Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared in Project Syndicate.
The covid-19 pandemic has had differentiated impacts across countries. This is true even among the set of Emerging Market and Developing Economies (EMDEs), which share the disadvantages of more poverty, less adequate health care, and fewer jobs that can be done remotely, compared to Advanced Economies.
Differentiation across continents
Surprisingly, the rates of infection and death have so far been lower in most EMDEs than in the US and Europe, as pointed out by Pinelopi Goldberg and Tristan Reed, and by Raghuram Rajan. Undercounting is undoubtedly massive, however. Furthermore, the situation is evolving rapidly.
Across continents, health in Latin America has been the hardest hit in general among EMDEs. Southeast Asia has been the least affected; for example, Vietnam and Thailand report extraordinarily few cases.
Why has the coronavirus hit Latin America so hard? Obvious possible reasons include the region’s inequality, large densely populated cities, many workers in the informal sector, inadequate public health systems, and many internal migrants (a problem that also looms large in India). A less obvious factor is that Latin America — like North America and Europe — had had less experience with pandemics in recent decades, as compared to East Asia or Africa, where SARS and Ebola made people more familiar with the dangers, and the consequent need for social distancing.
The situation in sub-Saharan Africa is unclear. On the one hand, the numbers of cases and deaths have been relatively low, at least up to now. The young population may help explain this. On the other hand, testing is probably even more inadequate here than elsewhere and the situation is worsening rapidly in South Africa. Apparently hotspots start in major metropolises with busy international airports – think Milan, London, New York, and now Johannesburg — and then inevitably spread out to neighboring regions with a lag.
Differentiation within Latin America
There is also differentiation of the impact within continents. In Latin America, Brazil and Mexico are suffering especially badly. Brazil ranks #2 in the world, in absolute numbers of reported cases and deaths, after the United States. Uruguay is apparently doing the best. It is not that Uruguay is following the Trump philosophy and reporting few cases by means of few tests; it has a low rate of positive results per test, which is the more meaningful statistic.
There is a ready explanation for why Brazil and Mexico are suffering such high rates of infection and mortality: poor political leadership. Their presidents are following the strategy that Trump has pioneered since the start: denying the seriousness of the situation and visibly undermining experts’ recommended responses such as campaigns to get people to wear masks. (Nicaragua probably belongs on this list of ostrich-leaders, but test numbers are unavailable.)
Then there is the case of Peru. It is hard to say what the government has done wrong, and yet reported cases and deaths per capita are worse than Brazil and almost as bad as the U.S. Similarly, one can’t explain why Chile reports more cases per capita than virtually any country.
The economic impact of the pandemic shock is worse in EM and Developing Economies than in advanced economies. Besides the direct health impact, including lockdowns as in advanced countries, they have lost major sources of foreign exchange: export revenue (especially in the case of oil exporters), tourism, and remittances from emigrants. In March, global investors pulled out of emerging markets, in a switch to risk-off attitudes in financial markets generally. Subsequently, as tremendous stimulus by the Fed restored investors’ reach for yield, capital flows returned to some countries. The current easy conditions in global financial markets mean that the much-invoked “perfect storm” analogy does not quite apply. But the situation facing EMDEs is bad enough as it is. Moreover, the current risk-tolerance in financial markets may not hold up.
The US and other advanced countries have been able to respond to the coronavirus recession with massive domestic government spending. EMDEs, in contrast, lack the fiscal space to respond with big spending programs, even for public health and support for hard-hit households, let alone for general macroeconomic stimulus. (The US can get away with running record deficits, not because it has been prudent in the past – it hasn’t – but because of its “exorbitant privilege”: investors everywhere are happy to hold dollars and US treasury bills.)
Some debtors, including Argentina, Ecuador, Lebanon, Nigeria, and Venezuela, already had severe debt troubles even before the pandemic, and have had to restructure their debts or default. Some others like Peru entered 2020 with relatively strong debt and reserve positions (due to prudent policies put in place when mineral prices were high), and yet have been badly hit by both the pandemic and the global recession nonetheless.
The G20 moratorium and what it leaves out
In recognition of acute financing constraints, the G20 in April offered to suspend bilateral official debt payments for the year, for the world’s 73 poorest countries. But this step falls short in four different ways.
- Suspension is of course not the same as debt forgiveness. There is little reason to think that the situation will be better at the end of the year. Further debt restructuring will be needed in some cases.
- It is very unclear to what extent China will participate among the creditors offering relief. This matters a lot. As Carmen Reinhart and co-authors have uncovered, China is not merely the largest official creditor; its outstanding claims surpass “the loan books of the IMF, World Bank and of all other 22 Paris Club governments combined.”
- The G20 moratorium also doesn’t include private creditors. Indeed, many debtors are showing themselves reluctant to take up the G-20 suspension offer for fear that downgrading would lose them access to private capital markets. In past debt crises, the international community (there used to be such a thing), asked the private sector to participate simultaneously with the IMF and rich-country governments: Rescue packages associated with IMF programs took steps so that the foreign exchange freed up by new public loans to the debtor country, conditional on sacrifices by its population, did not just go to paying off private creditors. In 1990s currency crises, it was called Private Sector Involvement. Similarly, in the 1982 international debt crisis, rich-country banks were “bailed in” to the rescue effort rather than being “bailed out.” Where restructuring is necessary, private creditors should do their share.
- The G-20 moratorium doesn’t extend to middle-income countries. But some of them will need accommodation too.
What else is to be done? EMDEs need to be able to export to the rest of the world, to restore growth and to earn the foreign exchange to service their international debts. But global trade has collapsed. The twin reasons are the worst tariff war since the 1930s followed by the worst global recession since the 1930s. The whole world is paying a cost for an absence of political leadership and a virtual breakdown in the multi-lateral order.
This post written by Jeffrey Frankel.