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.
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.
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/