07/04/2020
Flattening the COVID-19 Curve in Developing Countries | World Economic Forum
But one frequently unstated assumption of this approach is that governments will be able to
mobilize the necessary resources, essentially by borrowing more, if needed, from their own
central banks, as they implement quantitative easing (QE). Economists refer to governments’
ability to borrow as fiscal space. In short, the flatter you want the contagion curve to be, the
more you will need to lock down your country — and the more fiscal space you will require to
mitigate the deeper recession that will result.
That leaves developing countries in the lurch. Even in the best of times, many of them have
precarious access to finance, and resort to the printing press leads to a run on the currency
and an inflationary spike. And these are not the best of times.
Most developing countries rely for foreign income on a combination of commodity exports,
tourism, and remittances: all are expected to collapse, leaving economies short of dollars and
governments short of tax revenues. At the same time, access to international financial markets
has been cut off as investors rush to the safety of US and other rich-country government-
issued assets. In other words, just when developing countries need to manage the pandemic,
most have seen their fiscal soace evaporate and face large funding gaps.
The standard prescription for revenue collapses and external financing problems is a
combination of austerity (to bring spending in line with income), devaluation (to make scarce
foreign exchange dearer), and international financial assistance to smooth the adjustment. But
this would leave countries with no resources to fight the virus and no means to protect the
economy from the damaging effects of lockdown measures. Moreover, the standard
prescription is more inefficient if all countries try it at once, owing to negative spillovers on
their neighbors.
Under these conditions, even if developing countries want to flatten the curve, they will lack
the capacity to do so. If people must choose between a 10% chance of dying if they go to
work and assured starvation if they stay at home, they are bound to choose work.
To give countries the financial capacity to flatten the curve requires a level of financial support
that will not be feasible with existing approaches and with international organizations’ current
balance sheets. To help manage the pandemic in the Global South, therefore, it is critical to
recirculate the money that is fleeing the developing countries back to them. To do that, the G7
and the G20 should consider several measures.
First, the US Federal Reserve has announced swap lines with the central banks of Australia,
Brazil, Denmark, Korea, Mexico, Norway, New Zealand, Singapore, and Sweden. This
mechanism should be extended to many more countries. If fear of default is an impediment,
these funds could be intermediated by the International Monetary Fund, which should
redesign its existing Rapid Financing Instrument to meet current needs.
https:/Avww.weforum.org/agenda/2020/03/flattening-the-covid-19-curve-in-developing-countries
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