vaccines to inoculate its entire population; in most countries only a small minority will receive jabs in 2021.

Marcos Casarin, Latin America chief economist at Oxford Economics, said some governments in the region had in effect given up trying to restrain the spread of the virus, even if they were not prepared to admit that publicly. An economic recovery is under way and “the assumption we’ve made is that urban mobility should return to normal by around September”, he added.

But Latin America’s poor economic performance in recent years has left it with the developing world’s highest average government debt-to-GDP ratio, constraining room for fiscal stimulus, economists warn.

Bar chart of General government gross debt as % of GDP (forecast for 2021) showing Latin America has developing world’s highest debt levels

In Brazil, its biggest economy, President Jair Bolsonaro spent lavishly last year on emergency aid for the poor. This boosted his popularity but increased the country’s budget deficit — fuelling investors’ concerns about the sustainability of its public finances.

With debt already exceeding 90 per cent of GDP and the highest total debt of any emerging market outside China, Brazil faces an unpleasant choice: shun stimulus and stunt the recovery or keep spending and risk a revolt by investors.

For now, Mr Bolsonaro has decided against more stimulus — last week he claimed that “the country is broke and there is nothing I can do” — but as he looks to his re-election campaign in 2022, there will be an increasing temptation to spend.

“Brazil faces another year of living dangerously,” said Alejo Czerwonko, chief investment officer for Latin America at UBS Wealth Management. “Failure to rein in spending cannot be ruled out.”

Meanwhile, its Congress remains deadlocked over structural reforms to overhaul Brazil’s byzantine tax code and rein in public spending. 

Assuming that there is no extra spending, most forecasters expect Brazil’s recovery to be among the weakest in the region, with growth of just 3.2 per cent this year after a fall of 4.9 per cent last year, according to Citi.

Nonetheless “Brazil is likely to be among the first countries to cross the line [in terms of recovering to pre-pandemic levels] because it suffered the least”, said Mr Casarín. 

In Mexico, the region’s second-biggest economy, investors’ worries are about parsimony rather than profligacy. President Andrés Manuel López Obrador has refused to allow big additional spending. This led to a much worse recession last year, with a fall in GDP of about 9 per cent, but left the country with a far smaller budget deficit to finance.

However Mr López Obrador’s preference for state intervention in the economy and his perceived hostility to the private sector is likely to lead to a “gradual worsening of the business climate”, Mr Czerwonko warned.

In the meantime, the region’s debt pariahs, Argentina and Ecuador, have restructured foreign borrowings but are grappling with domestic political tensions. 

Claudio Irigoyen, chief Latin America economist at Bank of America, believes Argentina could benefit economically this year if it reaches a successful deal with the IMF, adding: “Relative to expectations it can do well, but that’s because there are very low expectations.”

In Ecuador, opposition to austerity is mounting and the presidential election next month may return a leftwing populist, Andrés Arauz, who has pledged to tear up the IMF agreement. Peru and Chile also face elections this year with heightened political risks.

Latin America’s main hope for economic recovery is to address longstanding wealth inequalities; the UN Economic Commission on Latin America calls it the “world’s most unequal region”.

The World Bank’s Mr Jaramillo believes that various initiatives to improve broadband access for the less privileged, to bring in tax reforms to increase revenues and improve public services, and to free small and medium-sized businesses from excessive regulation, are all promising.

“This crisis has been particularly harsh on the poorest and particularly comfortable for the middle class [and] upper middle class,” Mr Jaramillo said. “It’s become evident in most countries that this is really just not something that should be sustainable for too long.”



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Analysis

A pivotal moment for Scotland’s independence champion

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Nicola Sturgeon, Scotland’s first minister, has credited her former mentor and predecessor Alex Salmond with making her career.

Sturgeon’s appearance on Wednesday morning before a parliamentary inquiry into her Scottish National party government’s handling of harassment complaints against Salmond will be a potentially pivotal moment for her, and her dream of leading Scotland to independence from the UK.

