How poor countries can deal with the economic shock of COVID-19

poverty kids

Uganda (Roman Nguyen, Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Dorothy Tembo, Acting Executive Director, International Trade Centre (ITC) & Ratnakar Adhikari, Executive Director, Enhanced Integrated Framework (EIF)


  • The coronavirus crisis could increase the number of poor and hungry by 2%.
  • Countries should refrain from imposing trade restrictions where possible.
  • Governments should enhance affordable internet access to enable e-commerce.

The least developed countries (LDCs) have limited capacity and preparedness to handle the economic fallout of the COVID-19 crisis, and are likely to face significant hardships. Initial estimates suggest that these disruptions could potentially contribute to increased global poverty, with the number of poor and hungry people rising by 2%.

 

However, with appropriate support measures and policies, and coordinated efforts, the world’s poorest countries can navigate this crisis. Here’s how.

1. Keeping trade open

According to the World Trade Organization, 87.5% of goods exported from LDCs are sold in 10 major markets, all of which are either severely or moderately affected by the COVID-19 outbreak. Due to a fall in demand in these markets, LDCs are certain to lose a significant portion of their export revenues. This decline will make it impossible for LDCs to achieve Target 11 of the Sustainable Development Goal (SDG) 17 to double their share of exports.

A shortage of raw materials from China, due to supply chain disruptions will affect many LDCs. For example, shutdowns at Cambodia’s garment factories, which procure 60% of their raw materials from China, could affect 160,000 workers in a worst case scenario.

LDCs are equally affected by declining orders or the cancellation of ready-to-ship orders by Western clothing brands, some of which have already closed outlets. As a result of these closures, Bangladesh alone has seen garment orders worth $1.5 billion being cancelled, affecting more than 1,000 garment factories.

Another important aspect on the trade front highlighted by Global Trade Alert is that, as of 21 March 2020, 54 governments have put in place 46 export bans on medical supplies, including personal protective equipment, which is critical for medical workers to treat patients suffering from COVID-19. LDCs will need imported medical supplies to address the increasing number of COVID-19 patients, as many LDCs do not produce them domestically.

Exports of services from LDCs are another casualty, with the travel and tourism sector being the worst impacted. According to an initial forecast by the United Nations World Tourism Organization (UN WTO), up to $50 billion in income could be lost as a result of the crisis. Since many LDCs depend on this sector, which contributes to 7% of their export income, a prolonged downturn will have a significant impact on export revenues, foreign exchange reserves, GDP and, of course, jobs, especially for women.

To address these problems, countries should refrain from imposing trade restrictions when other policy options are available. And, it is important to keep trade open, not only for medical supplies but also other goods such as food, raw materials and energy supplies. Trade, transport and transit facilities should continue to operate without restrictions, in line with a recent joint ministerial statement issued by seven World Trade Organization members, including one LDC. More LDCs should come forward to join such an initiative. To minimize face-to-face contact between traders with border, transport and transit authorities, paperless trade should be promoted as a quick win measure.

Evolution of the number of people in extreme poverty.

2. Providing investment-related support

The latest projection from the United Nations Conference on Trade and Development (UNCTAD) shows that the overall flow of foreign direct investment could fall by up to 15% depending on when COVID-19 is contained. These figures are in stark contrast to the data released in January 2020, which predicted FDI growth of 5% in 2020-2021.

This decline will surely hit LDCs where significant investments have been made in fuels, minerals and manufacturing – all sectors that are experiencing demand and supply shocks. Despite an inevitable fall in FDI, the international community should work closely with the private sector to contribute to Target 5 of SDG 17, which envisages the adoption and implementation of investment promotion regimes for LDCs so that much-needed flows of FDI to LDCs can be maintained. This is even more critical for LDCs at the threshold of “graduation” from the LDC category.

3. Increasing aid for trade flows

Although it is too early to predict the impact on the Aid for Trade initiative, which is a critical lifeline for LDCs to achieve sustainable economic growth and poverty alleviation, there could be a temporary decline due to development resources being channelled toward COVID-19 response efforts. Since Aid for Trade, part of Official Development Assistance, is inextricably linked to the Gross National Income (GNI) of each donor country, a reduction in GNI would generally mean decreased Aid for Trade.

