JUNE 25, 2020
1 Hour 2 Minutes and 1 Second
As developing nations confront the pandemic and its economic fallout, what is the outlook for their recovery? What should governments and the international community do to avoid a catastrophe that could end in currency, debt, banking, and humanitarian crises? Listen to this Wiener Conference Call with Ricardo Hausmann, Rafik Hariri Professor of the Practice of International Political Economy, as he addresses these issues and takes questions.
Wiener Conference Calls recognize Malcolm Wiener’s role in proposing and supporting this series as well as the Wiener Center for Social Policy at Harvard Kennedy School.
Good day, everyone. I am Mari Megias in the office of Alumni Relations and Resource Development at Harvard Kennedy School, and I’m very pleased to welcome you to this final Wiener Conference Call of the 2020 academic year. Today, we are joined by Professor Ricardo Hausmann, who is the director of the Growth Lab at Harvard Center for International Development. He’s also the Rafik Hariri Professor of the Practice of International Political Economy at Harvard Kennedy School. Formerly the director of the Kennedy School Center for International Development, he also previously served as the first chief economist of the Inter-American Development Bank, as minister of planning of Venezuela, and as a member of the board of the Central Bank of Venezuela. His research interests include issues of growth, macro-economic stability, international finance, and the social dimensions of development. We are so fortunate that he has chosen to share his expertise today with the Kennedy School’s alumni and friends. Ricardo.
Well, good noon, I guess. Good afternoon, good morning, good evening, depending on where you’re calling from. It’s really an honor and a pleasure to be again in one of these Wiener Center calls. This time, I’m going to be talking about the impact of COVID-19 around the world with a special attention on developing countries. At the Growth Lab, in March, let me tell you, the Growth Lab has grown to be a group of about 50 people. In March, we decided to create a task force to help countries think through their COVID-19 response. We are working with, I believe it’s now 12 countries, Honduras, El Salvador, Panama, Ecuador, Peru, Dominican Republic, Namibia, South Africa, Ethiopia, Saudi Arabia, Jordan, and Albania. The future is no longer what it used to be, as I guess Yogi Berra said. And so, the picture of what the situation is and what we anticipate going forward has changed quite dramatically.
To date, the countries that have suffered the greatest mortality because of COVID on a per capita basis are in that order, Belgium, United Kingdom, Spain, Italy, Sweden, France, Netherlands, Ireland, and only then the following countries are Peru, Brazil, Ecuador, Chile, Switzerland and Mexico. So you see, it was a disease that started in the rich countries, it has caused the largest number of cumulative deaths to date in the rich countries, and it’s now ... and only in the second tier, do you start to see Latin American countries. Now, in Europe, the disease generated enormously high peaks of death in terms of the biggest peaks, deaths say in a week, they happened in Belgium, Spain, Italy, and Ireland. Those were the four biggest peaks in Europe. And in these four countries, they’re down in the number of new cases, they’re down by over 95%. In the case of Ireland, they’re down 99.1%. They’re barely at 0.9% of the number of cases they were having around the peak.
Those are countries in which they imposed a lockdown because people take about 18 to 20 days to die between infection and death. Obviously the day they imposed the lockdown, the people who were already infected kept on growing, but eventually, these lockdowns caused a dramatic decline in the number of cases and deaths, not so in the UK and in Sweden. The luster with which people saw Sweden initially, now it doesn’t look so high. There were, in some cases, incredible successes caused by lockdowns in very, very odd countries like New Zealand, Australia, Thailand, Taiwan, Belize, Uruguay. But in other countries that we have a keen interest in, they were very quick to lock down, a lot of South America locked down before Massachusetts locked down. I think we were told to go home on March 17th, by that time, many Latin American countries had already a week of lockdown. The last one to lock down formerly was Mexico in April 2nd. But right now, because of that lockdown, they didn’t see those peaks that were seen in Europe.
The lockdown kept the situation under control, but unfortunately, the lockdown started to increasingly lose its effectiveness in controlling the disease. Right now, the biggest deaths per day are happening in the following countries, and in that order, in Chile, followed by Peru, by Mexico, by Brazil, by Armenia, Moldova, Macedonia and then only do you get Spain, Sweden, Panama, Ecuador, Bolivia, Colombia and then you get the U.S. Right now, in the, say the frontier of the disease, the hotspots of the disease have moved to Latin America and Eastern Europe. Now, what’s odd about the situation is that this is happening in spite of countries being under severe lockdown. This is not happening because people decided to open up and then they got a second wave or something. This happened in countries that locked down very early like Peru and never really opened up. And in the list, there’s also Brazil that never really locked down, except some governors did at a more local level, even though people did stop going to work and getting out of homes according to Google statistics.
