Paltry international support for spending needs sets South further back

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR. With the pandemic setting back past, modest and uneven progress, huge disparities in containing COVID-19 and financing government efforts are widening the North-South gap and other inequalities once again.

Developing country pandemic

Developing countries are struggling to cope with their generally feeble health systems. These had been weakened by funding cuts and privatisation policies prescribed by both Bretton Woods institutions (BWIs): the International Monetary Fund (IMF) and the World Bank. Unsurprisingly, COVID-19 has become a “developing-country pandemic”.

Developing countries – especially lower middle-income countries (MICs) and low-income countries (LICs) unable to afford diagnostic tests, personal protective and other equipment, medical treatments and vaccines – now account for much more and still fast rising shares of worldwide deaths and infections.

With grossly uneven vaccination, death and infection rates in high-income countries (HICs) have dropped as LIC and MIC (LMIC) shares have spiked. The Economist estimates much higher mortality rates in developing countries than suggested by official data: 12 times more in LMICs, and 35 times greater in LICs!

Greater global divergence

The COVID-19 pandemic and policy responses have further set back Agenda 2030 for global sustainable development. UNCTAD estimates developing country output fell by 2.1% in 2020. To make matters worse, progress towards achieving the Sustainable Development Goals (SDGs) was poor even before the pandemic.

The world now faces greater divergence, as developing countries fall further behind due to the pandemic and disparate responses to it. The IMF management proposes US$50bn can accelerate vaccination to end the pandemic worldwide, with benefits worth US$9 trillion!

The IMF estimates average LIC growth declined sharply to 0.3% in 2020 from over 5% in the previous three years. It also projects 33 developing countries – including 15 in Sub-Saharan Africa (SSA) and nine small island developing states – will still have lower per capita incomes in 2026 than in 2019.

Constrained fiscal space

Most developing countries faced constrained ‘fiscal space’ even before the pandemic. The average tax/GDP ratio in 2018 was 12% in lower MICs and 13% in LMICs, compared to 25% in developed countries.

Developing countries’ poorer fiscal means are often due to weaker revenue collection, lower incomes and larger informal sectors. They also lose between US$49bn and US$194bn yearly to illicit transfers, e.g., to corporations’ ‘trade mis-invoicing’ or ‘transfer pricing’.

Africa loses about US$89bn, around 3.7% of African output, to illicit capital flight yearly. This revenue loss is almost equivalent to the total inflow of official development assistance (ODA) and foreign direct investment African countries received during 2013-2015.

Developing countries are typically caught in harmful tax competition in a ‘race to the bottom’ following ‘neoliberal’ advice from the BWIs and others. Thus, statutory corporate tax rates declined from 39% in MICs and 46% in LICs in 1990 to 24% and 29% in 2019 respectively.

From frying pan into fire

Developing countries have long faced limited fiscal capacity and policy space or choice, worsened by decades of neoliberal policy conditionalities and advice. Donors and the BWIs have also urged LMICs to borrow from international capital markets rather than official sources.

Meanwhile, ODA increasingly supports private businesses. Such new mechanisms, e.g., ‘blended finance’, promised to turn aid ‘billions into trillions’ of private finance for Agenda 2030. The promise has failed spectacularly, depriving countries relying on declining ODA while advancing the interests of private finance.

Thus, LMIC debt surged before the pandemic. Total (public and private) debt reached over 170% of emerging market and developing economies’ output and 65% of LIC GDP in 2019. The increase in EMEs involved almost equal shares of both external and domestic debt.

This bad situation has worsened – with less tax revenue, reduced exports and ODA cuts – due to the pandemic as government spending needs rise sharply. In April 2020, UNCTAD called for US$1tn in debt relief of developing country obligations – estimated at between US$2.6tn and US$3.4tn in 2020 and 2021.

Donor support unlikely

However, rich countries, especially G20 members, have responded frugally to this call, while private commercial lenders have rejected all debt relief initiatives so far. This poor country predicament has been worsened by World Bank refusal to supplement IMF debt service cancellation for the most vulnerable LICs.

Meanwhile, ODA has remained below half the donor aid commitment, made half a century ago, of 0.7% of their gross national income (GNI). The aggregate ODA/GNI ratio fell from 0.31% in 2017 to 0.29% in 2019.

The IMF estimates LICs need around US$200bn for relief and recovery up to 2025, and another US$250bn to resume development progress. It projects another US$100bn will be enough to cover ‘downside risks’, e.g., due to delayed vaccination and more lockdown measures.

However, some major donors have already cut their already modest aid budget allocations. Meanwhile, no rich country has yet pledged to transfer its unused new IMF special drawing rights (SDRs) to provide more recovery finance for developing countries through the 15 designated multilateral financial institutions which can so use SDRs.

