Poor and developing countries are now starting to be affected by the Covid-19 pandemic. Important differences in the setting need to be considered when thinking about their prospects, and the role richer countries may play in helping them face the challenge.

Introduction

Most of the focus in current analyses of the policy response to the Covid-19 crisis center on Western and East Asian countries that were hit first and hardest. Some initiatives are tracking the situation in transition countries of Eastern Europe (e.g., the FREE Network initiative and the Vienna Institute for International Economic Studies tracker).

However, poor and developing countries start also being affected by the pandemic, and richer countries have an important role in helping them face the challenge. Besides the moral obligation, in the presence of a global externality it would be extremely myopic not to do so. When thinking about this, it is important to reflect on the differences that will be relevant in these settings.

What is Happening? The Spread of the Virus

Currently, the spread of the contagion is still at substantially lower levels in low income countries (LIC) as compared to high income countries (HIC). There is not enough evidence yet to either support or reject the hypothesis that a lower spread could be due to differences in climatic zones (warmer temperatures and humidity). Younger populations might account for both a lower (observed) spread and lower mortality, but on the other hand the denser and multigenerational living arrangements with poorer hygienic conditions should be pushing in the opposite direction. Observing lower spread and lower mortality could also be put down to lower testing (and more generally, data availability and quality of information systems). Finally, we can’t exclude that this is simply a matter of timing. Many LIC are relatively less connected to global routes, and moreover were fast to close their borders: many opted for early lockdown. If this is the case, they are merely postponing the sharp increases in infections and fatalities observed in other countries. (At the time of writing, worrisome reports of a severe outbreak in Somalia are emerging.)

Figure 1: Total confirmed Covid-19 deaths.

Source: Our World in Data, downloaded on May 6, 2020.

Figure 2: Total Covid-19 tests per 1,000 vs. GDP per capita.

Source: Our World in Data, downloaded on May 6, 2020.

A number of factors related to the demographic structure as well as the public health systems are relevant as a base for our expectations on how the situation is going to evolve in these countries.  Since age plays an important role on how severely Covid-19 patients are affected by symptoms, the demographic structure of the population has consequences for the demands that will be placed on the health care system by an outbreak. This plays in favor of LICs, where only 3% of the population is above 65 years of age on average. The corresponding share is 18% in OECD countries. The state of the health care system is intuitively crucial once there is an outbreak. In Table 1, the Global Health Security Index (GHS) “Health Security Score” paints a dismal picture in terms of overall capacity “to treat the sick and protect health”, where the group of LICs (as defined by the World Bank) scores an average of 14,5 out of 100 (HIC average is 51,9).

Table 1: Public health.

Source: Over 65, share of total: WB, values for 2018 except Eritrea (2011); Health care spending % of GDP: WB, values for 2017, except Syrian Arab Republic (2012) and Yemen, Rep. (2015); Health care spending USD p/c: WB, values for 2017, except Syrian Arab Republic (2012) and Yemen, Rep. (2015); Health security score: GHS Index 2019, Health Overall Score “Sufficient & Robust Health Sector to Treat Sick & Protect Health”; Health security – response capability: GHS Index 2019, Response Overall Score, “Rapid Response to and Mitigation of the Spread of an Epidemic”.

This is clearly related to how wealthy a country is. The wealthier countries have better health care systems in general, and will do better if they experience an outbreak, while the poorer countries will do worse. Even if the average 6% of GDP devoted to health care spending in LICs looks comparable to the HIC average share (8,8%), these translate into very different figures in terms of per capita dollar spending: 40 USD per capita in the first group, to be compared to over 4,000 USD in the second. Even if costs do differ as well, a ventilator is unlikely to be two orders of magnitudes cheaper in Liberia than in Italy. Nevertheless, the “Health security – response capability” index, which includes things as emergency response plans and existing links between health and security authorities, averages 30,9 in LICs against 45,8 for HICs. The difference across income levels is much smaller in this case, reflecting both the more general lack of preparedness in this particular domain, but also the familiarity and experience of poorer countries with infectious diseases outbreaks, which might give an edge in an emergency. The World Health Organization reports over one hundred “public health events of varying magnitude and socio-economic effects” annually in Africa, for example. After the 2014-15 Ebola outbreak, an Africa Centre for Disease Control and Prevention was set up in 2017, which might have contributed to an upgrade in the index. The Centre has been quick to react in the present case, as discussed later in the policy response section.