Now, we’re having another situation, countries that were very successful in reducing the number of cases and the lockdown worked out, and then they decided that it was time to reopen. Those are countries a bit like Chile and Israel. They’ve reopened, and in the case of both countries, they decided to close again, so Chile is back on the lockdown. You have other countries that have decided to reopen and are now seeing infection spikes, like the case of the U.S. and the Albania. That’s in some description of the spread of the disease worldwide. Let me make some conclusions and say something about how I see the future and then stop for your question. First lesson to me is that lockdowns have been incredibly differentially effective. There are enormously restrictive lockdowns say in a country like Peru or Panama or El Salvador, and in those countries, they now are at their peak of the number of cases and at the peak of the number of deaths. So, they have not really been able to shut down the disease the way it happens in Ireland.
We don’t really know why, because if you look at traditional measures of the lockdown, the intensity of the lockdown, according to the Zurich policies, like Blavatnik index from Oxford, or by Google or Apple Mobility Statistics, these countries have locked down more than the successful countries. So, it’s in spite of these formal lockdowns, and we don’t really know why. That’s I think, take away number one. Take away number two is that the lockdowns have been incredibly costly, incredibly costly. I mean, we are starting to get data for April and some data for some variables in May in the developing world, but there was just a destination of employment in countries like Peru and Colombia. Peru GDP fell 35%, they lost 25% of the jobs. Same in Columbia, they lost 5 million jobs in the month of April compared to last year. And these are countries that don’t have the unemployment compensation that you see in the U.S. Apparently in the U.S., in the month of April, 40 million jobs were lost, but household disposable income went up because it was more than compensated by social transfers.
In the case of the countries of the South, there isn’t that magnitude of social compensation. So, this is very significant in terms of a shock to social welfare. We’ve also seen incredible collapses of tax revenues, seen tax revenues declined by 40%, 50% in several countries. Now, the third implication is that early on, markets shut down, debt markets seized and money started to flow out of emerging markets, but with a monetary easing in rich countries and by the FED, the ECB, and so on, liquidity started to go back to the developing countries. Fortunately early on in the pandemic, several countries like Peru, Panama, Paraguay, Chile, were able to go to market. Other countries were shut out from markets, but as of a month ago, there was a dramatic improvement in the condition of these capital markets. So, other countries that are like Albania, Honduras, were able to go to market this past week or two, and there are other countries that we’re working with that are expecting to go to market soon, which is really great, because that was not the picture we were seeing a month ago, but apparently international liquidity’s eventually getting back to some of these emerging markets.
Not all, some countries like Ecuador or Ethiopia are shut out of these markets, and they need a more official international financial support. Going forward, I would expect this situation to last unfortunately a significant amount of more time. Essentially, the way I think about it is that unless, and until 80 plus percent of the people have developed immunity to this virus, we will have to be shutting down parts of the economy, restricting international travel. And so, tourism is not going to recover, and we are not going to be allowed back into the classroom. Harvard already announced that we will be teaching remotely in the fall. And so, it’s just that there’s too many susceptible people out there, and this is too contagious a disease for us to go back to normal. So, economic activity will be constrained by that fact. Now, how close are we to 80%? Well, to put it in sports terms, we’re something like starting the second inning of this fight. We’re still early on in the game, so there’s quite a few quarters to go ahead of us.
The recovery from the lockdowns will be slow because it’s not that you end the lock down and you go back to normality, there’ll be significant restrictions on economic activity. That’s point number one. Point number two is that many governments thought that this was going to be more like a sprint than a marathon. They prepared themselves mentally for a lockdown of say six weeks, two months, eventually three months, but they thought that after that, would come up period of recovery. Well, that recovery now looks less of a recovery, more encumbered by the presence of the disease and slower. And this, I think in my third point, puts the government’s ability to provide support to households and firms at a premium and their ability to mobilize financial resources, whether to make social transfers, to maintain the expansion of the healthcare system, to provide the financial support to firms so that they can survive the period is going to be at a premium. And I think that there will be a very significant demand for the international financial support.
