The public-health effects and economic impact of the COVID-19 pandemic in developing and emerging economies are only just becoming apparent, but it is already clear that the toll will be devastating. If the international community wants to avoid a wave of defaults, it must start developing a rescue plan immediately.
As it spread from one country to another, the novel coronavirus paid no attention to national frontiers or “big, beautiful” border walls. Nor were the ensuing economic effects contained. As has been obvious since the outset, the COVID-19 pandemic is a global problem that demands a global solution.
In the world’s advanced economies, compassion should be sufficient motivation to support a multilateral response. But global action is also a matter of self-interest. As long as the pandemic is still raging anywhere, it will pose a threat – both epidemiological and economic – everywhere.
The impact of COVID-19 on developing and emerging economies has only begun to reveal itself. There are good reasons to believe that these countries will ravaged far more by the pandemic than the advanced economies have been. After all, people in lower-income countries tend to live in closer proximity to one another. A higher share of the population suffers from pre-existing health problems that render them more vulnerable to the disease. And these countries’ health systems are even less prepared to manage an epidemic than those of the advanced economies (which have hardly functioned smoothly).
A March 30 report from the United Nations Conference on Trade and Development offers an early glimpse of what lies in store for emerging and developing economies. The most successful of them rely on export-led growth, which will now collapse as the global economy contracts. Not surprisingly, global investment flows are also plummeting, as are commodity prices, indicating a tough road ahead for natural-resource exporters.
These developments are already being reflected in the yield spreads on developing countries’ sovereign debt. Many governments will find it exceedingly difficult to roll over the debts coming due this year on reasonable terms, if at all.
Moreover, developing countries have fewer and harder choices about how to confront the pandemic. When people are living hand to mouth in the absence of adequate social protections, a loss of income could mean starvation. Yet these countries cannot replicate the US response, which features (so far) a $2 trillion economic package that will blow up the fiscal deficit by some 10% of GDP (on top of a pre-pandemic deficit of 5%).
Following a virtual emergency summit on March 26, G20 leaders issued a communiqué committing “to do whatever it takes and to use all available policy tools to minimize the economic and social damage from the pandemic, restore global growth, maintain market stability, and strengthen resilience.” To that end, at least two things can be done about the dire state of affairs in emerging and developing economies.
First, full use must be made of the International Monetary Fund’s Special Drawing Rights, a form of “global money” that the institution was authorized to create at its founding. The SDR is an essential ingredient in the international monetary order that John Maynard Keynes advocated during the Bretton Woods Conference of 1944. The idea is that, because all countries will obviously want to protect their own citizens and economies during crises, the international community should have a tool for assisting the neediest countries without requiring national budgets to take a hit.
A standard SDR issuance – with some 40% of the SDRs going to developing and emerging economies – would make an enormous difference. But it would be even better if advanced economies like the United States donated or lent (on concessionary terms) their SDRs to a trust fund dedicated to helping poorer countries. One might expect that the countries providing this assistance will attach conditions, in particular, that the money not go to bailing out creditors.
It’s also crucial that creditor countries help by announcing a stay on developing and emerging economies’ debt service. To understand why this is so important, consider the US economy. Last month, the US Department of Housing and Urban Development announced that there would be no foreclosures on federally insured mortgages for 60 days. In essence, this policy is part of a broader “stay” on the entire US economy as a response to the COVID-19 crisis. Workers are staying home, restaurants are staying closed, and airlines are all but shut down. Why should creditors be allowed to continue racking up returns, especially when the interest rates they charge should have already created a sufficient risk cushion? Unless creditors grant such a stay, many debtors will emerge from the crisis owing more than they can possibly repay.
Such stays are just as important internationally as they are domestically. Under current conditions, many countries simply cannot service their debts, which, in the absence of a global stay on repayment, could lead to massive, rolling defaults. In many developing and emerging economies, the government’s only choice is either to funnel more income to foreign creditors or allow more of its citizens to die. Obviously, the latter will be unacceptable to most countries, so the real choice for the international community, then, is between an orderly or a disorderly stay, with the latter scenario inevitably resulting in severe turbulence and far-reaching costs to the global economy.
Of course, it would be even better if we had an institutionalized mechanism for restructuring sovereign debt. The international community tried to achieve that in 2015, when the United Nations General Assembly adopted a set of shared principles with overwhelming support. Unfortunately, that framework lacked the necessary buy-in from key creditor countries. It is probably too late to establish such a system now for use in the current crisis. But there will inevitably be more crises down the line, which means that sovereign-debt restructuring should be high on the agenda for the post-pandemic reckoning.
In John Donne’s immortal words, “No man is an island …” Nor is any country – as the COVID-19 crisis has made abundantly clear. If only the international community would get its head out of the sand.•
Source: World leaders must unite in tackling COVID-19,
says Joseph Stiglitz: World Economic Forum, Switzerland, 8 April 2020
* Joseph Eugene Stiglitz (* 9 February 1943 in Gary, Indiana) is an American economist and professor at Columbia University and at the French elite universities École polytechnique and Sciences Po Paris. He was Chief Economist at the World Bank from 1997 to 2000 and President of the International Economic Association from 2011 to 2014. It was for his contribution to the theory of information asymmetry that Stiglitz shared the Nobel Memorial Prize in Economics in 2001 „for laying the foundations for the theory of markets with asymmetric information“ with George A. Akerlof and A. Michael Spence. He has published numerous books including Globalization and its discontents, New York: W.W. Norton & Company, 2002. Together with Linda Bilmes, The three trillion dollar war: the true cost of the Iraq conflict. New York: W.W. Norton & Company, 2008, The Price of Inequality: How Today‘s Divided Society Endangers Our Future, New York: W.W. Norton & Company (2012), The great divide: unequal societies and what we can do about them, New York: W.W. Norton & Company, 2015
ef. On 30 March the United Nations Conference on Trade and Development, UNCTAD, presented its report: “The Covid-19 Shock to Developing Countries: Towards a ‚whatever it takes’ programme for the two-thirds of the world’s population being left behind.“ The press release says: “With two-thirds of the world’s population living in developing countries (excluding China) facing unprecedented economic damage from the COVID-19 crisis, the UN is calling for a US$2.5 trillion package for these countries to turn expressions of international solidarity into meaningful global action.“
The amount corresponds in size to the amount that would have been delivered to developing countries over the last decade if countries in the Development Assistance Committee of the Organisation for Economic Cooperation and Development had met their 0.7% Official Development Assistance (ODA) target (i.e. if they had paid their promised contributions).
The report shows that in the two months since the virus began spreading beyond China, developing countries have suffered enormous damage in terms of capital outflows, growing bond spreads, currency depreciations and lost export earnings, including from falling commodity prices and declining tourist revenues. According to the report, the losses go far beyond the impact of the 2008 global financial crisis. For example, the prices of commodities, on which many developing countries heavily depend for their foreign exchange, have dropped precipitously since the crisis began. This year, The overall price decline has been 37%.
In view of the devastating effects of the crisis that are becoming apparent, UNCTAD proposes a four-pronged strategy “that could begin to translate expressions of international solidarity into concrete action.“
Source: www.unctad.org from 30 March 2020
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