At an extraordinary appearance before the parliament committee on Friday lasting almost six hours, Salmond accused Sturgeon’s closest associates of maliciously colluding to drive him from public life and his former protégée of breaching the ministerial code by intentionally misleading parliament — potentially a resignation matter.

Sturgeon denies the allegations. But the televised session must have made difficult viewing for the formerly shy working-class girl from Ayrshire in south-west Scotland who has, in recent years, helped bring her nation closer to independence than at any time since the 1707 union with England that created Great Britain.

When Sturgeon succeeded Salmond as first minister in 2014 — in the aftermath of a referendum in which Scottish voters backed staying in the union by 55-45 per cent — she was fulsome in praise of her predecessor. “Without the guidance and support that Alex has given me over more than 20 years, it is unlikely that I would be standing here,” she told the Scottish parliament.

But Salmond was hardly the first figure in the SNP to spot Sturgeon’s talent. Aged just 16, Sturgeon in 1987 timidly rang the bell of then SNP general election candidate Kay Ullrich to offer her support. Four years later Sturgeon was a veteran student campaigner and, according to biographer David Torrance, Ullrich was presciently describing her to party comrades as the future “first female leader of the SNP”.

Sturgeon, who describes her nationalism as more “utilitarian” than “existentialist”, has said her early interest in politics was driven by anger at the social cost and deindustrialising impact of the policies of late UK prime minister Margaret Thatcher and the powerlessness of Scottish voters to resist them.

After studying law at Glasgow university, she became a community lawyer and a rising SNP star. In 1999, she was elected to the new devolved Scottish parliament and by 2004 she was a contender for the party leadership. But she accepted the junior place on a joint ticket after Salmond, who had already led the SNP from 1990 to 2000, entered the race.

Sturgeon, right, with Kay Ullrich in May 1999 © Mirrorpix/Alamy

Robert Johns, politics professor at Essex university and author of a book on the SNP’s rise, said Sturgeon was a big factor in the party’s fortunes as deputy leader from 2004 and as deputy first minister of Scotland after it won power in Edinburgh in 2007.

“She’s got better and better at being seen as a normal human being and becoming likeable, while at the same time not losing that reputation for competence,” Johns said.

After playing a central role in the 2014 referendum, which the pro-independence Yes campaign lost by a much smaller margin than expected, Sturgeon took over an SNP energised rather than dispirited by defeat.

Today, the first minister enjoys approval ratings unmatched by any other UK party leader despite 14 years in government and a patchy record on key policies.

Voting with her husband Peter Murrell in Glasgow in 2019 © Jeff J Mitchell/Getty Images

An international education survey in 2019 found Scotland’s progress in narrowing the attainment gap between advantaged and disadvantaged pupils had actually slowed since Sturgeon made the issue her top priority four years earlier. And the SNP’s reputation for governing competence has been dented by serious problems with construction and equipment at flagship hospitals in Edinburgh and Glasgow. 

Sturgeon’s instinctive caution and mastery of detail — on display at near-daily televised briefings — appears to have served her well during the coronavirus pandemic. Most voters think she has handled the crisis better than UK prime minister Boris Johnson. While Covid-19 deaths in Scotland are high by international standards, they have been somewhat lower than in England.

But Sturgeon’s determination to keep a tight rein on the SNP and her reliance on a small inner circle of confidants, which includes her husband and SNP chief executive Peter Murrell, has fuelled discontent among some party colleagues. Formidable self-discipline was an ingredient in the once anarchic SNP’s rise, Johns said, but now the party felt “over-professionalised”. “It’s more top-down than it ever used to be,” he added.

‘The Alex Salmond Show’ on RT © Russia Today

Some in the SNP also believe that Sturgeon has been too cautious to take full advantage of a rise in support for independence since the UK in 2016 voted for Brexit despite 62 per cent of Scottish voters backing staying in the EU. Tensions in the party have also grown over her plans to make it easier for trans people to receive official recognition for the gender they identify as.

But it is the rift with Salmond that now threatens Sturgeon’s hopes for a renewed push for a second independence poll.

