Covid-19 will hit developing countries hard

The permanence of the losses caused by the pandemic depends on the size of the scars

Martin Wolf

Coronavirus Monsoon
© James Ferguson

“Covid-19 is the most adverse peacetime shock to the global economy in a century.”

Moreover, this recession “is the first since 1870 to be triggered solely by a pandemic”.

Both observations come from the World Bank’s excellent new Global Economic Prospects.

They illuminate the scale of the damage. Never can there have been a greater need for an ambitious and co-operative response. Alas, not for a long time have these qualities been so absent.

One of the report’s salient conclusions is the scale of uncertainty about what lies ahead. We know that we are in the midst of an extraordinary global economic contraction. We do not know how deep and persistent it will be, nor how long its adverse effects will last.

We are, after all, at an early stage in managing the disease. That is particularly true for emerging and developing countries, where Covid-19 is still taking off. Measures to contain it are especially hard to implement there, given the dependence of so many on work in the informal sector and the limited health and fiscal capacities of governments.

Their sole advantage is the relative youth of their populations.

Yet managing the disease is only a part of the challenge now confronting emerging and developing countries. Many of them are highly vulnerable to global economic shocks. This one is of devastating proportions. They have been buffeted, to varying degrees, by a global slump, sharp falls in commodity prices, flight from risk in financial markets, a huge decline in remittances and receipts from tourism and a large decline in world trade.

Many are likely to be forced into default. Moreover, the impact on their economies is unlikely to be brief. Many economies and billions of people are likely to be scarred. This might be the beginning of many lost years, or even worse, for multitudes.

Line chart showing growth in global GDP per head in percentages entitled 'This is forecast to be the fourth worst global recession since 1871'

Much depends on the economic consequences.

The bank indicates that the range of possible outcomes for global economic growth this year (at market exchange rates) falls between minus 3.7 and minus 7.8 per cent. For emerging market and developing economies, it falls between minus 0.5 and minus 5 per cent.

The bank expects a return to growth in 2021, at between 1.3 and 5.6 per cent in the world and between 2.7 and 6.4 per cent in emerging and developing economies. This means that output is quite likely not to recover to 2019 levels before 2022 in emerging and developing countries. It will not return to levels implied by a continuation of pre-pandemic growth until well after then, if ever.

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The permanence of the losses depends on the nature of the scars. As the report notes, “severe recession has been associated with highly persistent losses in output”. Low levels of capacity use deter investment and leave a legacy of obsolete capacity. Expectations of weak future growth discourage investment and so become self-fulfilling.

Long periods of unemployment cause loss of skills and may permanently deter workers from seeking jobs. Countless companies will disappear for ever.

Line chart showing daily new Covid-19 cases in thousands entitled 'Covid-19 is now taking off in emerging and developing countries'

Beyond this, in emerging and developing countries, the crisis threatens severe underfunding of important health and welfare programmes. The loss of sustenance for many may cause severe longer-term damage to health and other malign consequences for workers and their families.

Many may die of maladies unrelated to the pandemic. The education of many children may be permanently damaged.

Other important longer-term threats include short-sighted policy reactions. There may, as in the 1930s, be a permanent shift away from market economics and international trade. The self-defeating policies of import substitution followed by many developing countries after the second world war had their roots in that era’s calamities.

Today, it is almost conventional wisdom to condemn globalisation and the international integration of supply chains. But, as the report stresses, both have proved powerful engines of economic development. Remember that we saw an extraordinary decline in the proportion of people in extreme poverty, from 43 per cent in 1980 to 10 per cent in 2015.

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Avoiding both enduring damage and permanent mistakes is crucial. But so, too, is providing adequate assistance today. A recent high-level plea to the Group of 20 leading countries noted that the crisis may plunge 420m people into extreme poverty.

Moreover, it adds, 80 per cent of children have been out of school. It is a matter of high moral and practical urgency, given the interdependence among countries, to contain such outcomes, with all the dire consequences they must bring.

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More help is needed.

The IMF has argued that emerging and developing countries need $2.5tn, far more than now available. Further debt relief is a necessity for the poorest countries and also for debt-encumbered emerging countries. It is crucial, too, to help emerging and developing countries meet the public health challenges confronting them.

Beyond this, there is an opportunity to accelerate the world’s shift away from a carbon-intensive pattern of economic activity. Needless to say, the outcomes depend also on policy choices made by leaders of the emerging and developing countries themselves.

Bar chart showing Informal activities role in employment in developing countries

When future generations look back at this crisis, will they view it as a decisive turning point and, if so, in which direction? Will they conclude that we understood that a pandemic is a shared crisis needing an effective and co-operative response?

Or will they conclude, instead, that we allowed our capacity for co-operation and the fragile progress of economic development to wither away?