Right now, what we’ve discovered is that the only real game in town in international financial support is the IMF, all other organizations combined look like a small midget vis-a-vis the IMF. The IMF has a trillion dollars to lend, and compared to that, the World Bank is say 1/70th or something. And so, it’s very important that the IMF play a key role that it’s called to play. But right now, there’s no international leadership on this topic, G20 is in disarray, there hasn’t been too much movement. The IMF has the capacity to be very impactful, but right now it’s constrained by rules that were designed for another time, and they’re slowly going through a discussion and an agreement on changing the rules to make themselves more useful, but that is going slowly and the disease is not. That’s my summary. I’m looking forward to your comments, questions and interactions. Thank you very much.
Q: Do you believe the COVID-19 driven prices to be negative, neutral, or positive in terms of accelerating policy choices toward increased economic diversity?
Well, that’s a very good question. It’s very important to try to understand what are the longer term changes that this disease will bring. Obviously, if you look at incomes, if you look at GDP and so on, I would be satisfied if all countries return to their 2019 levels of income per capita before 2025. But I wouldn’t be surprised if they don’t. So, this is going to be from an income point of view, a very significant loss. They’re going to come out of this with very significantly worsened balance sheets with much, much higher levels of that, that they did not expect to have. And consequently, with governments that will have to rethink if they want the fiscal pact, the pact structure and other issues going forward. Now, there’s one thing that this disease has caused, and it has caused us to work from home. We have now discovered many, many different ways in which people can work from home. If I want to report on the Growth Lab, I would say that the Growth Lab has never been so productive.
We haven’t seen each other except by Zoom, but we have been incredibly productive in these last three months. Now, that has one very important implication, that things that can be done from home can also be done from abroad because the internet doesn’t care if you cross a border or not. I think this is going to potentially open the door to a new form of globalization that is not going to be the movement of goods across borders. That’s going to come back, but there’s a whole trend to seeing greater obstacles to trade, even the U.S., Mexico and Canada signed the free trade agreement, USMCA in order to make NAFTA less open. And so, there’s been a trend towards restricting the movement of goods. But there hasn’t been a trend, and I don’t think there could be a trend for restricting the movement of services by Zoom.
And so, I think that may lead to very significant changes in the organization of production and interactions, and it may lead to new forms of internationalization of production, which may open up opportunities that countries didn’t have before, in particular, countries that may have had the battle logistics, but now could offer services through the web. That is one little bright future that I am not just maybe predicting, but we’re trying to do research on figuring out where are the opportunities and what it will take to seize them.
Q: Hi, I’ve been working in international development since ’97. I’ve been working on financial systems through USAID projects, developing bankruptcy laws, debt collection, everything up and down the line that deals with credit in about 13 countries. I’ve also written the bankruptcy law on a number of countries, including Montenegros and Serbia, and I was debt resolution manager for the MENA region with IFC, Tunisia, Egypt, Jordan and Lebanon. Professor, I had posed the question in writing, but one of the things I’m concerned about is cascading defaults among many businesses that are hit by the temporary liquidity shock as the first part, but then as businesses adjust and open, they are also hit with a long-term slowdown, both the sprint as you referred to, and the marathon. And I believe, and this is important, is bankruptcy is not the solution for a lot of these companies. The problem is a cascading series of defaults that will cause one business to cascade the default into another, and to another, all the way up the system to banks and threaten the system.
And second, like ventilators, the flood of bankruptcies could threaten the systemic capacity. Courts cannot handle this with COVID, and they won’t be able to handle the volumes. Second, not all those companies need to be in bankruptcy if they can do out of court workouts. In Jordan and in Lebanon, I worked on protocols for out of court workouts. They don’t need government support in the sense of laws, they can be signed by heads of Central Bank, they can be consortiums of banks agreeing to follow it. I’m posing that bankruptcy is not the solution and out of court workouts on a micro level, either cure or the immediate cure to prevent the overflow and to flatten the curve of insolvency that will overflow the system. What do you think? Is this the right track for many countries and many businesses to go on, and what are your views on getting the solution out to people on the financial side? Thank you.
