Basic Relationships Between Epidemic, Economy, and Inequalities

The public debate on the current economic crisis and the COVID-19 pandemic has focused on rich countries. But how is this crisis truly “global”? What are the current inequalities with developing countries? Here is an overview with Jérôme Sgard, Professor of Political Economy at the Centre for International Studies (CERI) at Sciences Po and specialist in the construction and regulation of markets.

COVID-19 has reminded us that there are great inequalities between rich countries and developing ones in terms of health facilities. What is the scale of this imbalance?

Jérôme Sgard: If you watch a TV report on the intensive care units in French hospitals, you quickly understand that this is a high-tech medicine that relies on equipment that you can guess is very expensive. In this respect, the gap with the poorest countries is huge, particularly with sub-Saharan Africa. Whether we compare the number of doctors and nurses per inhabitant, intensive care equipment, or respirators, the ratio is ten to one or even more. A day in intensive care in Paris costs more than 4,500 euros, whereas in sub-Saharan Africa, the health budget per capita is around 200 euros per year (in purchasing power parity). This suggests that if these countries were to suffer epidemic attacks comparable to the one we have experienced in Europe, the capacity to respond to them would a priori be very limited. And the primary factor here is obviously the wealth gap—mass poverty. However, there is also less investment in public health: on average, rich countries spend between 8% and 12% of their GDP on health (with a maximum of 17.1% for the United States); in low- and middle-income countries, the rates vary between 3% and 5%, on the basis of much lower GDPs.

Developing countries seem to have potential advantages such as young populations, or even warmer climates. Can such factors augur a more favourable fate for poorer countries in the face of COVID-19 or similar viruses?

JS: No epidemiological expertise is needed to figure out that we are far from knowing everything about COVID-19. Yet, indeed, many developing countries today seem to be spared from the epidemic. Is this due to structural factors that would keep protecting them in the future, or is it due to a simple delay or even to chance? At this stage, we do not really know. That being said, it is indeed a known fact that age has a considerable impact on mortality, but we also know that in developing countries, older people remain much more socially integrated, due to the structure of families and housing, but also to the lack of pension systems. Problems of co-morbidity have also been highlighted; they are very present in developing countries (diabetes, tuberculosis, AIDS). Lastly, remember that in sub-Saharan Africa, more than 800 million people cannot wash their hands with soap and clean water; 240 million live in shantytowns. Similar figures are observed in South Asia.

The economic consequences of the epidemic and the responses they call for are the central issue today, in rich countries: reduction of working hours, furlough, financial support to businesses, European recovery plans, etc. Is the question similar in developing countries? How can the current situation be compared to that of 2008?

JS: The impact of the current crisis will be much more direct in developing countries than in 2008. Twelve years ago, the crisis originated at the heart of the global financial system, in Wall Street, and from there it then contaminated the real economies of rich countries. Developing countries were only affected indirectly, first of all through the slowdown in international trade and the fall in the price of raw materials. The emerging economies also absorbed the financial shock without great difficulty whereas they had experienced severe crises in the previous decade (Mexico in 1994, Asia in 1997, etc.). Today the scenario is completely different: the crisis affects the real economy first and it hits everyone at the same time, even if through different channels. This crisis is thus much more global than in 2008 and the developing countries are a priori much more threatened: the benefits of years of efforts and investments could be lost due to their difficulties to protect altogether their populations, their economies, and their external financial position.

So, is there a direct correlation between the global pandemic and the global economic crisis?

JS: Of course, there would not be this economic crisis without the pandemic. The countries most affected by the virus are paying a high price. But there is no direct proportionality between the two issues, as we see in Europe: countries that have managed the virus relatively well will also be hit. Two basic dynamics are at work here. First, a very large number of companies, from France to India, have stopped operating because their staff have been confined. Then, the logistics of the global value chains have been thoroughly disrupted. No engineering degree is needed to understand that the suspension or a delay in the delivery of a few spare parts due to the quarantine of a ship or a slowdown in customs clearance can quickly block the entire production chain of Airbus or Apple, for example. Then come the effects on revenue, and hence on demand: if you produce less, you earn less money, so either you receive aid, you accumulate debt, or you cut back on expenses. This applies equally to an entire country, a company, or a worker. And on this level again, international inequalities are huge.

Are these same basic mechanisms at work in rich countries and developing ones?

JS: To a large extent, yes. Clothing companies in Tunisia, for instance, or industrial spare parts producers in Morocco are suffering from these shocks. Tens of thousands of employees have lost or will lose their income, which will affect domestic demand in these countries. These workers will consume less, they will not be able to repay their loans, etc., unless, again, they are supported. On the other hand, countries that are poorly integrated in the global economy and are not part of global value chains are therefore less exposed when these seize.