We do not know their answer.

That depends on what we now decide.

We know what we should do: act, together.

Column chart showing forecast 2020 GDP growth in emerging market and developing regions in percentages entitled 'Huge contractions in output seem especially likely in Latin America'

Achilles heal

Most investors and some firms are upbeat about the world economy

They won’t be if stimulus cheques dry up or the virus surges again

According to the theory of cognitive dissonance it is stressful to dwell on contradictions. Pity, then, anyone trying to reconcile the miserable mood of many economic forecasters with booming stockmarkets and the increasingly bullish mood in many boardrooms.

This week the OECD, a club of mostly rich countries, predicted “dire and long-lasting consequences” in the rich world from the recessions caused by the covid-19 pandemic.

As it did so, the S&P 500 index of American shares was almost back to its level at the start of the year, when to most people “corona” still meant something to be drunk with a slice of lime.

For a while the strength of America’s stockmarket, which recently enjoyed its biggest 50-day rally in history, looked like a global exception. But since the end of April European and Japanese markets have outperformed even a jubilant Wall Street.

To some this is a clear sign of spreading irrational exuberance. Shares, it is argued, have been pumped to unsustainable highs by monetary and fiscal stimulus, and, perhaps, by a wave of speculation by idle workers who have been punting on the stockmarket with their stimulus cheques (TD Ameritrade, a retail broker, says trading activity is four times the level of a year ago).

In fact, investors have not lost their minds. A stream of positive corporate and economic data provides some grounds for optimism. The trouble is that it would not take much bad news—whether about the withdrawal of stimulus or the pandemic—to throw the rally into reverse.

Start with the good news. Most analysts had thought that America’s unemployment rate would rise from 14.7% to around 20% in May. Instead it fell to 13.3% as millions of Americans were recalled to work.

Real-time data on credit-card spending, e-commerce and consumer mobility suggest that American consumer spending reached a trough in April and has now recovered to around 90% of its pre-pandemic level. The recession that was only this week officially declared to have started in March already looks to have bottomed out.

Like the market rally, the green shoots are not confined to America. In May Chinese goods exports were only 3.3% lower than a year ago—analysts had expected almost twice that fall.

Labour markets have beaten expectations in Canada and South Korea. In Europe surveys of business sentiment remain depressed but have rebounded strongly from record lows in April. It helps that the euro zone has embraced stimulus. This month the ecb has expanded its bond-buying programme and Germany has fired a fiscal bazooka.

Indeed, one conclusion to draw from this turn in the data is that stimulus works. Governments have successfully shielded firms from bankruptcy and protected consumers’ incomes.

America’s banks say that fewer debts are turning sour than you might expect from looking at the unemployment rate alone; household incomes are higher than they were before the pandemic.

Meanwhile many investors and firms have persuaded themselves that lifting lockdowns will not cause an immediate second spike in covid-19 infections. All this has led them to look past the evisceration of corporate profits in 2020 to a rapid economic rebound in 2021 and 2022.

Yet each prong of the argument also carries a warning. Stimulus will not last for ever.

America’s emergency $600 weekly boost to unemployment insurance payouts, for example, expires at the end of July. Were Congress to continue to support the jobless so generously, it could slow the economic restart by discouraging people from working. But an abrupt withdrawal of benefits would slash incomes and leave many unable to spend.

America’s headline unemployment rate may be falling but the number of workers who report that they are jobless because they have been permanently (rather than temporarily) laid off continues to rise ominously.

Nobody yet knows how many will join their ranks as the economy changes for good in response to the pandemic.

That makes it hard to judge for how long policymakers should keep the pedal to the metal. And for as long as the labour market looks damaged, households will save more than they otherwise might, slowing the recovery.

The second risk stems from the virus itself. It is still poorly understood and, as it spreads through developing countries, the global daily count of new cases is trending higher than ever.

Another wave of infections still remains possible, especially during the winter, when its transmission may be easier.

That could bring on another round of lockdowns or, failing that, lead consumers to choose to stay at home for their own protection, limiting the extent of the rebound. In February markets were caught out by the speed with which the outlook shifted.

Though the world economy has begun to recover, do not rule out a relapse.

Which Economic Stimulus Works?

During the initial shock from COVID-19, it was understandable that governments and central banks would respond with massive injections of liquidity. But now policymakers need to take a step back and consider which forms of stimulus are really needed, and which risk doing more harm than good.

Joseph E. Stiglitz, Hamid Rashid

stiglitz273_Spencer PlattGetty Images_USdrivethroughmoneyeconomy

NEW YORK – Governments around the world are responding forcefully to the COVID-19 crisis with a combined fiscal and monetary response that has already reached 10% of global GDP. Yet according to the latest global assessment from the United Nations Department of Economic and Social Affairs, these stimulus measures may not boost consumption and investment by as much as policymakers are hoping.

