Carlos Arteta is Lead Economist in the Prospects Group of the World Bank, where he heads the work program on global surveillance and serves as a lead author of the Global Economic Prospects Report. Previously, he served as Principal Economist in the International Finance Division of the Federal Reserve Board and as Deputy Chief International Economist at the U.S. Treasury.
According to the 2021 Global Economic Prospects, the pandemic reversed gains in global poverty reduction for the first time in a generation, with over 100 million people falling back into extreme poverty. In addition to these immediate consequences, what will be the longer-term effects, for instance in terms of destruction of potential growth, for the low-income countries (LICs)?
This pandemic has had a very pernicious effect on the poorest countries of the world, because it came on top of preexisting fragilities such as violence, extreme poverty, rising levels of debt, weaker social safety nets, frequent natural disasters and insecurity. All of these make low-income countries less resilient than other countries to external shocks. On top of that, the pandemic has led to a substantial erosion of human capital through its impact on education, employment as well as the stock of capital and investment.
The prospects going forward are not good; they will further delay the catch-up with more advanced economies. In fact, according to our most recent forecasts, the growth rates in LICs will be essentially 0% this year and only 2% in 2022. At this rate, the convergence with advanced economies will reverse. So it is a devastating outcome that will affect the LICs, and in particular among them, the most vulnerable ones.
Why are the LICs lagging behind?
According to our monitoring, the recovery in advanced economies is actually pretty fast. By the end of next year, we now expect that the output levels in advanced economies will not only go back to pre-pandemic levels, but will also go back to pre-pandemic trends. That means that there would ultimately be no permanent loss for these countries in terms of level of output. In contrast, emerging and developing economies will be about 4% below pre-pandemic trend levels by the end of next year – and this gap is going to subsist in the next few years. So for them it will be a permanent loss.
The LICs are lagging behind because the pandemic has exacerbated existing vulnerabilities, such as the ability to support the population, to provide macroeconomic support to the private sector, to provide an effective health response and to safeguard jobs and education access. And within the poorest countries, it is the poorest population which suffers the most: unskilled workers, women, etc.
What about the middle-income countries (MICs)? Which fragility has been outlined by the pandemic?
LICs and MICs have some commonalities and some differences. The main difference is that LICs faced the pandemic at the same time that they were facing substantial vulnerabilities. Look for instance at the capacity of those countries to acquire and distribute vaccines: in MICs, roughly half of the population has received at least one dose, whereas in LICs, this number drops to 5%. In comparison, more than 70% of the population in developed economies have received one dose.
But there are also commonalities. The first one is the preexisting trend of weak productivity, which the pandemic will worsen because of its damage on both physical and human capital. The second one is the substantial level of debt. In the past 10 years, we have observed the fastest accumulation of debt across the world in history, including in LICs and MICs. During the pandemic, the need to support the population and the lack of fiscal revenue from collapsing activities have raised the debt level even higher. Those high levels of debt make LICs and MICs more vulnerable to shocks. And with the upcoming normalization of monetary policies, some countries will face substantial roll-over issues for their debt.
Low access to vaccines, rising debt burden, destruction of human capital, lack of macroeconomic stabilizers such as government spending programs: which of these factors had the most impact? Was this a lesson for the future?
The crisis has shown the critical need to prevent, prepare and respond to crises. “Prevent” means ex-ante policies that lower the probability of the crisis – for instance a proper health system for pandemics, good monitoring system and a resilient infrastructure for natural disasters, proper macroeconomic and macroprudential tools for financial crisis. “Prepare” means ex-ante policies that mitigate the impact of the crisis when it occurs – for instance rapid capitalization of financial institutions during the financial crisis. “Respond” means ex-post policies that can be launched when the crisis has occurred.
In LICs, the ability to respond to crises is limited. Advanced economies were able to produce and distribute vaccines quickly, to provide monetary and fiscal support to the population and the most affected groups. In contrast, the pandemic has outlined the lack of preparation of LICs, and so the international community needs to cooperate to improve the ability of those countries to prevent, prepare and respond to crises.
You mentioned that only about 5% of the population in low-income countries had received their first shot of vaccine, and the Covax initiative got off to a slow start. Now the World Bank is also cooperating with the Africa Vaccine Acquisition Task Team (AVATT) initiative. What are the actions undertaken by the World Bank to facilitate the access to vaccines in low-income countries, and what is the most efficient level of action?
The World Bank has been working with partners in what is the largest vaccination effort in history, in order to stop the pandemic. In the initial phase of the crisis, in April 2020, the World Bank approved a $6 billion Global COVID-19 Response Program, which has reached over 100 countries with emergency operations to prevent, detect and respond to COVID-19 and strengthen systems for public health preparedness. Next, in October 2020, the World Bank approved an additional financing of $12 billion to finance the acquisition and distribution of vaccines. Finally, in June 2021, the World Bank announced the expansion of financing available for COVID-19 vaccine financing to $20 billion over the next 18 months.
