Latin America needs economic reforms that advance business

Latin America is entering one of the most difficult economic periods in its history with the coronavirus crisis exposing and exacerbating weaknesses in the regional market. The International Monetary Fund forecasts a major recession for many nations in Latin America, with a regional contraction of more than 9 percent and spiking unemployment. The path to recovery will be difficult, however, government leaders can take concrete steps now to lay the foundation for a robust journey toward economic growth.

Latin America and the United States must redouble efforts to facilitate and encourage private sector activity and foreign direct investment using free market reforms, while turning the area into an attractive alternative for the manufacturers with operations in China. The most important task for Latin America is to provide the critical fiscal and monetary support to shepherd the private sector through the worst of the downturn, such as sending key financing to businesses and facilitating a safe return to activity.

Governments should work to address issues that undermine businesses. The guiding standard for this effort should be the World Bank benchmark report. No country in Latin America made it to the top 50 of the ranking of favorable economic environments and legal frameworks. Weaknesses like corruption, complex taxation systems, barriers to the hiring and dismissal of employees, and bureaucratic red tape severely undermine the regional activity and entrepreneurship that drive an economic recovery.

Another opportunity for reforms is in the promotion of innovation in the economic downturn and enabling new startups and businesses to flourish and to diversify the regional market. Many countries in Latin America have placed legal and political barriers against disruptive innovation, as seen in the experience of Uber, but the benefits of new ideas are dramatic.

The technology startup Rappi has allowed Colombia to absorb millions of Venezuelan refugees by offering them as well as native citizens accessible employment with gig jobs. The app provides millions across Latin America safe access to food delivery while enabling thousands of small businesses to remain connected to their customers even during the pandemic.

Technology companies are key for the management of the coronavirus in Latin America, with regional startups boosting productivity through online platforms offering workers and students greater access to critical training and educational opportunities. The controversies and challenges over the integration of such startups into regional markets and the labor standards should be addressed, but this should not be a barrier to innovation.

Finally, as firms based in the United States look for alternatives to China amid rising political tensions, Latin America should work to attract supply chains to the Western Hemisphere. The United States should also work to increase regional ties so supply chains maintain stable trading partners in Latin America that offer distinct competitive economic advantages.

Some countries in Latin America are more prepared than others to take these steps. The United States must be prepared to work more intensely with countries ready to take appropriate measures. It should leverage a combination of the private sector, development funds, and multilateral institutions. A great tool for such efforts is the America Crece initiative, which can be used to promote the infrastructure development vital for facilitating private sector activity and raising trade connectivity.

The barriers to business and entrepreneurship have been the subject of several reforms and lip service across Latin America, but the coronavirus crisis and the opportunity to attract new supply chains make addressing them an important priority to bolster the troubled regional private sector. Doing so now is essential to promoting economic stability and prosperity across the Western Hemisphere after the pandemic is finally over.

Andres Martínez Fernandez is a senior research associate focused on Latin American policy issues at the American Enterprise Institute in Washington.