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Without adequate public health resources, the ability of developing countries to deal with the coronavirus pandemic is questionable.
While home to around half of the world’s population, health care spending in emerging markets is about 5%-6% of GDP — less than half the 14% of GDP that developed economies allocate. On a per capita basis, emerging market spending is just 5% that of richer nations.
Controlling the spread of COVID-19 in developing nations is being hampered by high population density, especially in slums and informal settlements, as well as poor general health and pre-existing conditions, such as respiratory diseases from polluted air, tuberculosis and HIV.
Better hygiene, quarantine, social distancing and mobility restrictions are impractical due to the lack of proper housing and clean, running water. A large portion of the population in emerging nations will be infected, with many deaths.
The public health failures of emerging countries will impact developed nations. Even if advanced economies manage to control the virus, the risk of transmission via travellers infected overseas may necessitate maintaining closed borders. Only an effective vaccine, broad vaccination coverage, extremely high levels of testing and stringent contact tracing would allow restoring cross-border mobility.
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The pandemic will decimate emerging economies. The informal economy, such as micro-businesses and traders, which makes a substantial section of activity, cannot function under lockdowns, eliminating livelihoods and income for large sections of the population.
Slower global trade, expected to fall by up to 30% this year, will decrease exports. Industries dependent on mobility, such as travel and tourism, will be impaired. Declines in commodities prices, especially oil and metals, and lower volumes will affect many countries.
Lower GDP, higher debt and lack of capital
Moreover, annual remittances of around $500 billion from nationals working overseas contribute significantly to emerging market GDP, savings and financing balance of payments. The Philippines, for example, receives around $34 billion a year in this manner, reducing the country’s current account deficit from 10% to around 1.5% of GDP. These remittances, which come from foreign workers in hospitality, domestic work and construction, will decrease as richer countries scale back.
Debt will compound the pressure. Over the past 10 years, official debt for the 30 largest emerging markets increased to over $70 trillion, a rise of 168%. Falling income, higher interest costs and capital flight — almost $100 billion of foreign capital has already been withdrawn since the start of the crisis — will make servicing and refinancing this debt difficult. With a significant proportion of the debt denominated in foreign currency, the devaluation of emerging-market currencies exacerbates the problem.
Slowing GDP, a deteriorating balance of payments and lack of capital inflows will constrain emerging markets’ responses to the health crisis and support for their economies.
“ Investors in richer countries will suffer loss of income and capital as borrowers restructure debt or default. ”
Weakness in emerging markets, which contribute around 60%-70% to global growth, will spill over to advanced economies. The health crisis will interrupt the supply of essential foodstuffs and raw materials. Markets for exports of finished goods from advanced economies will shrink. As the major creditors of emerging markets, investors in richer countries will suffer loss of income and capital as borrowers restructure debt or default.
Longer term, a shift away from global trade to closed economies will further reduce economic activity in emerging markets. It also will reduce living standards in developed economies as the drive for greater self-sufficiency increases domestic production costs. If all of this leads to social unrest or the collapse of governments in developing countries, increased illegal immigration, drug trafficking or terrorism may be a consequence.
While self-interest dictates that advanced economies assist emerging markets, health assistance so far has been limited. For example, the EU restricted exports of medical supplies; the U.S. has used threats and emergency powers to force vital supplies to be redirected to America.
The financing gap for developing countries, particularly for oil exporters and those dependent on tourism and remittances, is potentially extremely large. More than 100 of the International Monetary Fund’s 189 member countries have asked for aid, the greatest number ever. The Fund has doubled its available lending to $100 billion. The World Bank has committed $160 billion to budget support and health infrastructure. Bilateral lenders are being asked to suspend debt payments from the poorest nations. The International Monetary Fund estimates that support may ultimately cost $2.5 trillion.
Given the strains on finances, it is difficult to see the governments of advanced economies being able to finance a bailout, which moreover would not be popular with voters. Yet a failure to tackle the emerging-market crisis risks prolonging the emergency and a weaker recovery worldwide.
Satyajit Das is a former banker. His latest book is A Banquet of Consequences (published in North America as The Age of Stagnation). He is also the author of Extreme Money and Traders, Guns & Money.
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