The Economic Impact of COVID-19 on Developing Countries – Part 2

By Daud Khan and Leila Yasmine KhanReprint | |

Print | Send by email

What is likely to be the economic impact of COVID-19 on developing economies? This second part will look at possible medium to longer term developments.

AMSTERDAM/ROME, Apr 6 2020 (IPS) - What is likely to be the impact of the COVID-19 pandemic on developing economies? In the first of this two part article we looked at possible short term disruptions and discussed actions by the private sector and Governments.

These included mobilizing available public resources to augment what private citizens are doing to help the poor and vulnerable; working on some of the national macro-economic levers to sustain businesses; and discussing with international creditors about cancelling – or rescheduling – repayments, of some of their debts.

This second part will look at possible medium to longer term developments.

Clearly, it is too early to say how long this first phase of infections will last; if there will be return waves; how many people will be infected; and how many will have mild or severe symptoms. Most likely we will not get a precise number even for deaths.

Whatever its medical trajectory, the fear and anxiety it has generated is unprecedented and will most likely mean the end of globalization as we know it. It will very likely also accelerate the isolationist trends in the USA and Europe

This is partly due to a lack of accurate data, especially from developing countries that often lack adequate testing facilities; and partly as many victims may have pre-exiting conditions, and establishing the primary cause of death is difficult.

However, we need to stay positive and believe that the COVID-19 outbreak will run its course as other pandemics have done. Resources are being allocated to cure the sick, and both Governments and private companies are working together to find a cure, improve diagnostic tests and develop a vaccine.

Moreover, lessons from previous pandemics, as well as lessons from the current pandemic coming from China, South Korea and Singapore about early containment and social distancing are being mainstreamed in all countries. And there is a lot of international cooperation on all fronts.

Provided that countries take the right steps, the number of deaths is likely to be much smaller than the three great pandemics of the 20th century – the “Spanish Flu” in 1918–1919 (20–50 million deaths); the “Asian Flu” in 1957-58 and the “Hong Kong Flu” in 1968 (1–4 million deaths each).

A first guess is that the death toll, at least for this year, could be similar to that for the 2009 “Swine Flu” pandemic which caused between 100,000–400,000 deaths worldwide. But whatever its medical trajectory, the fear and anxiety it has generated is unprecedented and will most likely mean the end of globalization as we know it. It will very likely also accelerate the isolationist trends in the USA and Europe.

There is little doubt that the pandemic will result in a very large cut in international trade as a result of falling global demand, both for consumption as well for investments. Sectors such as travel, tourism and construction would be particularly hard hit.

There may be some recovery as Governments in the USA and Europe launch expansionary fiscal and monetary interventions to counter the expected recession, but the positive impact of these interventions on international trade may be limited.

A key factor is that expansionary measures would likely favor domestic production and employment. In particular, Government support funds would be focused on employment intensive activities which have been hardest hit, such as the retail trade, catering and entertainment – which have limited import needs.

Trade will also be affected by changes in production patterns. Over the last two decades the thrust for improved efficiency and productivity has driven manufacturing, as well as many service industries, towards minimizing costs.

Two key elements of this have been just in time delivery which meant firms holding minimum stocks and inventories; and outsourcing to reduce costs, which meant long supply chains. The crisis has brought to the fore the vulnerability of both these processes.

With disrupted supply chains and low stocks, firms are already finding it hard to maintain operations. As time goes on, supply shortages will become a major constraint in Europe and USA.

As firms make future investment decisions in the post-COVID world, diversifying risk is something that they will be obsessed with and this will mean a strong push to reduce dependence on suppliers in other countries.

The countries most likely to be hit hardest by the changing international trade patterns are China and India, who are major suppliers of components and services to the international markets.

However, a number of other countries, irrespective of whether they are exporters of raw materials or finished good, from Viet Nam to Bangladesh, and from Nigeria to Mexico, will suffer as a result of lower export revenues and balance of payments difficulties.

These trade problems will be exacerbated by developments on the monetary side. Falling sales and liquidity shortages are beginning to hit companies around the world. Many risk having to lay off workers or even close down completely.

Central banks everywhere are trying to push money into the system and cut interest rate. However, its impact may be limited in the USA and Europe where base interest rates are already close to zero, and further cuts may not be enough to overcome pessimistic market sentiments.

Nevertheless, banks and other lenders may maintain or expand lending as a result of Government guarantees or pressure, or a combination of the two. However, they will almost certainly curtail lending to firms in developing countries who may see even normal lines of credit being restricted and foreign direct investments drying up.

The combination of trade and monetary problems emanating from Europe and the USA will put severe strain on Governments in developing countries which are already battling with soaring medical costs, pressing demands to provide emergency assistance to the poorest sections of the population, and assistance to bail out faltering firms.

It will also put tremendous pressures on banks and firms in these countries. With their backs to the wall, there is a serious risk of defaults.

External debts of developing countries, by both Government and the private sector, have risen sharply in the last decade as a result of low interest rates, high commodity prices and availability of credit due to quantitative easing by developed countries.

For middle and low-income countries external debt (excluding China) now stands at around US$6 trillion – more than the combined GDP of France and UK. The poorest countries (those with Gross National Income per capita of below US$1,175) have doubled external debt since 2008.

A World Bank report issued late last year pointed out their debt-vulnerability and stated that “with increased access to international capital markets, many low- and middle-income countries shifted away from traditional sources of financing and experienced a sharp rise in external debt, raising new concerns about sustainability”.

If, due to problems caused by the COVID-19 crisis, there is widespread defaults among poor countries this would pose serious problems for the global economy. It is therefore imperative that requests for debt forgiveness or rescheduling do not fall on deaf ears.

Daud Khan works as consultant and advisor for various Governments and for international agencies including the World Bank and several UN agencies. He has degrees in Economics from the LSE and Oxford – where he was a Rhodes Scholar; and a degree in Environmental Management from the Imperial College of Science and Technology. He lives partly in Italy and partly in Pakistan

Leila Yasmine Khan is an independent writer and editor based in the Netherlands. She has Master’s degrees in Philosophy and one in Argumentation Theory and Rhetoric – both from the University of Amsterdam – as well as a Bachelor’s Degree in Philosophy from the University of Rome (Roma Tre). She provided research and editorial support for this article.