The problem is that a significant portion of the money is being funneled directly into capital buffers, leading to an increase in precautionary balances. The situation is akin to the “liquidity trap” that so worried John Maynard Keynes during the Great Depression.

Today’s stimulus measures have understandably been rolled out in haste – almost in panic – to contain the economic fallout from the pandemic. And while this fire-hose approach was neither targeted nor precise, many commentators would argue that it was the only option at the time. Without a massive injection of emergency liquidity, there probably would have been widespread bankruptcies, losses of organizational capital, and an even steeper path to recovery.

But it is now clear that the pandemic will last much longer than a few weeks, as was initially assumed when these emergency measures were enacted. That means these programs all need to be assessed more carefully, with an eye to the long term. During periods of deep uncertainty, precautionary savings typically rise as households and businesses hold on to cash for fear of what lies ahead.

The current crisis is no exception. Much of the money that households and businesses receive in the form of stimulus checks will probably sit idle in their bank accounts, owing to anxieties about the future and a broader reduction in spending opportunities. At the same time, banks will likely have to sit on the excess liquidity, for lack of credit-worthy borrowers willing to take out fresh loans.

Not surprisingly, excess reserves held in US depository institutions nearly doubled between February and April, from $1.5 trillion to $2.9 trillion. For comparison, excess reserves held in banks during the Great Recession reached just $1 trillion. This massive increase in bank reserves suggests that the stimulus policies implemented so far have had a low multiplier effect. Clearly, bank credit alone is not going to lead us out of the current economic stalemate.

Making matters worse, today’s excess liquidity may carry a high social cost. Beyond the usual fears about debt and inflation, there is also good reason to worry that the excess cash in banks will be funneled toward financial speculation. Stock markets are already gyrating wildly on a daily basis, and this volatility could in turn perpetuate the climate of increased uncertainty, leading to still more precautionary behavior, and discouraging both consumption and the investment needed to drive the recovery.

In this case, we will be facing a liquidity trap and a liquidity conundrum: massive increases in the supply of money and only limited uses for it by households and businesses. Well-designed stimulus measures could help once COVID-19 has been brought under control. But as long as the pandemic is still raging, there can be no return to normalcy.

The key for now, then, is to reduce risk and increase incentives to spend. As long as firms are worried that the economy will remain weak six months or a year from now, they will postpone investment, thereby delaying the recovery. Only the state can break this vicious circle. Governments must take it upon themselves to insure against today’s risks, by offering compensation for firms in the event that the economy does not recover by a certain point in time.

There is already a model for doing this: “Arrow-Debreu securities” (so named for the Nobel laureate economists Kenneth Arrow and Gérard Debreu) would become payable under certain predetermined conditions. For example, the government could guarantee that if a household purchased a car today, and the epidemic curve remained at a certain point six months from now, its monthly car payments would be suspended.

Similarly, income-contingent loans and mortgages could be used to encourage the purchase of a wide range of consumer durables, including housing. Similar provisions could apply to real investments made by firms.

Governments also should consider issuing spending vouchers to stimulate household consumption. This is already happening in China, where local governments across 50 cities are issuing digital coupons that can be used to buy various goods and services within a certain timeframe. The expiration date makes them potent stimulants of consumption and aggregate demand in the short term – when it is needed most.

With the pandemic likely to last much longer than was originally assumed, still more stimulus will be necessary. Although the United States, for example, has already spent $3 trillion on various forms of assistance, without more – and, one hopes, better-designed – measures, that money will have merely prolonged the lives of many enterprises by a few months, rather than actually saving them.

One approach that has been working in several countries is to provide assistance to firms on the condition that they retain their workers, supporting wage bills and other costs in proportion to an enterprise’s decrease in revenue. In the US, Representative Pramila Jayapal, a congresswoman from Washington State, has proposed legislation along these lines, as have several senators.

Poorly designed stimulus programs are not just ineffective, but potentially dangerous. Bad policies can contribute to inequality, sow instability, and undermine political support for government precisely when it is needed to prevent the economy from falling into a prolonged recession. Fortunately, there are alternatives. But whether governments will take them up remains to be seen.

The views expressed here do not reflect the views of the United Nations or its member states.

Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, is Chief Economist at the Roosevelt Institute and a former senior vice president and chief economist of the World Bank. His most recent book is People, Power, and Profits: Progressive Capitalism for an Age of Discontent.

Hamid Rashid, a former director-general for multilateral economic affairs at the Ministry of Foreign Affairs in Bangladesh and senior adviser at the UNDP's Bureau for Development Policy, is Chief of Global Economic Monitoring at the United Nations Department of Economic and Social Affairs.