Despite these challenges, the significance of Aid for Trade in helping LDCs recover by supporting the competitiveness of their micro, small and medium-sized enterprises (MSMEs) should not be underestimated.

International Trade Centre (ITC) research shows how MSMEs are likely to experience four phases, either successively or simultaneously, as global trade stumbles – from shutdowns to disrupted supply, depressed demand, and eventually bouncing back in recovery. ITC has cautioned that MSMEs in different sectors are affected in different ways, and policy responses must be carefully tailored.

The case has never been stronger for meeting Target A of SDG 8 to increase the Aid for Trade allocation to LDCs to promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.

4. Harnessing the potential of e-commerce

E-commerce will continue to be a critical support to consumers during this time, as brick-and-mortar stores shut down and consumers avoid public spaces and move to cashless transactions.

LDC governments working closely with their telecommunication and internet service providers and central banks should use the opportunity presented by the crisis to adopt a few quick-win measures. These include: enhancing affordable internet access in line with Target C of SDG 9, providing robust payment solutions and facilitating mobile financial transactions.

5. Designing and implementing safety net policies

Several developed and a few developing countries have already announced stimulus packages through monetary policy, such as quantitative easing, or fiscal policy, such as resource transfer, to help prop up their economies and provide safety nets during the COVID-19 crisis and in its aftermath.

What is the World Economic Forum doing about the coronavirus outbreak?

A new strain of Coronavirus, COVID 19, is spreading around the world, causing deaths and major disruption to the global economy.

Responding to this crisis requires global cooperation among governments, international organizations and the business community, which is at the centre of the World Economic Forum’s mission as the International Organization for Public-Private Cooperation.

The Forum has created the COVID Action Platform, a global platform to convene the business community for collective action, protect people’s livelihoods and facilitate business continuity, and mobilize support for the COVID-19 response. The platform is created with the support of the World Health Organization and is open to all businesses and industry groups, as well as other stakeholders, aiming to integrate and inform joint action.

As an organization, the Forum has a track record of supporting efforts to contain epidemics. In 2017, at our Annual Meeting, the Coalition for Epidemic Preparedness Innovations (CEPI) was launched – bringing together experts from government, business, health, academia and civil society to accelerate the development of vaccines. CEPI is currently supporting the race to develop a vaccine against this strand of the coronavirus.

Although LDCs may not have the capacity to undertake such measures, they should use this crisis as an opportunity to put in place safety net mechanisms to provide relief to their companies, particularly MSMEs, and the poor and vulnerable segments of society. In order to ensure LDCs do not increase their debt burden, we should fully explore and make use of any support extended by international financial institutions – including a recent Call to Action to suspend debt payments from the so-called IDA countries, which are home to two-thirds of the world’s population living in extreme poverty.

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Comments

  1. samir sardana says:

    You are missing “The Corona Bonanza” for LDCs like Pakistan.The Opportunity is being missed out.

    Bonanza 1

    There will a temporary shock to the government fiscal revenues as Imports will crash,CIF rates of imports will also crash,domestic production has stopped (as tax on MRP less deductions is paid at the time of production and not sale),domestic MRP rates will also crash.That is Y the state has not passed the benefits of lower crude and palm rates to the people.dindooohindoo

    The Bonus is in non-salary expenditures of the state,which are on ARC (Annual Rate Contracts) or other RC.With crash in commodities and surplus capacities – Pakistan can easily make and re-negotiate its procurements.Large nations like Hindoosthan,will face disaster,as they will face supply risks,per se.W.r.t the purchases by the Pakistani state,the state can declare Force Majeure,especially on International contracts.

    There is no immorality in this,as the suuply and value chain of the suupliers to the state – will,in any case,declare Force Majeure – which will ensure that the suupliers will default on the government contracts.The supliers will make supplies at ARCs,only to the extent of the existing stocks,as at March 15th,2020.They cannot be allowed to supply,from new purchases at the old ARC rates.

    Global suppliers will be glad to dump their stocks – with depots in Pakistan – for sale to the Pakistani State.

    This could easily reduce the costs by 30-50%,on a one time and recurring basis.Once this Cost is saved,in phases,the benefit of oil price crash on fuels and edible oils and also power tarriffs and fertilisers,can be passed on to the public.That will be pure jannat.