But let’s take the case of the international commodity market. Today, there is no major supply crisis in global grain or rice production. However, the trade logistics underlying the international grain market have been profoundly affected: materially, supply and demand don’t reach as easily as they used to, especially if there are also reactions of storage or speculation. This creates a very serious risk of food shortages, locally or regionally, particularly in Africa. Clearly, we are no longer dealing with printer cartridges that are not delivered, even if the mechanics of the shortage are somewhat similar.

But developing countries are also affected by the fall in the international demand and in the prices for raw materials, especially minerals and energy. And consider also the case of economies that rely heavily on tourism: since last March, hundreds of thousands of tourists and long-term residents have been repatriated to Europe. This has caused massive shocks in terms of external payments and income for a job-rich sector. In many countries, 4% to 6% of GDP has disappeared in a few weeks, sometimes much more. Lastly there is also the case of remittances from migrant workers, which are of roughly the same order of magnitude: they are not going to disappear overnight but if unemployment becomes widespread and long-lasting in developed countries, there will inevitably be an impact in countries of origin. This was already the case in 2008.

Chiredzi, Zimbabwe,03 June 2020,Group of women with face masks. Copyright: Shutterstock

Chiredzi, Zimbabwe,03 June 2020,Group of women with face masks. Copyright: Shutterstock

You have noted that the poorest countries are particularly poorly equipped to face the pandemic. What about the economic crisis?

JS: It's all here: whether you look at fighting the epidemic, supporting households and businesses, or the external financial threat, states are on the front line—from Niger to Sweden. The nature of the epidemic, like the financial crisis, is that it directly calls into question a particularly precious common good, for which states are, in principle, the last resort guarantors. Indeed, the inequalities in the means and competences of states have rarely appeared as disproportionate as in recent months.

In the rich countries, the expenses incurred to maintain as much as possible the populations’ living standards are considerable. Historically, a substitution of private income by budgetary transfers has never been observed on that scale. The same goes for the protection of businesses and jobs. That being said, within Europe the support plans announced in Germany, for example, are far superior to those in the heavily indebted Mediterranean countries. This observation applies a fortiori to the developing countries. The most ambitious economic plans in Africa are much lower, whether one considers Côte d'Ivoire (4.7% of GDP), Namibia (4.25%), Niger (7.4%), or Senegal (5.1%). In many cases, nothing has been announced, due to poverty but also to limited tax revenues: in the European Union, tax revenues represent on average 45.2% of GDP (53.8% in France); in Latin America, the average is 31.5% of GDP; in Africa, 22%, with many countries around 15%. The IMF has called on developing countries to mobilise the budgetary instrument on a massive scale, but with such a narrow tax base and with limited access to external debt, there is little they can do. The same thing goes for the so-called policies of quantitative easing, by Central banks, which are much more difficult to implement in emerging countries, not to mention developing ones. Between rich and developing countries, this episode could thus lead to even greater inequalities in terms of income and collective well-being, but also in terms of public governance in the long run.

What are the effects of debt in such conditions? Can standstills or cancellation of debt bring an answer to the current double crisis?

JS: Debt is a crucial issue today, though it comes with different dimensions. On the one hand is the problem of interest payments: this is typically what we first think about when we talk about the “debt burden”. From this perspective, in most poor countries, particularly in Africa, the figures are not that large (close to 1% of GDP). As in the OECD area, these countries have borrowed at very low interest rates over the past decade or so. Moreover, in many cases, multilateral banks and development aid agencies are lending to them at below-market rates. So cancelling interest payment, or the whole debt, would certainly release tangible resources, but it would not affect the extent of the budgetary problem, whether in terms of public health or support for the economy. On the other hand, serious problems with external payments can appear if export earnings collapse, for the reasons I have just mentioned. In the most indebted countries, interest payments may then crowd out imports of essential goods, and this must be avoided at all costs.

That being said, the main problem in the short term and in dozens of countries is the refinancing of external debt. Normally, a country refinances its debt as it becomes due, by immediately re-borrowing on the markets. The French Treasury does this on an almost daily basis. But in the event of major uncertainty or panic on the financial markets, countries that were considered solvent and stable a few months ago may find themselves unable to raise these funds. If they are not helped, default can occur very quickly, which would magnify the long-term economic and social costs of the crisis. Moreover, what applies to sovereign borrowers also applies to private companies and banks, which in emerging economies are massively engaged in international capital markets. Here too, a wave of bankruptcies could have extremely serious consequences.

Today this is the worst-case scenario on the financial side: since last March, more than one hundred countries have called the IMF for help, which now announces support programmes to countries, on an almost daily basis, often with a rather weak conditionality. As we speak the markets are less destabilised than they were between March and May, but there is still a major risk that this will not be enough to avoid a wave of payment defaults by sovereign states. A first step has been the decision of public lenders, both multilateral and national, to grant a moratorium on debt service, including an extension of maturities to two or three years. The case of private creditors, particularly bondholders, has made much less progress. More than the issue of debt cancellation, which is a typically fraught and highly contested decision, the real short-term financial issue lies here.

This interview by Corinne Deloy was originally published on the CERI website.

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