Retirement Face Painful Decisions

Individuals face perhaps one of the most difficult investing decisions in their lifetimes: whether to wait out a potentially long rebound or exit the market altogether

By Akane Otani

The stock market has clawed back much of its losses from the new coronavirus pandemic. Ophthalmologist Craig Sklar is selling his stocks anyway.

When the pandemic hit, the value of Dr. Sklar’s investments tumbled. So did the income he earned from his private practice in Connecticut, which was forced to furlough staff and dip into emergency loans to try to keep its doors open.

At 62 years old, Dr. Sklar, who had been hoping to retire in a few years, decided he couldn’t risk seeing his portfolio take a bigger hit. He sold much of his stockholdings at a loss between January and early March.

“I don’t have 10 to 15 years left to recover my losses,” said Dr. Sklar, who now has more cash as a percentage of his portfolio than he has in decades. “At some point, I’ll need my cash to live on.”

The coronavirus pandemic has created a crisis that some economists believe could take the country nearly a decade to recover from.

Individuals like Dr. Sklar now face perhaps one of the most difficult investing decisions they will make in their lifetimes: whether to wait out a potentially long rebound or exit the market altogether.

Data from Fidelity Investments suggests millions of individuals have decided to do the latter. Nearly a third of investors ages 65 and up sold all of their stockholdings some time between February and May, compared with 18% of investors across all age groups.

The stock market has defied many investors’ expectations, recovering much of the losses it suffered after the pandemic forced businesses to shut down and countries to close their borders. The S&P 500 is now down 5.9% for the year, while the Dow Jones Industrial Average is off 10%, despite tumbling last week on growing fears of a second wave of coronavirus infections.

Money managers who believe the stock market’s rebound is justified have attributed the rally to aggressive central bank action, fiscal policy and projections that the U.S. will be able to contain the pandemic in the coming months. Those who are more skeptical point to the worries about another spike in coronavirus cases—especially after a wave of protests broke out around the country—that could send the market tumbling again.

In many cases, those hoping to retire in the coming years aren’t waiting around to find out who is right.

Dr. Sklar has told his children, who are in their 30s, to “be 100% in equities if you can.” But he himself isn’t planning on dipping back into the stock market soon.

Over in Illinois, Philip Eberlin, who owns a woodwork-restoration business, has most of his portfolio in certificates of deposits and cash.

He knows from experience that, even after world-changing events—9/11 and the 2007-08 financial crisis—the stock market has always gone up again. Mr. Eberlin said he missed out on much of the market’s stunning recovery after the last financial crisis because he never figured out a time to move more of his money back into the stock market.

But he is 66. And he hasn’t worked since late March because the pandemic has dented demand for contract work in Chicago residential buildings.

With hopes to work for another two or three more years before retiring, “what I’d rather not do is invest at this point and then see the market plunge 40 to 50%,” Mr. Eberlin said.

For the most part, financial planners and advisers recommend that individuals who are approaching retirement gradually reduce their exposure to riskier assets, like stocks, while increasing exposure to more conservative investments, like government bonds. 
What they don’t typically recommend is pulling out of the stock market altogether.

“When you sell, you have to be right two times: right that the market is going to keep going down, and right that the market is going up when you get back in,” said Sarah Catherine Gutierrez, a certified financial planner based in Arkansas. “The problem is, very few people can be that right.”

But Ms. Gutierrez acknowledges the impulse to sell can be overwhelming—especially for those who don’t have as big of a cash reserve to fall back on during economic downturns.

One of Ms. Gutierrez’s clients had planned to sell his business to help supplement his retirement nest egg. When the pandemic hit, potential buyers pulled out, and the client had to put aside his retirement plan.

“We feel so much compassion for this age group,” she said. For many, “it feels like their dreams are being postponed at best.”

‘I don’t have 10 to 15 years left to recover my losses,’ said Dr. Sklar, who now has more cash as a percentage of his portfolio than he has in decades.

Photo: Julie Bidwell for The Wall Street Journal .

Both Dr. Sklar and Mr. Eberlin said they consider themselves more fortunate than most.

Dr. Sklar has been able to pick up telemedicine shifts that allow him to talk with patients over the phone.

And Mr. Eberlin has been able to hold up, in part because of his savings and because of his wife’s job as a schoolteacher.

“When you think about how many people in the country have very little in savings and retirement, I am blessed,” he said.

But Mr. Eberlin still feels a sting of regret, especially having sat out the nearly 11-year bull market that began in 2009 and missed out on much of the stock market’s resurgence the past few months. With the future of his job up in the air, he isn’t looking to make any drastic changes to his portfolio soon.

“I wish I had a crystal ball,” he said.