    Bonanza 2

    The Only Solution to the supply chain risk in USA/EU (w.r.t their supply chains in PTRC) lies in massive robotics and AI – which will make humans obsolete in manufactuirng and also,in part,in IT.The question is,what to do with the humans.That is Y the virus is sought – Simple !

    For Pakistan – the crash in Raw Materials and cost of capital, availability of capital and crash in logistics costs will make manufacturing and exports viable.That makes existing unviable manufacturing units viable and jobs and decline in NPAs.No fresh capacities should be launched,solely based on the current cost structure.Crash in costs plus the low labour costs in Pakistan and stable PKR – is the Alt-AI and Robotics

    The Pakistani people should thank its prior leaders,that they made manufacturing unviable in Pakistan,and made it a trading nation. Had the state set up manufacturing units – they would be unviable,banks would be busted and there would have been mass skilled unemployment. Just look at Hindoosthan. dindooohindoo

    This is the time for setting up manufacturing units – SME and others.

    The military,food,telecom,technology and health secuirty of the USA and EU is in the hands of the PRC.These nations will be FORCED to move at least 10-20% of their supply chain,to other nations.They have no choice.

    Bonanza 3

    The SBP and the treasury of the private sector,should suck in the Corona rate cuts and packages in EU/Nippon/North East Asia and the USA – and restructure the entire FX loan portfolio,w.r.t tenor,spreads,risk premiums,swaps and hedges. One simple way,is by trade finance,which is based on underlying trade and other activties with those nations.

    Bonanza 4

    After doing 3 and 4 above,the state should invite bids to build and repair infrastructure on BOOT basis.The Cost of infra should reduce by at least 30%,supplemented with long term soft loans and grants.

    With viable manufacturing and exports,lower cost of debt – an already cheaper infra cost – will make infra financing and operations,all the more viable

    Bonanza 5

    To lock in the gains to the people and industry,the SBP and the State should lock in to NYMEX crude and futures,at current rates (on CBOT or with large funds etc.) – for as long as possible,with reasonable contangos or maximum backwardation.A large nation cannot do this – as it will move the premiums,in the derivatives market.

    The State should thereafter, lock in the oil and gas rates – and then affix power and fertilisr tarriffs, for the same tenor – with a priority for industrial zones – after meeting the consumer needs.Edible oil contracts can also be struck with large funds,in the USA/EU.

    This is also the time for the state to declare Force Majeuer on the ulra high cost RPP/IPPs.With reduced power demand,the entire power demand of Pakistan, can be met from fuel and coal plants,at less than half of the previous marginal cost. For several people, this power supply can be free of cost,as the Marginal cost of power on current fuel costs,should be around 1-2 Rupees (which is not worth collecting from marginal users).

    It is time to celebrate !

  2. samir sardana says:

    Like I said in my post,as above on May 2,2020 at 20:24 pm,what the IMF/World Bank and the Pakistani state could not do for 73 years – COVID and my prophecy has ! dindooohindoo

    The CAD has crashed and will turn surplus in less than 5 months – as IRP (Islamic Republic of Pakistan is the only viable exporter,for several labour intensive and agri and animal husbandry products).It will be viable to fly camels and donkeys,to the world in 747s and C-130s for meat – it will occur soon !

    https://www.dawn.com/news/1562821/current-account-deficit-shrinks-a-whopping-73pc-to-under-3-billion-economic-survey-reveals

    The austerity which an Islamic state SHOULD have – BUT DID NOT – has come via COVID !

    This is the time to code austerity in the DNA of all subjects of Islamic states – which will also offset the Oil shock to Islamic economies

    It might be noted that 90% of the dead and 95% of the infected are in Christian nations !

    The next issue for IRP is the fiscal deficit – and for that also there is a solution !

    The disaster is for large populated nations,with higher cost manufacturing (w.r.t PRC) and large unskilled labour in manufacturing and agriculture.

    Which is India !

    We are witnessing the destruction of India – in slow motion !

    The IRP can give me a diplomatic passport and a posting in Geneva and USD 5 million !

    I will pray for them and solve all their problems

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