Unsurprisingly, this has become a ‘developing-country pandemic,’ write Anis Chowdhury and Jomo Kwame Sundaram
WITH the pandemic setting back past, modest and uneven progress, huge disparities in containing Covid-19 and financing government efforts are widening the north-south gap and other inequalities once again.
Developing countries are struggling to cope with their generally feeble health systems. These had been weakened by funding cuts and privatisation policies prescribed by both Bretton Woods institutions: the International Monetary Fund and the World Bank. Unsurprisingly, Covid-19 has become a ‘developing-country pandemic.’
Developing countries — especially lower middle-income countries and low-income countries unable to afford diagnostic tests, personal protective and other equipment, medical treatments and vaccines — now account for much more and still fast-rising shares of worldwide deaths and infections.
With grossly uneven vaccination, death and infection rates in high-income countries have dropped as the shares of low-income and lower middle-income countries have spiked.
The Economist estimates much higher mortality rates in developing countries than suggested by official data: 12 times more in lower middle-income countries, and 35 times greater in low-income countries.
Greater global divergence
THE Covid-19 pandemic and policy responses have further set back the Agenda 2030 for global sustainable development. The United Nations Conference on Trade and Development estimates that the developing country output fell by 2.1 per cent in 2020. To make matters worse, progress towards achieving the sustainable development goals was poor even before the pandemic.
The world now faces greater divergence, as developing countries fall further behind due to the pandemic and disparate responses to it. The IMF management proposes that $50 billion can accelerate vaccination to end the pandemic worldwide, with benefits worth $9 trillion!
The IMF estimates that the average low-income country growth shrank sharply to 0.3 per cent in 2020 from over five per cent in the previous three years.
It also projects that 33 developing countries — including 15 in Sub-Saharan Africa and nine small island developing states — will still have lower per capita incomes in 2026 than in 2019.
Constrained ‘fiscal space’
MOST developing countries faced constrained ‘fiscal space’ even before the pandemic. The average tax/gross domestic product ratio in 2018 was 12 per cent in lower-middle income countries and 13 per cent in lower-middle income countries compared to 25 per cent in developed countries.
This disparity is often due to weaker revenue collection, lower incomes and larger informal sectors. They also lose between $49 billion and $194 billion yearly to illicit transfers, eg, to corporations’ ‘trade mis-invoicing’ or ‘transfer pricing.’
Africa loses about $89 billion, around 3.7 per cent of the African output, to illicit capital flight yearly. This revenue loss is almost equivalent to the total inflow of official development assistance and foreign direct investment African countries received during 2013–2015.
Developing countries are typically caught in harmful tax competition in a ‘race to the bottom’ following neoliberal advice from the Bretton Woods institutions and others. Thus, statutory corporate tax rates declined from 39 per cent in middle-income countries and 46 per cent in lower-income countries in 1990 to 24 per cent and 29 per cent in 2019 respectively.
From frying pan into fire
DEVELOPING countries have for long faced limited fiscal capacity and policy space or choice, worsened by decades of neoliberal policy conditionalities and advice. Donors and the Bretton Woods institutions have also urged lower-middle income countries to borrow from international capital markets rather than official sources.
Meanwhile, official development assistance increasingly supports private businesses. Such new mechanisms — for example ‘blended finance’ — promised to turn aid of ‘billions into trillions’ of private finance for the Agenda 2030.
The promise has failed spectacularly, depriving countries relying on declining official development assistance while advancing the interests of private finance.
Thus, the debt of lower- and middle-income countries surged before the pandemic. Total (public and private) debt reached over 170 per cent of the emerging market and developing economies’ output and 65 per cent of lower-income countries’ GDP in 2019. The increase involved almost equal shares of both external and domestic debt.
This bad situation has worsened — with less tax revenue, reduced exports and official development assistance cuts — due to the pandemic as government spending needs rise sharply.
In April 2020, the UNCTAD called for $1 trillion in debt relief of developing country obligations — estimated at between $2.6 trillion and $3.4 trillion in 2020 and 2021.
Donor support unlikely
HOWEVER, rich countries, especially the G-20 members, have responded frugally to this call, while private commercial lenders have rejected all debt relief initiatives so far. This poor-country predicament has been worsened by the World Bank refusal to supplement the IMF debt service cancellation for the most vulnerable lower-income countries.
Meanwhile, official development assistance has remained below half the donor aid commitment, made half a century ago, of 0.7 per cent of their gross national income. The aggregate ratio of official development assistance to gross national income fell from 0.31 per cent in 2017 to 0.29 per cent in 2019.
The IMF estimates that lower-income countries need around $200 billion for relief and recovery up to 2025, and another $250 billion to resume development progress. It projects that another $100 billion will be enough to cover ‘downside risks,’ such as delayed vaccination and more lockdown measures.
However, some major donors have already cut their already modest aid budget allocations. Meanwhile, no rich country has yet pledged to transfer its unused new IMF ‘special drawing rights’ to provide more recovery finance for developing countries through the 15 designated multilateral financial institutions which can so use the special drawing rights.
Financing relief, recovery, reform
FISCAL measures of around $16 trillion have already been rolled out globally, with high-income countries accounting for more than 80 per cent. In contrast, fearing the macro-economic consequences of borrowing and spending much more, developing countries have committed much less.
While developed countries have deployed 28 per cent of their much higher national incomes, the ratios are only seven per cent for emerging market economies, three per cent for Sub-Saharan Africa and two per cent for lower-income countries.
Besides urgently containing the pandemic and its consequences, developing countries must quickly, effectively and adequately finance relief and recovery from Covid-19 recessions.
Cooperative efforts to secure much more tests, equipment, treatments and vaccines must be quickly stepped up. Meanwhile, the UN system, including the Bretton Woods institutions, needs to urgently expand developing countries’ means to finance measures to ‘build forward better.’
Consortiumnews.com, June 17. Anis Chowdhury is adjunct professor at Western Sydney University and the University of New South Wales, Australia. Jomo Kwame Sundaram, a former economics professor, was UN assistant secretary-general for economic development.
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