Such will be the impact of the Coronavirus, COVID-19, pandemic that the world economy will go into recession this year with a predicted loss of trillions of dollars of global income. ‘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’, a report presented by United Nations Conference on Trade and Development, UNCTAD, makes it amply clear that the recession will spell trouble for developing countries, in particular, with the likely exception of India and China. “Even so, the world economy will go into recession this year with a predicted loss of global income in trillions of dollars. This will spell serious trouble for developing countries, with the likely exception of China and the possible exception of India,” UNCTAD’s report said.
UNCTAD’s report, however, does not provide a detailed explanation as to why and how India and China will be the exceptions as the world faces a recession and loss in global income that will impact developing countries.
The report shows that in two months since the virus began spreading beyond China, developing countries have taken an enormous hit in terms of capital outflows, growing bond spreads, currency depreciations and lost export earnings, including from falling commodity prices and declining tourist revenues. Accordingly the UN has called for a $2.5 trillion rescue package for the developing nations that houses two-third of the global population. The report by the trade body reveals that commodity-rich exporting countries will face $2 trillion to $3 trillion drop in investments from overseas in the next two years. “The economic fallout from the shock is ongoing and increasingly difficult to predict, but there are clear indications that things will get much worse for developing economies before they get better,” said, UNCTAD secretary-general Mukhisa Kituyi.
Countries are gearing up for a fight-back. Accordingly, to fight the economic menace of COVID-19, G20 is expected to extend a $5 trillion lifeline to their economies. “This represents an unprecedented response to an unprecedented crisis, which will attenuate the extent of the shock physically, economically and psychologically,” said the trade body’s report. UNCTAD’s initial assessment estimates that the package will translate to a $1 trillion to $2 trillion injection of demand into the major G20 economies and a two percentage point turnaround in global output.
UNCTAD’s Four-Pronged Strategy
In the face of a looming financial tsunami this year, the UNCTAD proposes a four-pronged strategy that could begin to translate expressions of international solidarity into concrete action.
• First, a $1 trillion liquidity injection; a kind of helicopter money drop for those being left behind through reallocating existing special drawing rights at the International Monetary Fund and adding a new allocation that will need to go considerably beyond the 2009 allocation made in response to the global financial crisis.
• Second, a debt jubilee for distressed economies. An immediate debt standstill on sovereign debt payments should be followed by significant debt relief. A benchmark could be the German debt relief administered after World War II, which cancelled half of its outstanding debt. On that measure, around $1 trillion should be cancelled this year overseen by an independently created body.
• Third, a Marshall Plan for a health recovery funded from some of the missing official development assistance (ODA) long promised but not delivered by development partners. UNCTAD estimates that an additional $500 billion – a quarter of the last decade’s missing ODA – largely in the form of grants should be earmarked for emergency health services and related social relief programmes.
• Finally, capital controls should be given their legitimate place in any policy regime to curtail the surge in capital outflows, to reduce illiquidity driven by sell-offs in developing country markets and to arrest declines in currency and asset prices.