Financing relief, recovery, reform

Fiscal measures of around US$16tn have already been rolled out globally, with HICs accounting for more than 80%. In contrast, fearing the macroeconomic consequences of borrowing and spending much more, developing countries have committed much less.

While developed countries have deployed 28% of their much higher national incomes, the ratios are only 7% for EMEs, 3% for SSA and 2% for LICs. Besides urgently containing the pandemic and its consequences, developing countries must quickly, effectively and adequately finance relief and recovery from COVID-19 recessions.

Cooperative efforts to secure much more tests, equipment, treatments and vaccines must be quickly stepped up. Meanwhile, the UN system, including the BWIs, needs to urgently expand developing countries’ means to finance measures to ‘build forward better’.

Related IPS articles

“Pandemic relief policies need more resources, better design”. 1 Jun. 2021. http://www.ipsnews.net/2021/06/pandemic-relief-policies-need-resources-better-design/

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Pandemic relief policies need more resources, better design

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR. Pandemic relief measures in developing countries have been limited by modest resources, fear of financial market discipline and policy mimicry. COVID-19 has triggered not only an international public health emergency, but also a global economic crisis, setting back decades of uneven progress, especially in developing countries.

Struggling to cope

The pandemic’s economic and social impacts weigh more heavily on low- and middle-income countries (LMICs). The World Bank estimated that the pandemic pushed 119 to 124 million more people into extreme poverty in 2020.

The Bank also reported disproportionately larger business impacts in terms of closures, drops in sales, greater corporate debt and financial fragility. Meanwhile, households in poorer countries saw greater food insecurity as well as income and educational losses.

It also found public debt surging in many developing economies as a rising number of LMICs had greater difficulties servicing official debt. Facing sharp falls in tourism and export earnings, access to foreign credit for many has deteriorated.

Urgent financing needs

LMICs must address various urgent needs and other short-term problems. They need to finance emergency contagion containment and relief measures for those most adversely hit by the pandemic.

These would minimally include the costs of diagnostic testing, personal protective equipment for ‘frontline’ personnel, medical treatments for those infected, and urgent vaccination to mitigate further infections.

Liquidity support – e.g., low-interest loans and wage subsidies – can also be vital for the survival of businesses and workers. But in most countries, such credit facilities have mainly benefited more influential larger enterprises.

Policy and fiscal space as well as policy design are key elements influencing implementation of economic measures to cope with COVID-19 recessions. These require understanding the specific nature of recessions and options available, as distinct from simply following what others have done or recommend.

COVID-19 recessions different

What makes the pandemic economic shocks different? First, SARS-COV2 is a highly contagious aerosol-borne virus with variants and mutations rapidly evolving, with mixed, uneven, even deadly effects. COVID-19 has affected most countries, albeit with varying and unequal economic consequences.

Second, both supply and demand shocks have had mainly negative effects. The pandemic directly affected the ability to work, earn and spend. Containment measures have also hit production, supplies and incomes. In turn, these have lowered demand, spending and incentives for firms to invest.

Third, the shocks have worsened existing disparities and other inequalities. Fourth, they especially hurt LMICs, typically lacking fiscal resources and relevant governance capacities to better cope with the pandemic.

Government as ‘payer-of-last-resort’

Misreading the COVID-19 shocks and expecting brief V-shaped recessions, some novel fiscal and monetary measures were hastily introduced to assist businesses and workers. These typically emulated measures in developed economies including temporary tax relief, low interest loans, cash transfers and wage subsidies.

Many high- and upper middle-income governments have served as ‘payers-of-last-resort’, helping ‘suspended’ businesses to continue paying their involuntarily idle employees, instead of firing them.

Large firms have also been able to get governments to help settle some of their unavoidable bills, to cover their overheads and maintenance costs – such as rent, utility and other payments – during ‘stay in shelter’ lockdowns.

Such ‘payer-of-last-resort’ programmes have successfully complemented effective contagion containment measures, enabling early resumption of economic activity. While high, such costs can remain manageable if governments can secure sufficient fiscal resources and space.

Policy blind spots

There has not been enough consideration of country specific circumstances, or social, economic, cultural and institutional circumstances. Thus, large informal sectors, crowded slums and limited social protection in developing countries have been largely overlooked, or worse, ignored.

Unsurprisingly, most financing disbursed via various official channels have not reached most in the informal sector. These resources have not provided much relief to small and micro-enterprises, let alone the self-employed.

However, much of what was offered to large firms were not used due to uncertainty and reduced domestic spending options. Meanwhile, significant resources have ‘leaked out’ of many developing countries, including via corruption as well as tax and other incentives for foreign investors.

Such failures in policy responses and poor design have greatly impaired prospects for quick and equitable COVID-19 containment and recovery. They have also exacerbated various inequalities within and among countries.