Well, thank you very much for your comment, your information and your question. First of all, from a macro perspective, it’s very critical that things are managed in such a way that they prevent the kind of systemic crisis that you refer to. I think it’s fair to say that this is the largest economic recession that the world has seen since the great depression. It’s only comparable to things that we’re seeing with the collapse of the Soviet Union. It’s bigger probably than things that we’re seeing in Latin America in the 1980s. So, it’s a pretty, pretty big recession. Previous recessions have ended up in some combination of sovereign debt crisis, currency crisis, and banking crisis and sometimes all three or two of the three. So, it’s very important that we manage this situation very, very wisely to see if we can avoid those catastrophes. Now, if some countries are going to have difficulty in paying on time their acquired debts, they’re going to need some procedure to restructure those debts.
It may be that we get a significant number of countries in that situation. These may be countries that because of the pandemic, they will need to borrow additional resources. The additional resources that they need to borrow plus that old debt would represent the level of debt that is unsustainable. I think it would be a great addition to the international financial architecture to go in the direction of an idea that Anne Krueger floated about 20 years ago called the Sovereign Debt Restructuring Mechanism, which is to create something like a bankruptcy procedure or a bankruptcy protection mechanism so that all debts get pared down to the point of making the new debts viable, and so that the IMF can lend into this crisis. I think improving and facilitating and making more efficient sovereign debt restructuring is going to be part of the solution for a varying set of countries depending on how deep this recession ends up becoming, how deep and how long.
Number two, you’re talking about domestic resolution of commercial obligations between firms. Here obviously and how accommodative monetary policy can be is a very important thing. I have been very positively surprised by the fact that many central banks in the developing world this time for the first time were able to say in the middle of a crisis, lower interest rates. In previous crisis, they were raising interest rates in the middle of a crisis. Those that float their exchange rates and do inflation targeting have been able to let the currency take the hit, and that has in some sense, protected export activities and import competing activities and has allowed for a more efficient transition. I think that those countries that have inflation targeting have had some extra degrees of freedom, vis-a-vis those that pegged their exchange rates.
Now, you’re very right in saying there is a real possibility that if the number of bankruptcies overwhelms the judicial system, and if the number of bankruptcies is significant, then NPLs in the banking system will go up and people may lose confidence either in banks or in the currency, especially if they perceive that the central bank will have to come out and rescue all of these institutions. Those are the risks that we need to try to avoid and contain, but you’re very right in saying non-judicial resolution mechanisms may be very useful. But as you know, this is one of the reasons why I out of court settlements work, is because you know what would happen if you went to court. And so, you need to have the court resolution as an option so that people opt for the out of court settlement. In any case, I think people are going to be ... this is going to be a topic for discussion, it already has been in some of the countries we work on. Banks have decided to delay, or if you want to restructure all the loans that they have given so that households didn’t have to pay their existing loans until say January of next year or something.
And so, have done some telecoms and electricity companies and so on, so that there is ... in anticipation of the inability to pay because of lockdowns, people have tried to find these resolutions on a voluntary and preemptive basis. But I think that as the situation progresses, these topics that you’ve brought up are going to be part of the discussion.
Q: You are aware that in America, there’s this discussion on how to balance the interests of public health and the interest of the economy. Particularly in countries where we have a huge formal economy, the economy becomes either you die out of COVID or you die out of hunger. My question is, what are the main three things that you would advise any country on how to balance this dichotomy? Our secretary general claims that there is not such dichotomy that you have fears to take care of the virus and then carry it to a manageable level and then move on to the economy. Would you agree with this?
I think this is a great question. Actually, we are putting out this week, a working paper that I did with [inaudible 00:31:54], who’s our researcher at the Growth Lab, which we called Horrible Trade Offs, and it’s really this trade off of death versus death is real. In countries that are close to subsistence levels, if you stop the economy for a while, then people will starve or people die because of other things that weaken them. So, we’re talking about things that have really horrible trade-offs. The answer to your question as an answer to so many questions in economics, is it depends. If you are able to do what Jordan did, and I like to mention Jordan, because it’s a country that has an income per capita of say $5,000, so it looks ... I’m not talking about do what Norway did. I’m saying if you are able to do what Jordan did or you’re able to do what Namibia did, then you were able to impose a lockdown, really bring down the number of cases ...
