Pandemic and a difficult economic situation of developing countries

‘Developing countries have been ravaged by a combination of the pandemic-driven health crisis, collapsing exports, rising global food prices, domestic economic contraction, falling fiscal revenues, and external debt overhang. The World Bank estimates that 97 million more people – many of them in Africa – will fall into extreme poverty in 2021. This could well be an underestimate, because it does not take into account higher food prices, increasing inequality, and the impact on the poor in South Asia.’ – Excerpts from a recent Project Syndicate published article ‘A wrong turn for World Bank concessional lending’ by Jayati Ghosh, and Farwa Sial

There are limits to macroeconomic policies – monetary and fiscal – available with governments of developing countries. Surely, they can be more innovative but given the longevity of the pandemic, the lack of needed vaccine supply, and the needed multilateral support are the realities that have pushed countries to limits of policy instruments. On the other hand, there is far less approach adjustment by institutions like the International Monetary Fund (IMF) and the World Bank to support the needed stimulus response required by these countries, including public health sector spending requirements.

The recent allocation of special drawing rights (SDRs) by the IMF— although welcome—falls well short of the needed balance of payments (BoP) or fiscal support, both in terms of overall allocation size, but also in terms of distribution on the routine quota basis of member countries in times of the pandemic. Moreover, instead of supporting the developing countries on the macroeconomic stabilization end through greater financial support, the IMF in many of its programmes still continues with its bread-and-butter policy of squeezing aggregate demand, mainly to keep in check debt situation, along with reining in inflation, when a significant portion of it is related with international commodity price-hike and also dependent on rather institutional issues that require reforms of a medium-term nature. The extent of finances needed by low-income countries as estimated by the IMF itself is highlighted in the same article by Jayati Ghosh and Farwa Sial as ‘Researchers at the International Monetary Fund estimate that low-income countries will need around $200 billion over the four years until 2025 simply to recover from the pandemic and a further $250 billion to catch up with advanced economies.’

At the same time, the concessional International Development Association (IDA) lending arm of the World Bank, rather than supporting public spending a lot more than usual times when there are lesser public spending needs during the pandemic and its recessionary impact on economic growth and poverty, still continues to give priority to funding private sector. Jayati Ghosh and Farwa Sial have pointed out in the same article: ‘…there is a high risk that IDA funds will be used in part to favor private-sector actors, instead of enabling governments to support poor people directly. This is because the World Bank Group, in line with its 2017 “Cascade” approach, introduced a “private finance-first” model that prioritizes private financing options over the use of public resources in development projects. As part of this broader strategy, the IDA launched its own Private Sector Window (PSW) in 2017 to mobilize private investment in recipient countries.… Given the PSW’s inherent limitations, subsidizing the private sector to invest in public goods and services through the IDA will only exacerbate the pandemic’s harmful consequences. As long as the IDA can be an important source of recovery funds for the poorest economies, those resources must be used effectively. This will require closing the PSW and, instead, providing resources directly to governments and developing alternative approaches to strengthen public finances and public services.’

The extent of economic challenge being faced by developing countries could be understood from, for instance, the annual report in September last year by UN Conference on Trade and Development (UNCTAD), as highlighted by a Guardian-published article ‘UN warns of lost decade without Covid economic recovery plan’ back then: ‘The global economy faces a lost decade after the Covid-19 pandemic unless policymakers spurn austerity measures in favour of a comprehensive recovery plan built on investment in sustainable growth, the United Nations has said.’

Unlike what the IMF continues to stick with in a significant way in terms of aggregate demand squeezing policy prescription it has been prescribing many programme countries – unlike many rich, advanced countries going for major stimulus injections to the economy – UNCTAD’s last year’s annual report also pointed out as brought out by the same article: ‘In its annual trade and development report, the UN’s economic arm said a repeat of the cost-cutting conducted by governments after the financial crisis of 2008-09 would choke off recovery and risk a double-dip recession in 2022.’

Moreover, this year’s annual report by UNCTAD that came out recently, raised alarm bells over financial loss being caused and expected to unfold for poorest countries in the wake of the pandemic, whereby a Guardian-published article ‘Poorest countries will be $12tn worse off by 2025 due to Covid – UN’ highlighted the report as follows: ‘The world’s poorest countries will be left $12tn (£8.7tn) worse off by 2025 amid a weaker economic recovery from Covid-19 as wealthy nations limit their access to vaccines, the United Nations has warned. In its annual trade and development report, the UN Conference on Trade and Development (Unctad) said low-income countries had been hit much harder by the pandemic than during the 2008 financial crisis, adding to their debts and piling pressure on their public finances.’

But the rich, advanced countries, along with the multilateral institutions – including the World Trade Organization (WTO) on the front of forcefully pushing for at least temporary removal of intellectual property rights (IPRs) on Covid vaccines – have not played the needed role towards providing the financial support and meeting the vaccine supply needs of developing countries, especially Africa, as yet. To quote the recently- released annual report by UNCTAD, as highlighted by the same article: ‘The UN’s economic arm said there were growing risks that low-income developing countries would fall further behind due to limited progress in deploying coronavirus vaccines, despite western leaders promising to “build back better” from the crisis. “So far, the world economy appears to be building back separately,” it said in the report.’

In addition, the Covax programme has performed poorly as well, as highlighted by a recent Guardian-published article ‘The west has more vaccine doses than it needs – and no excuses not to share them’ by a former prime minister of UK, Gordon Brown, as follows: ‘The World Health Organizaton’s Covax programme is the global bulk purchasing agency set up last year to ensure equitable vaccine distribution. But even though the G7 nations promised Covax in June that they would share 870m doses with the poorest countries, just 100m have been released to them, and overall only 4% of all vaccines produced worldwide have been channelled through Covax.’

Moreover, on the exceedingly poor performance of vaccine supply, which forms an important underlying factor in the lack of similar economic recovery seen by developing countries, in addition to low stimulus provided comparatively by the latter group of countries, Gordon Brown pointed out in the same article that while the world by coming January, will have enough vaccines to inoculate every adult globally, extreme vaccine inequality will only allow much less inoculation rate reached by then. According to him: ‘Soon, the ten-billionth Covid vaccine will roll off the production lines. By January, according to a recent report from the data research agency Airfinity, a tipping point will be reached when there will be enough vaccine doses for every adult on every continent. By June the number of doses will reach 27bn, enough to fully immunise the world’s population twice over. But despite this manufacturing triumph, we are losing badly in the arms race to actually inject every adult in every country. Next summer, on current trends, more than half the world will remain unvaccinated. …Poor countries, which have injected just 2% of their adults, are being denied vaccines, while rich countries that have already fully immunised more than 60% of their citizens continue to monopolise access to doses.’

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2021