Diverging recoveries

The International Monetary Fund (IMF) projects divergent so-called k-shaped recoveries, leaving many LMICs and the vast majorities in most societies further behind. With ongoing vaccine apartheid and nationalism, early hopes of quickly addressing the crises in LMICs have faded.

Vaccinations in these countries have been much delayed, while donor countries, such as the UK, have significantly cut aid. Thus, economic crises in LMICs are far from over, delaying recovery with often disastrous consequences.

IMF Managing Director Kristalina Georgieva has even warned that uneven global recovery would ‘ricochet’ as “poorer countries are faced with the risk of interest rates increasing while their economies aren’t growing, and may find themselves ‘really strangled’ to service debt, especially if it’s dollar-denominated”.

Appropriate relief measures

All governments must try their best to prevent protracted recessions becoming extended depressions. Relatedly, policymakers need to ensure that temporary short-term liquidity problems do not become full-blown solvency crises.

Measures are needed to change contracts and other obligations to enable firms to better cope with involuntary suspension of business operations. Much more is needed to address specific challenges facing small family businesses.

Income maintenance policies can help those losing some, if not all their incomes. Often unable to earn their livelihoods from home, lowly paid and casual workers are more likely to be displaced by lockdowns. Typically, they have much less in savings to ride out temporary earnings losses.

Social protection has been poorly, if at all institutionalised in most developing countries. Instead, temporary ‘social safety nets’, in response to crises, have been recommended and deemed adequate by influential foreign agencies.

Such ‘one-off’ relief measures, typically involving targeting, usually miss many of the deserving as they strive, often at great cost, to prevent opportunistic ‘undeserving free-riders’ abusing such chances to secure benefits.

Recoveries threatened

Appropriate design and efficient implementation of adequate relief measures are also vital for enabling robust and equitable recovery. These can be crucial to the survival of businesses – especially micro- and small ones – and vulnerable people.

The absence of sufficient relief measures can strengthen vicious circles of business failures, job and income losses. Declining aid inflows, more capital flight and inadequate relief for high government debt even before the pandemic have prevented most developing countries from deploying the bolder measures needed.

Facing financing constraints, many low-income countries have even cut spending! Fearing punitive market responses and longer-term problems, many developing country governments have been reluctant to borrow more. The urgent challenge now, however, is to enable them to wisely and equitably spend more.

Related IPS commentaries

“Developing Countries Desperately Need COVID-19 Financing”. 25 Mar. 2021. .https://www.ipsnews.net/2021/05/developing-countries-desperately-need-covid-19-financing/

“Developing Countries Struggling To Cope With COVID-19”. 23 Feb. 2021. https://www.ipsnews.net/2021/02/developing-countries-struggling-cope-covid-19/

Developing countries desperately need COVID-19 financing

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR. Failure to sufficiently accelerate comprehensive efforts to contain COVID-19 contagion has greatly worsened the catastrophe in developing countries. Grossly inadequate financing of relief, recovery and reform efforts has also further set back progress, including sustainable development.

Uncertain and unequal recovery

After over a year, “Poor countries are facing severe setbacks on their development paths, encumbered by ballooning debts, high risks of default and limited ability to inject desperately needed liquidity”, observed participants at a recent UN Forum.

International Monetary Fund (IMF) chief economist, Gita Gopinath, estimates US$9 trillion in economic benefits from adequately accelerating affordable mass vaccination, testing, tracing and treatment at a cost of US$50bn.

Overall global projections obscure disparities among and within countries. With vaccine apartheid and developing countries’ constraints, uneven pandemic containment and recovery have been worsening prior inequalities, further setting back poor countries and people.

Global disparities

Government responses have been much constrained by macroeconomic policy space, especially access to finance. ‘Unconventional’ monetary policies since the 2008 global financial crisis, especially low interest rates, have helped.

Thus, high-income countries (HICs) have borrowed and spent much more on relief and recovery. While rich countries have been able to borrow and spend massively, developing countries have very limited fiscal space due to diminished borrowing capacity.

Often with poorer credit histories and ratings, developing countries generally face much higher interest rates on foreign borrowing. Their foreign debt burdens as shares of national income were already relatively higher before the pandemic. All these have constrained them from adopting bolder expansionary efforts.

Unsurprisingly, developed countries have accounted for nearly 80% of all fiscal efforts. Compared to 16% of their national incomes, least developed countries have only increased government expenditure by 2.6% on average. Facing financing constraints, many low-income countries (LICs) have even cut spending!

Insufficient international support

Total resource flows to developing countries have fallen as official development assistance (ODA) and foreign direct investment (FDI) have declined. FDI in developing economies fell by 12% in 2020: by 37% in Latin America and the Caribbean, 18% in Africa and 4% in Asia.

