Monday, April 13, 2020

The World Bank Suggests Temporary Socialism in Latin America

The World Bank has a new report, "The Economy in the Time of Covid-19," and it is grim reading. It's also well-written and highly conscious of the human suffering going on. It is, in short, not your World Bank of lore. In fact, it advocates socialism.

To support jobs and firms, governments may need to take ownership stakes in strategically important firms. To avert a financial crisis, they may need to recapitalize banks and absorb non-performing assets. If not adequately managed, these moves could open the door to rent seeking and political patronage. The process of acquiring and managing assets needs to be perceived as transparent and professional to maintain confidence in the government. This may also allow decision makers to take urgently needed measures without fearing prosecution in the future. 
Strong arrangements need to be put in place to ensure that the acquisition and management of assets is conducted at arms’ length from politicians, building on the best examples of sovereign wealth funds and asset management companies in countries at similar development levels.
It's a "temporary socialism" idea, with sunset clauses.
In the medium term, the priority has to be the divestiture of state assets to the private sector. Individual cases will need to be reviewed, and balance sheet repair solutions be designed. Benchmark-linked sales of government shares in companies will have to be arranged. While this is not an immediate priority, government should communicate clearly on the direction of travel, establishing a timeline and setting up sunset clauses wherever appropriate. 
This is remarkable, even with the temporary caveat. Corruption is the long-standing anchor dragging Latin American governance down, and we all know there is a strong elite movement to avoid accountability. The World Bank is actually advocating injecting state ownership into that mix. I wonder what "strong arrangements" would avoid turning such businesses into personal slush funds?

On the flip side, if such strong arrangements could be found, they would be revolutionary, though there is still the question of how to make sure such state firms continued to invest in R&D rather than being sucked dry. Some of this depends on the definition of "medium term."

I've had numerous conversations with colleagues about what will change forever as we re-evaluate everything and find new ways of doing things. The crisis is forcing us to do this, and on a bigger scale if it can actually change the way Latin American governments deal with the economy, all the better.


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