How will Covid-19 affect developing countries?

The global impact of Covid-19 on unemployment is hard to measure. One of the few institutions publishing short-term data is the FRED, the federal reserve bank of St Louis. This data shows that the number of unemployed people in the US has increased with 16 million in three weeks, leading to an unemployment rate that is rapidly approaching 15%. Also, there is a serious risk that the current liquidity crisis will turn into a solvency crisis over time, thus turning the current global recession into a possible future depression.

According to the European Centre for Disease Prevention and Control, the number of Covid-19 cases in Africa, Asia and Latin America is still relatively small. Expectations are, however, that these continents will in the long term be most affected due to a combination of having little testing equipment, fragile health systems, an environment where social distancing is impossible to achieve, and an economy where vulnerable SMEs account for a much larger share of the economy.

In addition, the Imperial College London points out that demographic differences between high and low income countries make for a very different Covid-19 risk profile. Thus, compared to China, Europe and North America, which all have relatively old populations, low- and middle income countries differ in at least two respects: they tend to have a young population, with young children being particularly susceptible to infectious diseases, and the households that have a resident over the age of 65 years is substantially higher. This combination greatly increases the risk of transmission of the virus.

A recent UN report therefore notes that we should quickly direct our attention to the impact of Covid-19 on developing countries:

“The analysis of the impact of the Covid-19 shock has been mostly concentrated on China and advanced economies, since they were initially more affected by the pandemic, account for three-quarters of world output and have the monetary and fiscal policy space to respond. However, since two-thirds of the world population live in the (remainder of the) developing world, the responses to the current shock must include dedicated and actions for developing countries, at all income levels.”

The pandemic could be disastrous for developing countries that lack social welfare and Oxfam has calculated that only a 20% income drop caused by the pandemic could push half a billion more people into poverty. Joseph Stieglitz and others point at the crucial role of the IMF in managing the current crisis. This role consists of at least two things: issuing special Drawing Rights (SDRs), which the IMF can use to boost global liquidity, and imposing a debt moratorium. A one-year debt moratorium could free up to $1 trillion (3.3% of low- and middle-income countries’ combined income) and would, according to analysts, “go a long way toward helping countries like Mexico and India tackle the current crisis”.

Edited by: Dr. Olivier Vonk