How will developing countries cope economically in the aftermath of the pandemic?

Nairobi Kenya Women

How will developing countries cope economically in the aftermath of the pandemic?

With so much of investors’ time being spent keeping an eye on the biggest economies of the world in the shadow of COVID19, it can be easy to overlook how developing nations will suffer in the wake of the pandemic. Despite a move towards deglobalisation, it is still important to be aware of how developing economies are faring, for a holistic investment view. Here, we investigate how exactly the developing countries of the world will cope economically due to the instability that the Coronavirus has caused there. 

What has happened to developing countries so far in 2020?

Interestingly, low income developing countries (LIDCs) have fared relatively well in keeping their infection rates lower than some of the richer nations around the world. Arguably, many LIDCs took a far stricter approach to containment and, importantly, did so far earlier in an effort to stop the spread of the disease. This undoubtedly helped protect lives but also had the intention of protecting economies for the future with a short term pain, long term gain stance. 

However, while LIDCs were able to control what their own nations did in response to the virus, they were unable to have any influence on how richer nations reacted to the pandemic. As we see America struggle to contain the disease at all, with many European nations seeing a resurgence in infections, this again has further negative impacts on global productivity. Reduction in worldwide productivity then goes on to affect LIDCs which are so dependent on developed economies for exports. 

What will happen to developing economies in a post COVID19 world? 

So what will those impacts be on developing economies in LIDCs? Recently, the IMF claimed that the pandemic already has the power to undo any of the gains that those nations made in reducing poverty in the last decade. Additionally, while in comparison to 2019 where LIDCs saw an average 5% growth in their GDPs, enduring and long lasting hurt caused by a sharply contracting economy in 2020 is what looks likely for LIDCs. In June, The World Bank released an article claiming that they saw a contraction in GDP for developing economies to be anywhere between -0.5% and -5%. While this range is better than their prediction for global economic growth of -3.7% to -7.8%, arguably the level of hurt that is felt by LIDCs is more acute and longer lasting for reasons to be discussed later. 

Additionally, economic matters will be made worse by further ramifications of lockdown and containment measures within LIDCs. In the short term, mobility in LIDCs, which the IMF uses as a proxy for domestic economic activity, has still not reached what it was before the pandemic. Decreases in mobility started as bans on international travel, large restrictions on movement within countries and populations being told to stay at home. 

As a direct result, productivity decreased – as it did everywhere in the world. However, in the long term, other effects from lockdown measures have the ability to restrict any GDP growth. School closures, for example, will have a lasting impact on developing nations. With a materially inhibited education, an individual’s future earnings will naturally be minimised and this is the prospect for huge swathes of populations within developing countries. 

Other effects of the pandemic will also play a part in thwarting the prospects of LIDCs. Outside investment will noticeably reduce due to a lack of confidence caused by lower levels of productivity. As a result, low growth becomes a vicious cycle as productivity will not be able to improve without that necessary investment. Additionally, when so many people become unemployed, unemployment continues for longer leading to a loss of skills.  

The IMF also highlighted other worrying outcomes from the legacy of the Coronavirus. Looking at past pandemics, like the Ebola virus in 2013, mortality rates will increase, general health standards will lower and many companies will cease to operate due to a lack of access to credit. The knock on effect of this is that productivity as a whole is hit both at an individual company level and nations in their entirety. 

Why are developing countries so economically affected by COVID19?

There are so many reasons that LIDCs will see their economies hit so severely by the Coronavirus crisis. Firstly, they simply started in a far less promising position than developed economies of the world. While countries in the G7 were seeing improving employment numbers and budget deficits starting to come down at the beginning of 2020, LIDCs commonly had very high public debt to service amongst other systemic issues. 

So, when the shock of the Coronavirus enforced lockdowns around the world, LIDCs had to deal with a huge reduction in exports, but they also had to deal with those exports reaching a lower price. Additionally, tourism ground to a halt stopping much needed inflows of capital. The result of all these external ‘shocks’ as the IMF called them was that while many LIDCs managed to contain the virus, they still had to grapple with a sharp contraction in their own GDP. 

How will developing economies cope in future? 

With a bleak outlook, the IMF has called for the international community to come together to ensure that all the gains in poverty reduction, made in the last decade, are not reversed and entirely wiped out. Without it, the IMF foresees that the pandemic will leave permanent scars on LIDCs due to a mass reduction in development prospects for the future. With outside support needed for investment on infrastructure and projects to help kickstart LIDC economies, it will be hard for LIDCs to reach a growth in their economies that meets pre-COVID19 levels. 

To that end, the IMF, in their report highlighting the vulnerability of LIDCs, recommend a number of tactics that should be taken by the international community. Firstly, they underline the importance of sharing and providing these countries with health supplies that must include vaccines for the virus when they are approved. The supply chains that provide those medical supplies as well as the supply chains that provide vital subsistence and food must be protected. Developed nations need also to avoid acting in a protectionist way as well as granting financial support, which must include access to liquidity when required in addition to restructuring debt in such a way that it is affordable and sustainable. 

If developed nations do not act in this way, the future for LIDCs is bleak. With so much progress having been made in the last 10 years to reduce those living in poverty, the pandemic has the ability to erase that progress even though it has only been with us less than 10 months. Furthermore the level of damage that will be felt is uncertain. We are living in unprecedented times where the only thing known for certain is that there will definitely be a large global economic contraction. 

Ultimately, the real worry is just how large and deep that contraction will be. With LIDCs being so sensitive to shocks felt on the global economy, the outlook for them is a very discouraging prospect indeed. 

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