Could the COVID-19 crisis erase years of progress within poverty reduction? While G20 members come together, one of the OECD directors, Mario Pezzini, underlines the importance of multilateral cooperation in these times of turmoil.

March 30, 2020, El Salvador (Central America): people line up to enter a bank in the capital to receive government aid. (Photo by Yuri CORTEZ / AFP)
March 30, 2020, El Salvador (Central America): people line up to enter a bank in the capital to receive government aid. (Photo by Yuri CORTEZ / AFP)

The 26 March G20 Leaders’ meeting was extraordinary in many respects including the announcement to “do whatever it takes” and a $5 trillion pledge – roughly the size of Japan’s GDP- to fight the COVID-19 pandemic.

Developed countries are focusing on the short- and medium-term impacts at home, implementing a wide range of fiscal, healthcare and travel-related policies as well as economic measures to support households and businesses.

What about developing countries? G20 Leaders expressed their concern and “stand ready to mobilise development and humanitarian financing”. But, will they consider the global spill over of their own domestic stimulus?

 

The COVID-19 crisis: a threat to global growth

All signs indicate that the COVID-19 crisis could erase years of progress within poverty reduction. Major outbreaks in developing countries could cause the collapse of weak health systems and expose gaps in social protection programmes, especially in Africa, where so many schemes rely on official development assistance. A humanitarian crisis may be in the making too: travel restrictions affect the delivery of humanitarian assistance, and infections in refugee camps – largely hosted in developing countries – will be difficult to fight. The ILO estimates that 25 million jobs could be lost worldwide, possibly more, as the majority of workers in developing countries are in the informal economy.

 

In Latin America and the Caribbean, the COVID-19 crisis intensifies poverty

Latin America and the Caribbean have registered more than 30 000 cases  (as of 6 April 2020) and a growing number of fatal cases. Many countries are scrambling to take measures such as border closures, while considering steps to mitigate the already deep economic impacts that will worsen in the next months. Two major sources of foreign exchange, remittances and tourism, are paralysed, while the decline in China’s demand for natural resources has significantly affected business prospects of commodities exporters. The slowdown risks accelerating the rise of poverty. About 60% of workers in the region are informal, with no safety net. An additional 35 million people could fall into poverty, bringing the total to 220 million.

 

Africa and Asia confronted to a shock wave

In Africa, the numbers are climbing with 9 000 cases (still as of 6 April 2020). Analyses of the potential impact of the virus highlight the region’s dependence on the performance of its partners. The slowdown in China, Africa’s major trading partner, is already having ripple effects in the region. African oil exporting nations could lose $65 billion in revenues as oil prices fall and Africa could see its GDP growth rate cut in half, falling from 3.2% to about 2% due in part to the disruption of global supply chains. Tumbling commodity prices are denting an already tight fiscal space – many countries have tax-to-GDP ratio below 15% – while existing debt levels may constrain the capacity to borrow.

 

 

Developing Asian economies, with their strong linkages to the Chinese economy, are also experiencing the effects of the pandemic. The size of the consumption shock in China could be bigger than the 3 percentage points decline of retails sales growth during the SARS outbreak in 2003. India’s decision to put its 1.3 billion residents in a 21-day lockdown will also have major consequences, for the country and for its neighbours. Another major blow to Asian and Pacific economies will come from a drop in tourism and business travel.

 

COVID-19: what priorities for foreign aid in developing countries?

Developing countries weathered the initial impact of the 2009 Global Financial Crisis relatively well thanks to their fiscal buffers built during the commodity super cycle – what in 2010 we called Shifting Wealth. This time is different. As the IMF warned in April 2019, the fiscal space is severely reduced.

Yet developing countries risk being the unintended casualties of this crisis, with systemic repercussions for us all; we must take coordinated action, with a truly global approach, now.

First, we need to mobilise public, private and philanthropic actors to respond to the health emergency and strengthen health and local production systems. The immediate priority is to scale up financing for health personnel and medical supplies and to help students cope with school closures. Over the medium term, the international community must work with developing countries to expand universal social protection, building upon initiatives such as Universal Social Protection 2030.

Second, we need an ambitious and coordinated fiscal response. Developing countries should also be able to help households and firms, through income-support measures, such as unconditional cash transfers, and other forms of relief such as tax breaks and deferred interest payments. To ensure a sustainable global recovery, developed and developing countries should join hands and establish a dedicated global investment fund to unlock productive transformation and jobs.

 

A strong leadership to overcome COVID-19’s consequences

Third, a coordinated response will not be possible without an open and supportive multilateral system. We must avoid protectionism and facilitate the continuous flow of goods and services, including critical drugs and medical supplies. We need to ensure the G20 financial package also benefits developing countries. An uptick in global demand will help, but will not be enough to fight the virus, mitigate its economic and social consequences, and build stronger public health systems – let alone create millions of jobs.

The lessons learnt in the response to this crisis must bring countries together in a reinvigorated and more inclusive multilateral system. The Marshall Plan worked because leadership was strong, and financing efforts to rebuild a continent were efficiently co-ordinated. Money was just part of the story. The Plan led to the establishment of the OECD and its Development Centre – where governments address shared concerns and exchange policy experiences. Sharing knowledge and resources in the Covid-19 crisis has proven vital. We must seize this opportunity to reconfigure multilateral co-operation for development, engage governments on an equal footing and create joint solutions to deliver global public goods.

 

 

The opinions expressed on this blog are those of the authors and do not necessarily reflect the official position of their institutions or of AFD.

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