The pandemic’s social and economic costs

In the report issued on April 13, on the eve of the annual spring meeting of the International Monetary Fund (IMF) and the World Bank, the former institution totally reversed its view of the future of the global economy. It said that the coronavirus pandemic would cause the worst economic slowdown since the Great Depression of the 1930s. It didn’t buy the forecast made by Donald Trump the day before, that normal activity in the United States would begin to return by or about May 1. It would take months before that happened. Jamie Dimon, the chief executive of JP Morgan Chase, agreed with the Fund’s suggestion. He said Americans will begin to return to work only gradually, depending upon conditions in individual regions and industries.

The IMF said that the global economy would shrink by 3% in 2020 before staging a partial rebound in 2021. Only three months ago, the institution had said that the world economy would expand in 2020 by 3.3%. The IMF said that the US economy will contract by 5.9% in 2020 and grow by 4.7% in the year that follows, leaving it still worse off than was the case when Covid-19 arrived. According to Gita Gopinath, the IMF chief economist, world output over the next two years will fall by $9 trillion. “This makes the ‘Great Lockdown’ the worst recession since the Great Depression and far worse than the global financial recession of 2008-09,” she said. However, the expected contraction is not likely to be as severe as in the 1930s when the world economy shrank by an estimated 10%. By April 17, 25 million Americans will have filed for unemployment benefits for which the US Congress has provided funding with its $2 trillion emergency package. All the 22 million jobs created since the end of the 2009 recession have been obliterated.

This is the first time since the Great Depression that advanced nations such as US, Europe and Japan as well as developing nations in Africa, Asia and Latin America are together in a slowdown. Some outside experts are skeptical of the prospects of a quick recovery the Fund expects. Dani Rodrick, a highly regarded development economist at Harvard University called the Fund’s projections “crazy” and “beyond wishful thinking”.

There was great worry that the Covid-19 pandemic could produce a number of unexpected consequences. In the weeks since the novel coronavirus came out of China, more than 90 countries appealed to the IMF for assistance. Pakistan is among those who have called for help. According to the Washington-based institution, $2.5 trillion would be needed in 2020 for the countries already in financial stress to meet their foreign obligations. Kristalina Georgieva, managing director of the IMF, secured from the institutions’ board one emergency funding programme. This would be fast disbursing assistance and unlike traditional IMF resources, will carry few conditions. On April 13, the board approved grants from a $500 million “Catastrophe Containment and Relief Fund” to cover six months of debt payments for 25 impoverished countries including Afghanistan and Somalia. But this would not be enough to stem the tide that is coming. It is not only that Covid-19 would do untold damage to the developing world but also the coming financial crisis.

Even before the pandemic arrived, developing countries were in economic trouble. Instead of badly needed foreign capital coming into these states, it was leaving, and going back to rich nations. Developing countries with large and reasonably open markets were attractive for foreign firms that made consumer goods. They also had cheap labour that would provide workers in the increasingly labour-short economies of rich countries.

In a video message to the international community broadcast on TV on April 12, Prime Minister Imran Khan asked the developed world to give financial assistance to developing countries to deal with the Covid-19 crisis. The countries that carried heavy debt burdens need special attention, he said. “In the developing world, apart from containing the virus and dealing with the economic crisis, our biggest worry now is to save people from dying of hunger,” he said. “The dilemma on the one side is to save people from Covid-19 and on the other to save them from dying of hunger due to prolonged lockdowns.”

Ruchir Sharma, the chief global strategist at Morgan Stanley Investment Management, supported the position Imran Khan had taken. Many officials in the emerging world say “they cannot simply copy the measures adopted in wealthy countries,” he wrote. “Imran Khan, the Prime Minister of Pakistan recently tweeted that South Asia is ‘faced with a stark choice’ between a ‘lockdown’ to control the virus and ‘ensuring that people don’t die of hunger and our economy doesn’t collapse’. Many emerging world-leaders are counting on warm weather and youth to slow down the contagion at their borders.”

Global finance ministers and heads of central banks in their meeting on April 14 agreed to provide debt relief for the world’s poorest countries while the finance chiefs from the Group of Seven said that they would suspend debt service payments poor countries owe. In a follow-up statement, finance leaders endorsed efforts to get global banks to offer similar relief to the 76 countries eligible to receive low-interest and long-term credits from the World Bank Group’s International Development Association, the IDA. The objective of all these moves was to free up the money needed by poor nations to fund medical care and support their economies during the pandemic. “The scale of this health crisis is generating unprecedented challenges for the global economy,” said the G-7 finance ministers while IMF officials said that “governments should combat the pandemic by spending freely on medical care and aid for the unemployed before pivoting next to stimulating economic growth.”

An article written by Gordon Brown, former prime minister of Britain, and Lawrence H Summers, the former US Treasury secretary, echoed Imran Khan’s sentiment. “The next wave of the Covid-19 crisis will be in the developing world, where often overcrowded slums make effective social distancing difficult. Without a basic social safety net, choices are narrowed and stark: Go to work and risk disease or stay home and starve with your family.” They presented an action plan that includes several components. It would include a significant increase in lending by the World Bank and regional banks and also a significant increase in the resources at the disposal of the IMF. A systematic approach would be needed to restore debt sustainability in the developing world. “The current proposal on the table is that creditor nations would offer a six- or nine-month standstill on bilateral debt repayment at the cost of $9 billion to $13 billion. But this proposal is constricted both in time and the range of creditors included. We propose relieving more than $35 billion that is due to bilateral creditors over this year and the next. Here the role of China, which holds over a quarter of bilateral debt will be crucial.”

Published in The Express Tribune, April 20^th, 2020.

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