Relations between the two had already been tested by Salmond’s decision to host a chat show on Kremlin-backed Russian broadcaster RT when in 2018 two civil servants made formal complaints against the former first minister dating to his time of office.

In 2019, the Scottish government accepted that its investigation into the complaints had been “tainted by apparent bias”. At a criminal trial last year, Salmond was acquitted of all of the 13 sexual offences charges against him.

Salmond has accused Murrell and Sturgeon’s chief of staff Liz Lloyd of involvement in a “concerted” effort to damage his reputation “to the extent of having me imprisoned”. They deny the allegations.

Salmond and Sturgeon present the white paper for Scottish independence in 2013 © Jeff J Mitchell/Getty Images

Salmond has also accused Sturgeon of breaching the ministerial code by misleading parliament about when she learned of the complaints against him and by failing to report meetings between the two. And he says she has presided over a broad failure of “national leadership”.

They are charges that, if proven, could prove politically fatal, but Sturgeon — a formidable debater — says she is “relishing” the opportunity to set the record straight on Wednesday.

With crucial elections for the Scottish parliament just nine weeks away, her committee appearance could have a major impact on the UK’s constitutional debate, said Mark Diffley, a consultant on Scottish public opinion.

Polls suggest the SNP has been on course to go from minority to majority government, removing its need to rely on the pro-independence Scottish Greens for support on constitutional matters and providing a strong mandate to demand UK approval for a second referendum.

But securing a majority in the proportionally representative Scottish parliament is a difficult feat that would be made harder if Sturgeon was not seen to effectively rebut Salmond’s allegations, Diffley said. “She can, with a good performance, recover some of the damage,” he added. “It’s a huge deal for her — and she knows it.”



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Can the lumbering US housing department become a force for change?

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One of Marcia Fudge’s first big battles as an elected official was over a shopping centre in Warrensville Heights, Ohio.

A developer wanted to build a hub for major retailers in the largely black Cleveland suburb, which has a population of 13,000. But Fudge would not have it. Warrensville Heights did not want “giant retail stores,” but office space and hotels, she said.

“We also control our own destiny and our own vision for the future,” Fudge, who was mayor of Warrensville Heights between 2000 and 2008, said at the time. “The days of plantation rule are over.”

Fudge won that battle and many others like it, and is widely credited for revitalising the area during her eight years as mayor.

Now she is being counted on by progressives to do the same in urban areas across the US as President Biden’s nominee to lead the Department of Housing and Urban Development (HUD). The $50bn agency manages 1m units of public housing and oversees a vast array of federally-funded housing programs — from insuring mortgage loans to voucher programs for low-income families.

Housing reform is expected to be a key part of Biden’s efforts to support the black voters who propelled him into office, many of whom still deal with the consequences of decades of segregation and discrimination in America’s housing market.

Malcolm Glenn, a fellow at the New America think-tank, called Fudge’s appointment to HUD “a real opportunity” to make tangible progress on an issue where race and economics are tightly bound.

“If this administration and Secretary Fudge make racial equity, not just a core, but sort of the singular core guiding force around everything that they do, I think we’ll be in a much much much better place than we’ve ever been,” Glenn says. “I don’t think any HUD secretary has ever done that.”
 
Ro Khanna, a Democratic Representative from California, believes Fudge is uniquely qualified for the job. “She understands deeply housing inequity, she understands racial exclusion,” Khanna said. “[She will] really focus on equity in housing and anti-racist zoning laws and anti-racist policies.”
 
But to deliver on those hopes, Fudge will have to grapple with a demoralised agency facing dual crises. An unprecedented number of Americans face the threat of eviction because of the Covid crisis. And inside HUD, a mass exodus of career staffers under previous Secretary Ben Carson has decimated the ranks.

Congress slashed the department’s operating budget by 15 per cent last year.

Carson, a black surgeon who grew up in public housing, did not believe that it was the government’s responsibility to rectify the effects of systemic racism on the American housing market.