Right now, in Jordan, all the cases that are present have come from abroad, there is no community contagion and so on. And that gives them the possibility of now opening up the economy and the economy is pretty much all opened up except the border. And that’s a huge shock for the economy because the border means that there’s no tourism and tourism is more than 10% of GDP. So, that’s a huge hit to the economy. But suddenly, people can go more or less about their daily lives with much, much less risk. That’s what has been achieved in some of the countries in Europe in spite of the horrible death peaks that they had. Your question about should we prioritize say the lockdown and the disease vis-a-vis the economic recovery, is that it depends on the effectiveness of the lockdown.
Now, the informal sector may mean that we are less effective, more informal economies are less effective at enforcing a lockdown. That’s a hypothesis that is out there, that the problem in Latin America is that we have very large informal sectors that people live on and that they cannot go out of the home because then they would starve. By the way, this is a hypothesis that I have not seen tested. Let me make a comment that I should have made in my initial remarks, which is the subject of my next column for project syndicate. We know that we don’t know how to do these things, but we are not setting ourselves up to learn from our own experience. So, researchers don’t have access to the data on the cases and where people live, where people go to work, what means of transportation do they use, how often did they go out, et cetera, from all the cases that we have, so that we can identify hotspots, we can identify means of contagion and so on. So, we don’t know how to make these lockdowns more effective.
But if the lockdown is not effective, then you’re going to have these death spikes that you’re having in Mexico, that you’re having in Brazil, you’re having in Peru, you’re having in Chile, and under those conditions, you may try to reactivate the economy, but people are going to be protecting themselves. They realize that they’re facing very serious health risks, and they’re not going to behave normally. So, you don’t really have the option of saying, I’m going to disregard the disease and operate as if it did not exist, because people are not going to follow that. They will protect themselves, and consequently, restaurants will be empty, and universities will decide to shut down, whatever the government decides and so on. So, I think that if you can get the disease under control, it really helps to open up the economy, but if you can’t get the disease under control, you’re screwed either way.
Q: Latin America is the most urbanized region in the world with close to 80% of people living in cities. I’m just wondering, it was a concern of mine even before the pandemic, if we had some sort of a new thinking on how to help cities develop, given that development is happening there. Now, this is the most affected sector let’s say, the pandemic is even worse in cities, so is there any new thinking, are you guys working any new ideas? I work at the IDB, and as multilateral organizations, we don’t have also instruments to lend directly to cities, in particular, directly to sub nationals without sovereign guarantee. So perhaps some instruments like SPVs with the guarantees, first of all, guarantees ... something like that. But I don’t know if you guys have thought about any financing mechanism in particular for each city that has different ... not just one blanket policy, but for each city that could be tailor solutions. Thank you.
Well, thank you for your question. Actually, at the Growth Lab, we started doing growth diagnostics and diversification strategies for countries, then we moved to states. And particularly in Mexico, we did growth diagnostics for Chiapas, for Campeche, for Tabasco, for Baja California and diversification strategies there. And then, we were asked by IBB to look into the city of Hermosillo, and we were then asked to work on the city of Buenos Aires, and we’ve now developed tools and techniques to analyze, diagnose, and develop development strategies at the city level. We were about to sign a four year program to help the government of India and develop their organization’s strategy, and then we were frozen by COVID-19. I hope that we’re able to revive that because we were supposed to be working on 32 cities in India and developing an Atlas of economic complexity for Indian cities and help them think through the strategies.
I think cities obviously exists because people want to interact with each other. It’s a way of bringing people with different know how to cooperate, to do more complex things. That’s why cities exist, and that’s why cities thrive. But because people interact with each other and so on, they can pass each other their germs, and as a consequence, it’s easy for diseases to spread faster in large cities than in rural areas. That’s why in the U.S., you saw this incredible death spike in New York city more than elsewhere. By the way, the death rate, I should have mentioned this, but the death rate in Boston and in Massachusetts in general is one of the highest in the world. I calculated, I don’t know today, but it was over 30 times the death rate in Columbia just to give a sense of proportion. So yes, cities are great because they facilitate human interaction, but they also facilitate germ transmission.
When you compare a disease like this, it’s very important to understand that you’re taking a picture out of a movie, and maybe if the vaccine never happens, then essentially 80% of the people will have been infected in cities before rural areas, but eventually everybody will be infected and it won’t have made a difference whether you were in a city or in a rural area. If we get the vaccine, then ... when you get the vaccine, the game stops and you can halt the disease in its track. I find it great that the IDB is thinking about if development is going to happen at the city or at the state level, how can it become a player in that? The problem you mentioned about sovereign guarantees is a problem of that type of bank, a bank that wants to lend with sovereign guarantees, typically multilateral development banks. That means that in some sense, probably it’s not the country that needs to change, it’s more of the bank that needs to change, and to figure out ways in which you can ask for a state guarantees or city guarantees instead of sovereign guarantees and communicate that and explain it to capital markets so that you don’t get downgraded. But it’s an important topic. Thank you.
