By Greg Ip
The pandemic has been bad for the U.S., but truly catastrophic
for the world's poorest. Last year, the number of people in extreme
poverty went up for the first time in two decades -- by 90 million
-- wiping out four years of progress, according to the World
The long-term effect may be just as profound. This year, most
emerging economies will grow, but few will recoup what they lost
last year. Poverty, the World Bank projects, will remain flat or
This isn't because of Covid itself. Mortality rates have been
much lower in developing countries, other than Latin America, than
advanced. One reason is that emerging countries are younger and
thus less susceptible: Just 2% of Ethiopia's population and 6% of
Peru's is over 70, compared with 17.5% in Italy, according to Penny
Goldberg of Yale University and Tristan Reed of the World Bank.
Obesity, another pre-existing condition, is also less common,
affecting just 2% of Vietnam's and 11% of Ghana's population, but
36% of America's, they note.
Rather, the real damage has come from the economic repercussions
of the pandemic, and how they exploited existing vulnerabilities:
Emerging-economy governments have less freedom to aggressively
deploy monetary and fiscal stimuli; are more exposed to rising
barriers to trade, immigration and tourism; and often suffer from
weak governance, high crime and corruption. The interaction of the
pandemic-related recession and those vulnerabilities will hobble
their ability to bounce back, perhaps for years.
"In the short run, things look better than expected, but in the
long run, there are reasons to be very pessimistic," says Ms.
Goldberg, a former chief economist at the World Bank.
Effects hit home
President-elect Joe Biden will be focused foremost on the U.S.
economy when he takes office, but he will also have to deal with
the repercussions of this uneven global recovery. Continuing
hardship in Mexico and Central America, for example, will send more
migrants to the Southern border. The U.S. may be called on to help
bail out sovereign borrowers teetering on default.
The recovery within the U.S. has been described as K-shaped,
with the affluent and skilled faring far better than those on low
pay. Something similar is under way between countries, though not
uniformly. Among wealthy economies, the U.S. and Japan have fared
better than Western Europe. Among emerging markets, the World Bank
expects per capita incomes in East Asia to grow 6.8% this year.
This is largely thanks to China, whose economy actually grew last
year, but others in the region should more than recoup last year's
The outlook for other regions is grimmer. The World Bank sees
just 2.8% per capita growth in Latin America and the Caribbean this
year, 2.1% in South Asia and 0.1% in sub-Saharan Africa, leaving
all of them well behind their pre-pandemic levels. In Latin America
and sub-Saharan Africa, incomes will be lower in 2022 than in 2011,
the World Bank projects. That is a stark statistic: It means the
gap between the richest and many of the poorest countries will have
widened over the past decade, instead of narrowing.
Advanced countries could run large deficits to support displaced
workers and companies in part because central banks have held
interest rates at or below zero and bought massive amounts of
government debt. Central banks in emerging economies were afraid
that doing the same would send their currencies plunging, which
would have squeezed companies with extensive dollar-denominated
debts, says Robin Brooks, chief economist at the Institute of
According to the International Monetary Fund, fiscal relief was
equal to 24% of gross domestic product in advanced economies, 6% in
emerging middle-income countries and 2% in low-income
Some countries with high debt loads were pushed over the edge by
the pandemic; Ecuador, Argentina, Lebanon, Suriname and Zambia all
defaulted last year. Others found their maneuvering room
constrained. South Africa, for example, had a large budget deficit
because of poorly performing state-owned enterprises and high wage
This year, as the Federal Reserve holds interest rates near
zero, emerging-markets currencies should strengthen, which could
give their central banks more leeway to lower interest rates, Mr.
Brooks predicts. Governments, however, may still be reluctant to
borrow. Brazil implemented a big spending boost in 2020, but with
its currency weak and bond yields rising will likely have to
reverse course and tighten fiscal policy significantly in 2021.
Meanwhile, many emerging economies saw important external
sources of revenue sharply cut during the pandemic -- though not as
badly as initially feared. These countries depend heavily on
commodities, remittances from migrants in richer countries and
tourism. Remittances fell 7% last year and will fall an additional
7.5% this year, according to the Global Knowledge Partnership on
Migration and Development. In October, international tourist
arrivals were down 83% from a year earlier, a severe blow to
tourism-dependent countries like Thailand, Mauritius, Seychelles
and Jamaica. With vaccinations rolling out slowly in most emerging
countries, tourism may be very slow to return.
Commodities have rebounded since their spring collapse, but
commodity-dependent economies never fully recovered from the
collapse in prices back in 2014. International trade has fared
better, recovering from most of its early plunge, a key reason for
the upbeat performance of East Asia's export-dependent economies.
But deglobalization will likely be an enduring headwind.
"Poorer countries have always relied on the richer parts of the
world, not only for direct aid but also connecting globally in
terms of trade, investment and immigration," says Ms. Goldberg.
"The pandemic...gave people who are against globalization new
arguments: The more integrated you are, the more exposed you are to
international shocks." This may benefit some, such as Vietnam, as
Western companies shift supply chains out of China. But it will set
back countries like India or those in Africa that may have emulated
East Asia's formula of export-led growth.
Who's in charge?
The pandemic's effects have been aggravated by bad governance
and threadbare public services. In many countries, health-care
systems can't adequately test, hospitalize and vaccinate, and
schools closed without adequate remote learning for students.
In Mexico, companies' biggest complaints aren't about inflation
and taxes but crime, corruption and bureaucracy, says Alonso
Cervera, chief economist for Latin America at Credit Suisse.
Security improved during the pandemic because more people were at
home and thus less likely to be robbed, but corruption has
worsened, judging by the declining transparency around
public-contract bidding, he says.
Meanwhile, Covid restrictions have closed hundreds of thousands
of formal businesses such as restaurants, but not those in the
"informal" sector, which generally don't pay taxes and are much
less productive. "So, what are the incentives for a restaurant to
be formal, pay taxes and employ people when the government
treatment is so unequal?" Mr. Cervera says.
Few countries embody the multiple challenges facing the
developing world more than Honduras. It was already beset by crime,
corruption and extreme poverty when Covid struck. The health-care
system collapsed, and with the recent resurgence in cases, "there
is literally no space, no beds," says Gina Kawas, a Honduras-born
consultant to the Central American Bank for Economic Integration.
"Doctors are saturated, many health-care workers have died. I was
personally affected: I saw my dad die in front of me."
In November, it got worse: Honduras was struck by two tropical
cyclones within two weeks. While no single weather event can be
blamed on a warming climate, such disasters are a growing threat to
countries like Honduras in tropical zones with inadequate
infrastructure. The storm left 100,000 homeless and wrecked bridges
and highways. Two months later, 200,000 still lack electricity, and
many neighborhoods are buried in mud, breeding grounds for
mosquito-borne illnesses like dengue and Zika, Ms. Kawas says.
Between Covid and the hurricanes, one-tenth of the country's
population has lost their jobs. Recovery has been made all the
harder by corruption and crime. Nongovernmental organizations say
humanitarian aid has been diverted or lost, and gangs are extorting
businesses that have stayed open. Even though the economy reopened
in September, "people are more afraid of dying of hunger than
Covid," Ms. Kawas says. Despite the difficulty of reaching the U.S.
border, Hondurans will keep trying this year: "If you don't leave,
you die -- if not from hunger, then insecurity."
Mr. Ip is the chief economics commentator for The Wall Street
Journal. He can be reached at email@example.com.
(END) Dow Jones Newswires
January 17, 2021 05:44 ET (10:44 GMT)
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