HUD also has a long record of underdelivering, and has sometimes been regarded as a backwater of government. Rates of home ownership among blacks have been largely stagnant since the 1968 Fair Housing Act outlawed discriminatory policies that, among other ills, made it exceedingly difficult for blacks to take out mortgages.
 
Even Fudge acknowledged its shortcomings soon after her nomination. “I don’t know that anybody can even tell you what HUD has done,” she said. “So I really do think that HUD has not fulfilled its mission.”

Fudge, 68, has lived in the same tightly-knit neighbourhood for decades. Her personal phone number is listed in the local phone book, and she drives her 89-year-old mother to church every Sunday morning, stopping first at McDonald’s for a cup of coffee.
 
Her success in Warrensville Heights elevated her to Congress before the end of her second mayoral term. But her ascent was also tinged with tragedy: she was elected to fill the seat of her close friend and former boss, Congresswoman Stephanie Tubbs Jones when she died suddenly in August 2008.

“She’s tough as nails and I have to caution her sometimes about being too tough,” said Jim Clyburn, the House majority whip, adding that Fudge is the first person that fellow members of the Congressional Black Caucus members confide in during a crisis.

During her time in Congress, she worked closely with the Department of Agriculture, an agency not often thought to be at the forefront of the fight for racial justice. But Fudge prodded it to expand food voucher programs, development schemes in rural areas, and for clearer labelling on food products.
 
She was actually angling for the top agriculture job when Biden tapped her for HUD instead. Last year, she told Politico in November: “You know, it’s always ‘we want to put the black person in [the Department of] Labor or HUD.’”

At HUD, Fudge has proposed boosting spending on housing, establishing programs to help Americans save up for mortgage down payments, and transforming a voucher program for low-income renters from a lottery to a guarantee for everyone that meets the requirements.
 
“Her style is not combative. She prefers to get along, but she’s not a pushover,” said Cleveland mayor Frank Jackson, who worked closely with Fudge during her mayoral tenure. “That means just don’t piss her off.”

In response to a question at her confirmation hearing from Republican Arkansas Senator Tom Cotton on what he called a “long history of intemperate comments”, Fudge replied: “Sometimes I am a little passionate about things.”

She is almost certain to meet further opposition. During the confirmation hearing, Pennsylvania’s Republican Senator Patrick Toomey complained that Obama-era fair housing policies were too costly and time consuming for home builders — and Fudge wants to go much farther than the Obama administration did.

People who know Fudge do not expect her to back down. “I think President Biden and his team want to have a slugger in that position,” said Tami Jackson Buckner, a partner Michael Best Strategies and sorority sister of Fudge’s. “She is someone who knows that without a home, it’s hard to fulfil your American dream.”



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Britons brace for price of UK going to net zero

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When the UK became the world’s first major economy to commit to a binding target of “net zero” carbon emissions by 2050, it had already made good progress with its electricity grid.

The rapid growth of renewable energy in the UK and the closure of many coal-fired power stations has cut the sector’s emissions by more than 70 per cent since 1990, and sent cleaner electricity to homes with minimum impact on consumers’ lives.

But as chancellor Rishi Sunak prepares to deliver a green-tinged Budget on Wednesday, and the UK gets ready to host the UN COP26 climate conference in Glasgow in November, experts are warning that decarbonising the electricity grid was in many ways the easy part of the journey to net zero.

“This year half the electrons supplied to British homes were green, but that doesn’t matter much to the consumer — the next stage of reforms and changes will be very different,” said Chris Stark, chief executive of the Committee on Climate Change, an independent body that advises the government on how to reach net zero.

The next leg of the journey will require consumers to adapt the way they live and, for those able to pay, also get their wallets out.

Hitting the net zero target will require sweeping changes in two key areas: transport, as the shift to electric cars accelerates, and buildings, where an overhaul is required to the way 30m homes are heated and insulated.