What is Happening? Economic Impacts

It is hard for HIC to put numbers on forecasts of economic activity. For LIC, the challenge of forecasting is further compounded by the normally poor array of statistical systems and the larger informal sectors. Better indicators of economic activity and income distribution normally rely on surveys, and while surveys are still being conducted these days (see for example the relentless work of IPA affiliates  the focus at the moment is naturally on the health emergency and related behavior, rather than incomes and investments.

Even without exact numbers, we can nevertheless expect that LICs’ economies are going to be hit harder, for two main reasons:

• They are more sensitive to the global shock(s), through commodity prices and exports, and also because of the limited access to international financial markets
• They start from worse structural conditions, in terms of fiscal capacity and governance capacity, which makes them less resilient.

Again, a number of fiscal and macro factors are relevant for our expectations on how the situation is going to evolve, such as the trade and fiscal balance, and the composition of exports. Besides concerns for long-term growth prospects, the most immediate threat is that to people’s livelihoods, in particular poor people’s, due to the slowdown of economic activity. While this can’t be fully avoided due to the dependence on international linkages, it is made radically worse in case of domestic lockdown. The combination of large populations living below or at the margin of the poverty threshold and the slim fiscal capacity for compensation and redistribution results in much sharper trade-offs associated to different policy measures.

Some of these countries, heavily dependent on external trade and in particular on commodity exports, are at the moment facing a double shock, due to the collapse of commodity prices and the disruptions to global value chains, on top of the epidemic itself. This is dramatically reducing the fiscal space for response, which was already limited to start with. Therefore, even though a number of LICs have formulated response plans, as will be discussed in the next section, the question remains how to finance them.

Table 2: Macro factors.

Source: External Trade as % of GDP: WB, Trade (% of GDP) for 2018 except Afghanistan, Malawi, Tajikistan, Tanzania (2017); South Sudan (2015); Eritrea (2011); Commodity Exports, %: UNCTAD, 2017, Commodity exports (as a share of total merchandise exports); Population Under Poverty Line: WB; Foreign Aid % of GDP: WB, Net official development assistance received (current US$) / GDP (current US$) for 2018; Tax revenue: WB.

What is Happening? Policy Response

With few exceptions, most countries in this group were quick to react in at least two dimensions: closing borders and closing schools. While the first was probably a very wise choice and might have delayed significantly the entry of the virus in the countries, not enough thought has been given to the consequences of school closures. Less than one in four countries is providing some form of distance learning; and even where this is available, access will be very unequal, for a number of reasons: access to internet and suitable devices, need to compensate for parent’s lost income, responsibility for younger siblings are just some of the factors, in addition to the inequality in parental socioeconomic and educational background which is common also to HICs. Based on experiences from the Ebola epidemic in 2014-15 in West Africa, the protracted lack of schooling is liable to leave deep long-lasting consequences.

A quarter of the countries (8 out of 31) entered lockdown or very strict social distancing. Few of them, with help from the international community, support the enforcement of a lockdown with food distribution (for example Liberia and Uganda). This is not possible everywhere, due to financing and logistic issues, and in its absence, livelihoods are put at risk. Because of this, in many areas people defy the rules, in some cases notwithstanding enforcement by the military. Another quarter of countries opted for curfews rather than lockdown, to limit the frequency of interactions without halting completely economic activity. Very few countries explicitly chose much more limited interventions in terms of social distancing (Burundi, Mozambique, Tanzania), while most of the rest do not have the governance capacity for intervention, in some cases due to other preexisting crises (Yemen, Mali, Guinea-Bissau).