While donors cut bilateral aid commitments by 36% in 2020, net ODA from 13 OECD Development Assistance Committee (DAC) rich member countries declined by US$4.7bn – led by a 10% UK cut – as “DAC donors prioritized their national responses towards COVID at the expense of international aid”.

International support for developing countries at this time of great need has been woefully inadequate. Despite acknowledging that “Debt service suspension is a powerful, fast acting measure that can bring real benefits to people in poor countries”, the World Bank has refused debt service cancellations.

The Bank claims these would adversely impact its credit rating, reducing its ability to borrow at low preferential rates for lending to middle-income countries (MICs) and to LICs on concessional terms. Unsurprisingly, debt cancellation has not been envisaged by the Bank.

From April 2020, the IMF’s Catastrophe Containment and Relief Trust has provided debt service relief of about US$500m, or 0.2% of GDP for 28 highly indebted LICs, its poorest and most vulnerable members. This relief has been extended twice – for half a year each time – to cover all eligible debt service payments due to the Fund estimated at US$238 million in the latest round.

The G20’s Debt Service Suspension Initiative (DSSI) is even worse, merely delaying repayments. Interest continues to accumulate to be repaid later. Despite two extensions, borrowing countries’ lack of enthusiasm for DSSI is hardly surprising. As private creditors have not joined, DSSI only covered 2% of total debt service payments due in 2020.

Leveraging the new SDRs

With Biden administration support, US$650bn in new IMF special drawing rights (SDRs) should be approved by August. But this is barely half of the trillion in SDRs (worth US$1.37tn) that The Financial Times deemed necessary.

SDR allocations are proportionate to countries’ shareholdings and voting rights, mainly benefiting developed, especially European countries. Allocations for the Group of Seven (G7) largest developed economies amount to US$272bn, with Africa getting only US$33.6bn! Nonetheless, the new SDRs should provide some welcome relief for many countries.

Developed countries which do not need to use their new SDRs should transfer their new allocations to the 15 ‘eligible’ multilateral financial institutions, including the IMF, World Bank and regional development banks. These should be used to expand their lending to developing countries on preferential terms.

Calling for massive multilateral development bank recapitalization for a ten-fold increase in official funding for poor countries, Jeffrey Sachs has called for much more official financing, by ‘recycling’ at least US$100bn of HIC SDRs.

Financing options for developing countries

Most developing country governments were already heavily indebted to varying degrees before the pandemic. Much greater debt forbearance is urgently needed as well as longer-term development financing are also needed.

While MICs may have more borrowing options, enabling them to minimise the burden of past government debt, domestic or foreign, is urgent. Already, the financial community and media frequently warn that their credit ratings will be adversely affected if they borrow more.

World Bank chief economist Carmen Reinhart – once reputed for her aversion to high indebtedness – now urges countries to borrow to fight the economic impact of the pandemic. She has rightly opposed putting “resources into zombie loans”.

Increasing non-performing loans and financial fragility to enable unviable firms to survive would slow recovery efforts. Instead, Reinhart has stressed the need to “expediently restructure and write down bad debts”.

However, there is no ‘one size fits all’ approach to financing needed measures to contain the pandemic and for macroeconomic expansion. Meanwhile, poor countries’ financing conditions are worsening as the pandemic drags on much longer than expected.

Facing economic slowdown, most governments need to spend much more domestically to prevent temporary recessions becoming depressions. Developing countries should not incur foreign debt except on preferential terms as necessary to import essentials such as medicines and food.

International cooperation must ensure significantly more official foreign exchange financing to supplement innovative domestic financing for urgently needed spending for relief, recovery and reform.

Related IPS commentaries

1. “IMF, World Bank Must Support Developing Countries’ Recovery”. 6 Apr. 2021. http://www.ipsnews.net/2021/04/imf-world-bank-must-support-developing-countries-recovery/

2. “IMF, World Bank Must Urgently Help Finance Developing Countries”. 30 Mar. 2021. https://www.ipsnews.net/2021/03/imf-world-bank-must-urgently-help-finance-developing-countries/

3. “Prioritise Pandemic Relief, Recovery: No Time for Debt Buybacks”. 9 Mar. 2021. https://www.ipsnews.net/2021/03/prioritise-pandemic-relief-recovery-no-time-debt-buybacks/

4. “Neoliberal Finance Undermines Poor Countries’ Recovery”. 2 Mar. 2021. https://www.ipsnews.net/2021/03/neoliberal-finance-undermines-poor-countries-recovery/

5. “Developing Countries Struggling to Cope with COVID-19”. 23 Feb. 2021. https://www.ipsnews.net/2021/02/developing-countries-struggling-cope-covid-19/

6. “Urgently Needed Deficit Financing No Excuse for More Fiscal Abuse”. 8 Dec. 2020. https://www.ipsnews.net/2020/12/urgently-needed-deficit-financing-no-excuse-fiscal-abuse/