The blog of the Urban Institute
April 17, 2020

How Developing Countries Can Manage the COVID-19 Economic Impact

April 17, 2020

Even as many developing countries are confronting the health impacts of the COVID-19 pandemic, they are already bracing for the widespread, global recession that will follow. These countries already struggle to provide many services and supports to their citizens, and although the emergency assistance packages of international financial institutions are a start, they alone won’t be enough to mitigate the economic impact of COVID-19 and enable a strong recovery.

Although most developing countries escaped the 2007–08 financial crisis with limited damage, for many, this economic downturn is expected to be much worse because of the direct health effects, the sharp decline in global economic activity, the structural composition of their economies, and constrained policy options.

For the most vulnerable citizens in the most vulnerable countries, this crisis may be particularly destructive, undermining progress toward the Sustainable Development Goals. We consider five factors that help explain a country’s baseline resilience and offer four recommendations to help policymakers mitigate the impact and accelerate their countries’ pathways to recovery.

Five factors to understand baseline resilience

A developing country’s ability to weather this economic storm will depend on a few key starting conditions.

  1. Health system capacity. Already strained health systems will struggle to manage the effects of COVID-19 and “flatten the curve.” Ethiopia and Niger, for example, have only 30 hospital beds per 100,000 residents (and nearly no intensive care beds). Chronically underinvested health systems may also be unable to efficiently absorb emergency funding, even when available.
  2. Demand for safety nets. Social safety nets (e.g., welfare and unemployment supports) help shield citizens from the effects of economic downturns and enable economies to recover faster. Most developing countries have weak or nonexistent public safety nets, and it’s too late to build them now; as one NPR reporter observed, “You go into the recession with the safety net you have, not the safety net you want.” The need for such a buffer becomes more acute when the population has limited alternatives, approximated by indicators such as a high degree of labor informality, low gross domestic savings rates, and high baseline poverty rates.
  3. Intergovernmental arrangements and cooperation. On paper, many developing nations have decentralized responsibility for delivering key services. In practice, decentralization is often limited by unclear or contested authorities, weak accountability mechanisms, inadequate and unreliable financing, and poor intergovernmental coordination. These factors hinder overall government effectiveness, can impede responses to crises, and hamstring recovery efforts.
  4. Dependency on external demand. Countries are particularly vulnerable to global crises if their economies are reliant on external demand. The sudden onset of this crisis has given countries little time to prepare for exogenous shocks like the sharp collapse in the price of many commodities, reductions in remittances (which have grown 50 percent since 2008), a drop-off in demand for exports like textiles, a reduction in global tourism, or the return of now-unemployed nationals from abroad.
  5. Fiscal health and space. Countries’ fiscal and external balances were a major factor in how well they handled the 2008–09 recession. But fiscal levers pulled in 2008 (increasing public spending and/or reducing taxes) are less well suited for the immediate crisis, and many countries have less space to use them without endangering market access and debt sustainability.

Four policy ideas for accelerating recovery

Bending, but not breaking, during the growing economic crisis will require cool heads, swift action, and an eye toward longer-term recovery. International cooperation will be critical, with Nobel Laureate Joseph Stiglitz arguing for a large increase in International Monetary Fund support for national budgets and for a pause on debt service for emerging economies. But national policymakers will play an even more important role in their countries’ recovery. Here are four recommendations to help guide them.

  1. Although it’s too late for most structural reforms, countries should take urgent steps to prepare their public financial management systems for the crisis and authorize emergency spending on public health and safety nets. Transparently costed loans and guarantees (PDF) for businesses and households, for example, may help cushion the collapse in economic activity.
  2. Central banks should wait until after the immediate crisis subsides before implementing aggressive monetary stimuli (such as quantitative easing policies). Although some efforts to calm the market are welcome, the central driver of this economic crisis is a collapse in private spending and investment from virus fears and countermeasures, not a traditional lack of liquidity (although that has become a factor). Economist Austan Goolsbee has equated providing extensive stimuli now to wringing out your shirt to dry it while still in the midst of a rainstorm.
  3. Governments should also resist the urge to pursue self-defeating policies of retrenchment, export controls, and protectionism. Although raising the drawbridge in times of crisis can be politically popular, actions that unnecessarily raise costs and constrain economic activity will deepen the economic slowdown and lengthen recovery.
  4. Smart investments and actions taken now may help countries not only recover quicker but also boost their longer-term development prospects. For instance, emergency intergovernmental coordinating bodies, if transparent and organized around agreed principles, may provide a model for collaboration on information sharing and resource allocation. Additionally, the crisis may offer a unique opportunity to make politically challenging investments in sectors and industries with the greatest potential for long-term job creation and growth.

This crisis will test the resilience of many countries, especially developing ones. By sharpening awareness of structural vulnerabilities and weaknesses, it may also build consensus and galvanize action on needed reforms and investments that not only accelerate recovery but also support longer-term development.

A worker pushes boxes containing mostly personal protective equipment at Ethiopian Airlines' cargo facility at the Bole International Airport in Addis Ababa, Ethiopia, on April 14, 2020. Ethiopia and the United Nations opened a humanitarian transportation hub at the airport in Addis Ababa to move supplies and aid workers across Africa to fight the COVID-19 coronavirus. (Photo by SAMUEL HABTAB/AFP via Getty Images)

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