By: Staff Writer
September 20, 2022
The Inter-American Development Bank, in a recently published Working Group Report, said that firms around the region that rebounded more quickly from the COVID-19 pandemic happened to be capital intensive while professional and soft services firms lagged behind.
For firms that are lagging behind, the bank said that a public, private institute (PPI) should be created to help support firms with growth potential to recover from the pandemic.
The IDB, in their report, “Healthier Firms for a Stronger Recovery: Policies to Support Business and Jobs in Latin America and the Caribbean,” said that revenues of typically larger firms fell by about 20 percent at the peak of the pandemic.
“Still, by the end of 2021, revenues had fully recovered in some sectors (mining; oil and gas extraction; agriculture, forestry, and fishing; and higher-capital-intensity manufacturing). In contrast, revenues remained significantly below pre-pandemic levels in several other sectors (professional services; business services; retail trade; transportation excluding air transport; air transport; health, legal, education, and social services; communications; construction; wholesale trade; hotels and restaurants; amusement and museums; and other sectors).”
The labour market performance post-pandemic is also still a major challenge as many firms went back to the informal sector, having being pushed out of the labour market by the pandemic. “The pandemic exacerbated structural challenges facing labour markets in the region. High informality lowers productivity, reduces the incentives to acquire skills, and shrinks the tax base. Lower female employment heightens inequality and lowers the potential output of the region.”
The report however advocated for new institutions to be created to support firms with growth potential, particularly starting a PPI that: “Would evaluate and develop techniques for identifying firms with good business prospects and provide support through a range of instruments including equity injections.”
The report also said: “The institution would have its own resources and provide expertise to strengthen corporate governance. The capital injections could lead to an initial public offering on the country’s stock exchange, widening the capital base of the firm and providing funds for the public-private institution to exit. In some cases, capital injections could be used to facilitate consolidation in affected sectors. The institution should aim to be profitable and, apart from initial financing, not require fiscal support. It would be critical to hire a high-quality team and ensure that the institution worked professionally and independently.”
The report added in other recommendations to: “consider supporting improved access to venture capital through international networks or the development of a local market.” Also, “consider reforms to improve formal insolvency codes, following five broad principles: flexibility, transparency, debtor-in-possession financing, human capital expertise, and procedural efficiency.”
The report also said: “Many existing investment protection systems provide mechanisms to facilitate consultations between countries and investors to advance common aims and avoid disputes, striking a balance between immediate concerns in the context of a crisis such as the pandemic and the longer-term goal of attracting stable and productive foreign investment. When available, these systems should be used. Where such systems are absent, countries should develop new mechanisms to facilitate substantive and transparent consultations.”
It added: “To prevent the region from falling farther behind in the adoption of digital technologies, countries should develop an explicit digitalization strategy. The strategy could include investment in digital infrastructure, incentives for firms to digitalize, and robust systems for digital identities, cybersecurity, and data protection. In addition, training schemes to boost the skills needed to support the digital transformation should be developed; such training could be subsidized through vouchers or tax incentives.”