Q: At least in the U.S., thanks to the financial support from organizations like NSF and NIH, the statistical in which learning researchers have been very productive in developing the data analytics theories and tools to identify big, significant uptakes in infections in counties, in census tracks in the U.S., thereby helping local governments to identify and mobilize resources to help those particular areas. During this process, the researchers have developed a rich set of lessons learned that many are anxious to apply and help developing countries, perhaps local governments or agencies. Do you think this would be helpful or are there ways in place for these researchers to work with local government leaders in developing countries to perhaps do the same that have been successful in the U.S.?
Well, I think that governments need to create fast feedback loops to learn from their own experience. And what you are mentioning is exactly that, is to have the data basis that allows you to quickly know what is happening, both in terms of epidemiological data, but also maybe mixing it with other data. We know that there have been these IT tools to try to do contact tracing using cell phone data mobility, and so on, and there are other ways of raising information. It’s very important that countries develop that capacity to analyze the information and not to simply import best practices, because in this case, best practices don’t really exist. So, you really want to develop the capacity to find the solution more than import the solution. Let me give you an example for why that is. In the U.S., researchers find that up to 40% of the deaths happened in homes for old people.
That is a structure that does not exist in Latin America, and it’s really, really sad that 40% of the people have to die before they realized that the point of contagion was the senior care centers, because there are many people living together, and a lot of people from outside coming to provide services. So, they became very important points of contagion. Had we known this a month or two earlier, maybe things would have turned out differently and maybe we would have come up with solutions to that problem, but it took until very recently to find out that that was an important form of contagion. There is a former economist from the IDB who’s now back in his home country in Peru, poses that one of the problems in Peru is lack of refrigerators. Because people don’t have refrigerators in their home, they have to leave home more frequently to purchase food. I don’t know that that hypothesis is true, but it should be verifiable. If we had the data, we could test for these hypotheses.
So, I think that in some countries, households are fairly small, in other countries, households are multi-generational. So we asked ourselves the question, if we told the over 65 or the over 60 not to leave home, how many of them would be living with people say under 40? When we did the numbers for Ethiopia, we found 85% would be living with people under 40. So, every society is different in ways that interact with the disease that were not obvious to us. So, we really need to develop the capacity to analyze and advise governments in real time so that they can adjust their social distancing policies to do what the disease is telling them.
Q: I’m wondering how this crisis is going to affect the growth patterns worldwide. Growth was largely driven by emerging economies, emerging markets, do you see a change in that, the balance of growth and who’s going to be driving it?
Well, very, very good question. I think the recession is probably going to be deeper in Latin America than in the developed world because Latin America is going to be hit by the collapse in commodity prices. And for many countries in Latin America, tourism and remittances are a significant part of the economy. So, through those mechanisms, the recession is likely to be bigger, and also, they have less of a capacity to do anti-cyclical policies by widening their fiscal deficits. The U.S. is this year, going to have probably a deficit in excess of 15% of GDP. That, for most countries, is out of a question. They could never mobilize that amount of financing. So for those reasons, I think recessions are bound to be bigger in Latin America. I think that they will be also very big in the Middle East. I haven’t looked enough lately at East Asia. East Asia has been remarkably successful in containing the virus, but they are very open economies and are going to be hit by the global slowdown.
So, one question is, if you stopped the clock in 2020 or 2021, you may see that the gap between rich and poor countries has increased, not decreased. After that, I think that then it depends on the damage that will be done to the economies of developing countries. If we are unable to avoid these triple whammies of debt crisis, currency crisis and banking crisis, then we might see a quicker recovery. But it may be that some of the countries get into serious trouble and it’s hard for them to recover. We shouldn’t forget that Latin America went through the last decade of the 1980s due to a macro shock that was smaller than this one. So, it’s very important that we keep the macroeconomic integrity of the countries going forward.