The quality of the country’s health care system and the resources that can be invested in testing will determine for how long containment measures will be needed. Two thirds of the countries have already enacted emergency interventions in the health sector, meant to strengthen the general capacity for care and in particular the infrastructure for testing.  All in all, though, half of the countries have opted for either strict public order measures or fiscal interventions. Most of the remaining half have neither, while very few have both. In most cases, the health-related emergency measures are financed by small reallocations of current spending that amount to few per-mille points of GDP. With fewer resources to cure and test, countries will need to maintain longer containment measures to avoid the spread, once the contagion reaches them. However, as mentioned above, the cost of lockdown is very different in these countries, where almost half of the population (48% on average) lives below the international poverty line. Stricter and longer lockdowns will call for broader fiscal interventions in support of households’ (food) consumption and SMEs. The few countries that planned such interventions, and/or to increase health sector spending by more than 1% of GDP, are counting on donor financing. At the same time, all are suffering contractions in their fiscal space, as noticed above, and the same can be said of most donor countries too. The question of how to finance this gap looms therefore large.

A Role for Rich Countries

In normal times, the relative importance of different financial flows entering developing countries could be phrased as follows: foreign aid is small, remittances bigger, trade and investments biggest. ODA receipt accounts for 12% of GDP in the average LIC. While almost all donor countries fall short of the pledge to give 0,7% of their annual GDP, even if they did, thus trebling the current aid bill (152,8 billion USD in 2019), this would still not reach the level of remittances flows, estimated at 551 billion USD in 2019. The FDI flows, estimated at 671 billion USD (in 2018) are more important in the aggregate, although their distributional implications are very different. The importance of trade is also substantial, as shown in Table 2.

Given the situation, though, with a global recession looming, we can expect substantial contractions in trade and FDIs at least in the short run, but more likely for a protracted period. The limitations to international mobility will also imply severe reductions in remittances flows, as migrant workers have either returned to their countries, or are more likely to lose employment in the host countries even if they stay. Clearly this implies a continued role for international support.

Without going in the merit of an optimal policy mix recommendation to developing country governments, which others have done (for example, the International Growth Centre COVID-19 guidance note), rich countries that want to play a role in this should keep in mind a few points. Aid budgets should at the very minimum not be reduced, notwithstanding the domestic fiscal squeezes. More than ever, the same amount of money has a much larger life-saving potential in a poor country than domestically. Besides quantity, the type of support will be important. During the health crisis, the priority needs to be to finance emergency expansion of health care spending, but for this to be sustainable it needs to be paired with a strong effort to limit the spread. This includes two elements: i) testing and tracing, or in absence of tests at least keeping track of the geographic spread of symptomatic outbreaks; and ii) supporting livelihoods to enable social distance or lockdown. The first includes, besides the medical material and infrastructure for the testing itself, which might not be the most cost-effective way of using resources, enabling safe and reliable public communication, which needs to go two-ways: from authorities to citizens, avoiding fake news and potential stigma attached to the contagion, and from citizens to the authorities to collect policy relevant data. Since internet is not widespread enough, and the radio only allows for one-way communication, the best shot at this is leveraging mobile telephone networks. Technical assistance in this could be valuable, as well as analytical capacity for the processing of the data.

It goes without saying that all the progress happening in rich countries, in terms of understanding of the virus spread, efficacy of different policies and behaviors, development of treatments and in due time vaccine should be promptly shared.

When it comes to consumption support, it is debatable whether cash transfers or in-kind distributions should be the preferred option. This will of course vary depending on the situation: cash is logistically easier and more flexible – but it will not help if and where the markets shut down.

In the aftermath, it is important to keep in mind that poor countries will not be able to borrow (in particular, issue domestic public debt) to finance fiscal stimuli and other recovery measures. There will be again an important role for international lenders. At the same time, a swift recovery of global economic activity must be considered as the all-over superior solution.

References

• GHS Index, 2020. “Global Health Security Index, 2019”.
• Our World in Data, 2020. “Total confirmed Covid-19 cases by country”.
• The World Bank, 2020. “World Bank Open Data”.
• UNCTAD, 2020. “Commodity exports (as a share of total merchandise exports) in 2017”.
• WHO, 2017.  “Acute Public Health Events Assessed by WHO Regional Offices for Africa, the Americas, and Europe under the International Health Regulations (2005) – 2017 Report”.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.