In search of resilient growth and social cohesion in the aftermath of shocks

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Central America: In Search of Resilient Growth and Social Cohesion in the Aftermath of Shocks




By Metodij Hadzi-Vaskov and Joyce Wong




July 5, 2022
















Central America is no stranger to big shocks. The region was once one of the most volatile in the world, the scene of civil and political unrest. More recently, it has been hit by natural disasters, in addition to the COVID-19 pandemic. After each shock, the region has managed to recover as it seeks a fresh start. Policymakers now have a unique opportunity to implement reforms that will steer the region’s economies onto a path of more resilient and inclusive growth, while meeting the critical needs of their citizens.

Fragile recovery

Since the start of the pandemic, the economies of Central America, Panama and the Dominican Republic (CAPDR) were among the best performing in Latin America. By 2021, all but Panama had exceeded pre-pandemic production levels.

This strong recovery was partly the result of the authorities’ rapid, comprehensive and, in many cases, unprecedented policy responses. These included historic cuts in key money rates to help support economic activity and a sharp expansion in social support and health care spending. External factors, such as the recovery in the United States, in the context of the region’s relatively high openness and dependence on remittances, also contributed to the recovery.

While battling the pandemic, the region was also hit by hurricanes Eta and Iota, a reminder of its vulnerability to climate change. The affected countries have once again responded by providing rapid support to the population and starting reconstruction.

As the recovery began in 2022, the region is now affected by the global ramifications of the war in Ukraine, most concretely through rising fuel and food prices. The authorities again responded with spending and fiscal measures to protect the nascent recovery and support the population, especially the most vulnerable.

These multiple shocks should leave scars on the level of GDP in the region. Although the negative impact on GDP is less than in the 2021 projections, it is larger than in advanced economies.

A test of resilience

The region’s economic outlook is now subject to an unusually high degree of uncertainty. A potential confluence of adverse global factors could once again test the resilience of economies at a time when policymakers have little room to manoeuvre, in the face of higher debt, among other factors.

These factors include: increased volatility in commodity prices amid the region’s heavy reliance on fuel imports; weaker growth in trading partners, including the United States; tighter financing conditions due to faster increases in global and domestic interest rates; and further moderation in remittances, a lifeline for some economies.

Opportunity for a Stronger New Beginning

The region now has a unique opportunity to refocus on a critical set of reforms aimed at improving social conditions and reversing the deterioration of pre-existing problems, such as high and persistent unemployment, poverty and inequality, all of which have fueled migration.

Policymakers should focus on creating employment opportunities by increasing the flexibility of labor markets, especially for women and young people who have been most affected by the crisis, by investing in disaster-resilient infrastructure and advancing their digitization agenda, in the public and private sectors. , which will make the region more competitive.

The process will take time, which makes it all the more important to put strong national policies in place to improve resilience before the next shock knocks on the door.

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Metodij Hadzi-Vaskov is the Regional Resident Representative for Central America, Panama and the Dominican Republic.
Joyce Wang is the Head of Mission for Honduras.



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