As the UK car fleet goes electric, the Treasury will need to find a way to recoup the £37bn a year it currently secures from carbon taxes, mostly fuel duty and vehicle excise duty © Dinendra Haria/SOPA/Getty

And the shift to low-carbon vehicles and swapping out of gas boilers for electric heat pumps presents the government with a series of delicate political and fiscal choices.

The projected cost is immense: the CCC estimates that annual capital spending largely by the private sector in greening the economy will peak at £50bn a year by 2030. That represents about one-eighth of current investment by the public and private sectors.

However, the CCC calculates that from the mid-2040s savings in operating spending — stemming in significant part from how it will be cheaper to run an electric car than a petrol-engine vehicle — will start to exceed the annual investment.

Stream graph showing that UK capital spending of about £50 billion a year is needed to hit the net-zero target, but it will be gradually offset by lower operating costs from deploying green solutions

The greening of transport and homes will create winners and losers, and the government has yet to clarify where the cost burden will fall. The Treasury has said it will later this year publish a net zero review, setting out in more detail “how the costs of achieving net zero emissions are distributed”.

For transport, which the CCC estimates will require £11.4bn of average annual investment over the next 30 years, the political pathway is easier than for buildings, according to Josh Buckland, who was an adviser to former business secretary Greg Clark and is now at consultancy firm Flint Global.

“Transport is to some degree a solvable problem,” he said. “Consumers can buy cars through financing deals, and so don’t have to pay up front costs.”

Still, there are political potholes ahead. As the UK car fleet goes electric, the Treasury will need to find a way to recoup the £37bn a year it currently secures from carbon taxes, mostly fuel duty and vehicle excise duty.

Stacked bar chart showing UK tax revenues from activities involving carbon emissions in 2019-2020 in billions of pounds sterling

The main contenders for replacing that revenue, said Buckland, are some combination of per-mile road-pricing and congestion charging — both ideas the Treasury has been toying with for years but shied away from for fear of a political backlash.

But far more problematic than transport, according to experts, will be the greening of the UK’s housing stock, which the CCC estimates will require £11.7bn of average annual investment over the next 30 years — and a massive shift in consumer attitudes. 

A 2020 poll by Energy Systems Catapult, a non-profit organisation, found that 49 per cent of people did not even consider their gas boilers as contributing to global warming — even though they account for almost one-fifth of carbon emissions.

The gap in public understanding is a huge challenge, according to Joss Garman of the European Climate Foundation, another non profit organisation. “Right now there is a big gulf about where the policy conversation is on decarbonising heat and where the public conversation is,” he said.

The scale of the necessary transition is also immense. The UK currently installs an estimated 30,000 electric heat pumps a year, while the government’s own goal is 600,000 a year by 2028, but to hit the net zero target installations will need to run at well over 1m a year into the 2030s and 2040s.

The CCC estimates that it will cost an average of £10,000 per household to achieve the target, with heat pumps priced at about £6,500 compared to £2,000 for a conventional gas boiler.

In its interim net zero review published in December, the Treasury was vague about how these costs will be borne, noting that they will be absorbed by households, property owners or the taxpayer, “depending on policy choices”.

Compared to transport, where an electric car is obviously attractive to the consumer, the political challenge of greening the nation’s homes are legion, said Buckland. 

“Firstly there is the upfront cost issue for homeowners, but also the consumer experience is different,” he added. “Gas boilers heat your home at the flick of a switch, whereas a heat pump takes 24 hours and heats the home to 17 to 19 degrees. It will require an attitudinal shift.”

Persuading consumers to spend money on heat pumps and loft insulation rather than kitchens and bathrooms will require a cocktail of grants and incentives, said Stark, which the government has so far failed to devise.

“There isn’t a technical barrier here, so much as the lack of a plan,” he added.

To drive change, the government could consider flipping the balance of energy taxes on to gas from electricity, which currently attracts far higher greenhouse gas levies.

Whatever the policy decisions, said Stark, the government will soon have to put some cards on the table when the Treasury publishes its net zero review before the UN COP26 summit. “To be credible it will have to spell out a clear plan . . . and that includes the fiscal choices ahead.”



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