Now, after that, as I was saying before, it may be that the new technologies facilitate greater participation in global value chains that are going to be more about trading tasks than trading goods, and that may lead to faster catch-up in the longer term. I hope that that’s the way things turn out, but we need to be very vigilant that we don’t mess up other things that compromise that future.
Q: I’m wondering what advice you would have for those of us who were pushing the U.S. government to honor its global response, what we should be pushing them on over the next six to nine months in order to help mitigate both the health, but also the secondary economic livelihoods and food security issues that are expressing themselves so seriously in so many countries. With that, thank you so much again.
Well, thank you for your question. Let me respond in several dimensions. First, I wish the U.S. exercised more leadership in the pandemic policy itself. I think this brouhaha with the World Health Organization is really a waste of a waste of effort. It’s a good organization that was created, led by the United States. It sees the CDC as its natural home, it has been like the anchor of the global health infrastructure. And there was on the table the issue of having an agreement where we make sure that the moment that a vaccine is available, we can make it available globally, and that we should be working on installing the capacity and the logistics and the whole framework to have whatever vaccine comes out universally available and quickly produced as fast as possible. I think that’s a very important element in the response. And by the way, any technological solution, because if it’s not the vaccine, maybe if we find some pill or something that just dramatically lowers the death rate and the seriousness of this disease, this will be a game changer both on the health side and on the economic side.
If there was a treatment that made this a much less lethal disease, we wouldn’t be where we are. So, making those things globally available at a moment when the world is so connected, is an important thing to do. The second thing I think is their policy in the IMF. They should be leading a strategy whereby we could provide as much financial assistance to countries, so that they have the macro-economic wherewithal to not only manage the pandemic, but to have the financial muscle to prevent the kinds of crises that could be generated due to the absence of enough finance. So, I think that the position of the U.S. at the IMF, maybe having a new issuance of SDRs, increase the quotas that countries have at the IMF, raise the financing limits at the IMF, those are simple things that are feasible, that don’t require real money to be put on the table, but that would make an enormous difference for the world.
Q: My question is more to do with the two Latin American countries that have, specifically Costa Rica, and a little bit less Cuba because Cuba has a very different model. These two countries seem to have contained the virus. I just want your response as it relates to Costa Rica. This is a country that perennially seems to be doing well on all indicators. What can other Central American and Latin American countries learn from the way Costa Rica structured its policies? Is there something transferable from Costa Rica to other Latin American countries that could put them in a position where Costa Rica is right now, where their robust public health system, economic performance and so on. That would be my question. Thank you.
Well, thank you very much. Costa Rica in fact, has been very, very effective at controlling the pandemic. Costa Rica is ethnically a very homogeneous country. It developed through coffee plantations that are small, so it was a little bit of a much more egalitarian society from the beginning. They didn’t have these large plantations, they didn’t have complicated ethnic relations of domination and so on. So, they developed a structure of much more horizontality in their society and in their relations. They have put an enormous emphasis on education, they have a rule that I think they have to spend 7% of GDP in education. And they have had, as a consequence of that, always very, very weak fiscal. They’ve always been struggling to keep their finances in check. They’ve been very effective in controlling the disease, but obviously, they are being tremendously hit by the collapse in tourism, and that is generating very serious economic recession in Costa Rica.
They are right there with the IMF trying to negotiate financial support program, and it’s very important that Costa Rica get the financing they need to be able to manage the situation. I think it’s going to be a difficult couple of years for Costa Rica on the economic front, but they have definitely been very successful up to date on the COVID-19 health fund. It is always dangerous because if we don’t get to a vaccine, say within a reasonable period of time, you’re only delaying the spread of the disease, you cannot stop it. The only thing that really stops it is the vaccine. And so, they have been very successful to date. I mentioned this because countries that have been very, very successful in keeping the disease under control like next door El Salvador, are now seeing much higher rates of contagion and spread then than they did before in spite of equally valiant effort.
Let’s hope that the Costa Ricans keep their act together, and they are going to benefit partially by the fact that one of their major exports is medical devices. Let’s hope that they’re able to supply the parts of medical devices that are now in greater demand, but the shock to their tourism trade is going to be significant. Thank you for that question.
Yes. Thank you very much for that question, and thanks to everyone who called in. We apologize that we did not have a chance to get to all the questions, but we’re very grateful to end this academic year’s Wiener Conference Call series with this call with Ricardo Hausmann. Thank you very much, Ricardo for joining us this morning.
Thank you all.