A new study by the Cen­tre for Glob­al De­vel­op­ment and the In­ter­Amer­i­can De­vel­op­ment Bank (IDB) finds many com­pa­nies in Latin Amer­i­ca and the Caribbean sur­vived the pan­dem­ic by slash­ing in­vest­ment, but this de­cline now threat­ens to con­strain the re­gion’s eco­nom­ic re­cov­ery.

To re­verse the sit­u­a­tion and pre­vent it from lead­ing to a type of “eco­nom­ic long COVID,” where a weak pri­vate sec­tor fails to cre­ate jobs and stim­u­late eco­nom­ic growth, gov­ern­ments in the re­gion should ac­tive­ly pur­sue a se­ries of poli­cies to help com­pa­nies boost in­vest­ment and hire new em­ploy­ees.

These are among the key find­ings of the re­port, which ex­am­ined the bal­ance sheets from a large num­ber of com­pa­nies across the re­gion and dis­cov­ered that, de­spite an eco­nom­ic re­cov­ery in 2020 and 2021, cap­i­tal lev­els at com­pa­nies are still 20 per cent low­er than they were be­fore the pan­dem­ic be­gan.

The study was writ­ten fol­low­ing dis­cus­sions of econ­o­mists and lawyers from the re­gion and led by An­drew Pow­ell, Prin­ci­pal Ad­vi­sor of the Re­search De­part­ment at the IDB and Lil­iana Ro­jas-Suarez, di­rec­tor of the Latin Amer­i­ca Ini­tia­tive and se­nior fel­low at the Cen­tre for Glob­al De­vel­op­ment.

“While it is good news that rel­a­tive­ly few larg­er firms failed, the drop in their pro­duc­tive cap­i­tal im­plies sig­nif­i­cant scar­ring and threat­ens the re­gion’s eco­nom­ic growth,” Pow­ell said.

The study sam­pled bal­ance sheet da­ta from larg­er busi­ness­es across the re­gion and found that in­vest­ment fell sharply while debt lev­els re­main high, es­pe­cial­ly in sec­tors hit the hard­est by the COVID-19 pan­dem­ic. In ad­di­tion, the de­mand for for­mal work­ers di­min­ished and in­for­mal em­ploy­ment rose steeply dur­ing the re­cov­ery.

The re­port al­so analysed com­pa­nies across a large swathe of the re­gion’s econ­o­my.

“Al­though rev­enues at com­pa­nies in sec­tors like log­ging, min­ing, and oth­er ex­trac­tive in­dus­tries have most­ly re­cov­ered, in many sec­tors—in­clud­ing con­struc­tion, re­tail, and most white-col­lar in­dus­tries—rev­enues re­main sig­nif­i­cant­ly de­pressed,” it not­ed.

The re­port al­so found that small firms, which of­ten have lim­it­ed ac­cess to cred­it, were pun­ished the most se­vere­ly by the cri­sis.

It added small­er com­pa­nies still face more fi­nan­cial chal­lenges and are more like­ly to fall be­hind on debt pay­ments, with a sig­nif­i­cant por­tion shut­ting down.

Ac­cord­ing to the re­port, while over­all eco­nom­ic growth has re­cov­ered sig­nif­i­cant­ly in many coun­tries across the re­gion, the stalled re­cov­ery for com­pa­nies in key sec­tors has had knock-on ef­fects for work­ers, es­pe­cial­ly for women and younger peo­ple.

It al­so not­ed the num­ber of work­ers in in­for­mal busi­ness­es has in­creased from its al­ready-very-high pre-pan­dem­ic lev­els.

High­er in­for­mal­i­ty, the re­searchers said, will fur­ther con­strain the re­gion’s pro­duc­tiv­i­ty and growth, large­ly be­cause in­for­mal com­pa­nies tend to be much less pro­duc­tive.

The re­port rec­om­mends sev­er­al ways gov­ern­ments could kick-start in­vest­ment and eco­nom­ic re­cov­ery for the re­gion in­clud­ing es­tab­lish­ing a new, in­de­pen­dent, and tem­po­rary pub­lic-pri­vate in­sti­tu­tion to iden­ti­fy and sup­port firms that suf­fered dur­ing the pan­dem­ic but are still vi­able and need in­vest­ment.

This in­sti­tu­tion needs to be staffed by the pri­vate sec­tor to avoid po­lit­i­cal in­ter­fer­ence, the re­port added.

It al­so sug­gest­ed dig­i­tal­i­sa­tion strate­gies in each coun­try, fo­cused on proven cost-ef­fec­tive and growth-en­hanc­ing poli­cies like the pri­ori­ti­sa­tion of in­vest­ment in dig­i­tal in­fra­struc­ture.

Ad­di­tion­al­ly, the re­port ad­vised poli­cies to boost and in­cu­bate promis­ing young firms and im­prove ac­cess to ven­ture cap­i­tal, through both in­ter­na­tion­al net­works and lo­cal mar­kets.