The World Bank has made substantial efforts to improve vaccine access because we believe that equal access to vaccines is essential to increase the pace of recovery.
How does the low vaccine coverage in low-income countries impact global growth and developed economies?
This is a global crisis, and it demands global solutions in a global scope. This is important to acknowledge in a context of highly contagious new variants. Large parts of the world left with very low vaccination rates are fertile grounds for the emergence of new variants that will, in turn, affect richer countries because of the world’s interconnection, let alone the impact on supply bottlenecks and global trade.
Richer countries can help poorer countries to scale up their vaccine delivery infrastructures. In addition, the multilateral initiative of Covax needs stronger financial support. In particular, we need to carefully articulate the provision of booster shots in richer countries with the provision of initial doses in LICs. There is also the need for domestic policy makers to bolster vaccine trust. In the meantime, we need to maintain control measures like universal masking or social distancing. Finally, it is essential to avoid resorting to protectionism. We need to remember the importance of our rule-based international trade regime, both for vaccine production and distribution, and for other goods.
Among the most concerning issues that were made more pressing by the pandemic is the debt burden for poor countries. The Debt Service Suspension Initiative (DSSI) has allowed eligible countries for a temporary suspension of debt-service payments owed to their official bilateral creditors. But this is only a deferral until December 2021 and not a cancellation, and it does not include debt-service payments to private creditors. How will these countries be able to face this issue when the deferral ends?
In recent years, debt levels have raised substantially in LICs, and in particular, in those that have increasing borrowing from bilateral non-Paris club creditors. The pandemic has exacerbated this: out of the LICs that are eligible for the DSSI, half of those countries are in either debt distress or approaching high risk of debt distress.
Since it took effect in May 2020, the Debt Service Suspension Initiative has delivered more than $5 billion in relief to more than 40 countries. However, the relief was insufficient because large non Paris-club bilateral creditors have only partially participated in the initiative and some creditors have even continued to collect full payments during the crisis. In order to offer a solution beyond the expiration of the initiative, the G20 has agreed on a common framework for debt distress, which focuses on debt relief, maturity extension and interest rates adaptation in order to reduce the net value of debt. Nevertheless, this will not always be sufficient, and in exceptional circumstances, debt redemption will be necessary.
How can we improve the participation of private creditors to this initiative?
Implementing the common framework I mentioned, G20 countries should create incentives for private creditors to participate in debt relief efforts, including national policy banks. In this respect, maturities extension and interest rates adaptation could play a role. Some countries currently pay 6-7% interest rates – this is not justifiable in the current environment of low interest rates. However, the success of any debt relief relies on the implementation of sound debt management policies in beneficiary countries: debt transparency, fiscal management, better domestic resource mobilization, quality and composition of spending.
Despite being a global crisis demanding a global response, this pandemic has revealed an ever more fractured world, with poorly-coordinated national responses. Is this a missed opportunity for international institutions such as the World Bank? What steps should be taken so that the international community is better prepared when the next global crisis hits?
The World Bank’s response to the pandemic has been unprecedented. Thanks to its country-level presence, its global expertise and knowledge, its financing power, and its ability to form partnerships, in particular with the private sector, the World Bank has really made a difference to alleviate the impact of the crisis.
In the short term, the immediate top global priority is to accelerate vaccination to bring the pandemic under control. Going forward, new crises will emerge in the future. We do not know what shape they will have or where they will happen, but we know they will happen. That is why we need to build a greener future and it is important for all actors, both public and private, to accelerate progress towards the goals of the Paris agreement.
After this pandemic, are the 2030 Sustainable Development Goals (SDGs) still relevant/attainable?
The 17 SDGs lay out a very ambitious agenda for development by the end of this decade. Some countries have made substantial progress, but the pandemic has made things worse for everyone. For instance, the reduction of extreme poverty objective was already difficult to reach before the pandemic. Now that about 100 million people have fallen back into extreme poverty because of the pandemic, it has become even more difficult to attain. However, we should not focus on a particular date, but on the path in order to go there.
In order to make meaningful progress, the international community and the affected countries need to find the right balance between financing development and safeguarding debt sustainability, between long-term development objectives and pressing immediate needs.
They will need to pursue decisive reforms to compensate for the damages of the pandemic on human capital, investment and productivity, and to better align private sector incentives with broader economic objectives, including policies that facilitate transition for labor across sectors, while also providing protection for vulnerable groups.
The most critical need is the need for growth in those poorer countries. This is what will drive poverty reduction going forward. And it needs to be achieved in a way that is consistent with green resilience, inequality mitigation, both among and within countries, and crisis preparation and response.
Les analyses et propos présentés dans cet article n'engagent que son auteur. François Lesage, Fellow de l'Institut Open Diplomacy, travaille principalement sur politique de développement.