Paltry support for spending needs sets south further back

 

With the pandemic setting back past, modest and uneven progress, huge disparities in containing Covid-19 and financing government efforts are widening the North-South gap and other inequalities once again.

Developing country pandemic

Developing countries are struggling to cope with their generally feeble health systems. These had been weakened by funding cuts and privatisation policies prescribed by both Bretton Woods institutions (BWIs): the International Monetary Fund (IMF) and the World Bank. Unsurprisingly, Covid-19 has become a “developing-country pandemic”.

Developing countries – especially lower-middle-income countries (MICs) and low-income countries (LICs) unable to afford diagnostic tests, personal protective and other equipment, medical treatments and vaccines – now account for much more and still fast-rising shares of worldwide deaths and infections.

With grossly uneven vaccination, death and infection rates in high-income countries (HICs) have dropped as LIC and MIC (LMIC) shares have spiked. The Economist estimates much higher mortality rates in developing countries than suggested by official data: 12 times more in LMICs, and 35 times greater in LICs!

Greater global divergence

The Covid-19 pandemic and policy responses have further set back Agenda 2030 for global sustainable development. The United Nations Conference on Trade and Development (UNCTAD) estimates developing country output fell by 2.1 percent in 2020. To make matters worse, progress towards achieving the Sustainable Development Goals (SDGs) was poor even before the pandemic.

The world now faces greater divergence, as developing countries fall further behind due to the pandemic and disparate responses to it. The IMF management proposes US$50 billion can accelerate vaccination to end the pandemic worldwide, with benefits worth US$9 trillion!

The IMF estimates average LIC growth declined sharply to 0.3 percent in 2020 from over five percent in the previous three years. It also projects 33 developing countries – including 15 in Sub-Saharan Africa (SSA) and nine small island developing states – will still have lower per capita incomes in 2026 than in 2019.

Constrained fiscal space

Most developing countries faced constrained ‘fiscal space’ even before the pandemic. The average tax/GDP ratio in 2018 was 12 percent in lower MICs and 13 percent in LMICs, compared to 25 percent in developed countries.

Developing countries’ poorer fiscal means are often due to weaker revenue collection, lower incomes and larger informal sectors. They also lose between US$49 billion and US$194 billion yearly to illicit transfers, eg, to corporations’ ‘trade mis-invoicing’ or ‘transfer pricing’.

Africa loses about US$89 billion, around 3.7 percent of African output, to illicit capital flight yearly. This revenue loss is almost equivalent to the total inflow of official development assistance (ODA) and foreign direct investment African countries received during 2013-2015.

Developing countries are typically caught in harmful tax competition in a ‘race to the bottom’ following ‘neoliberal’ advice from the BWIs and others. Thus, statutory corporate tax rates declined from 39 percent in MICs and 46 percent in LICs in 1990 to 24 percent and 29 percent in 2019 respectively.

From frying pan into fire

Developing countries have long faced limited fiscal capacity and policy space or choice, worsened by decades of neoliberal policy conditionalities and advice. Donors and the BWIs have also urged LMICs to borrow from international capital markets rather than official sources.

Meanwhile, ODA increasingly supports private businesses. Such new mechanisms, eg ‘blended finance’, promised to turn aid ‘billions into trillions’ of private finance for Agenda 2030. The promise has failed spectacularly, depriving countries relying on declining ODA while advancing the interests of private finance.

Thus, LMIC debt surged before the pandemic. Total (public and private) debt reached over 170 percent of emerging market and developing economies’ output and 65 percent of LIC GDP in 2019. The increase in EMEs involved almost equal shares of both external and domestic debt.

This bad situation has worsened – with less tax revenue, reduced exports and ODA cuts – due to the pandemic as government spending needs rise sharply. In April 2020, UNCTAD called for US$1 trillion in debt relief of developing country obligations – estimated at between US$2.6 trillion and US$3.4 trillion in 2020 and 2021.

Donor support unlikely

However, rich countries, especially G20 members, have responded frugally to this call, while private commercial lenders have rejected all debt relief initiatives so far. This poor country predicament has been worsened by the World Bank refusal to supplement IMF debt service cancellation for the most vulnerable LICs.

Meanwhile, ODA has remained below half the donor aid commitment, made half a century ago, of 0.7 percent of their gross national income (GNI). The aggregate ODA/GNI ratio fell from 0.31 percent in 2017 to 0.29 percent in 2019.

The IMF estimates LICs need around US$200 billion for relief and recovery up to 2025, and another US$250 billion to resume development progress. It projects another US$100 billion will be enough to cover ‘downside risks’, eg due to delayed vaccination and more lockdown measures.

However, some major donors have already cut their already modest aid budget allocations. Meanwhile, no rich country has yet pledged to transfer its unused new IMF special drawing rights (SDRs) to provide more recovery finance for developing countries through the 15 designated multilateral financial institutions which can so use SDRs.

Financing relief, recovery, reform

Fiscal measures of around US$16 trillion have already been rolled out globally, with HICs accounting for more than 80 percent. In contrast, fearing the macroeconomic consequences of borrowing and spending much more, developing countries have committed much less.

While developed countries have deployed 28 percent of their much higher national incomes, the ratios are only seven percent for EMEs, three percent for SSA and two percent for LICs. Besides urgently containing the pandemic and its consequences, developing countries must quickly, effectively and adequately finance relief and recovery from Covid-19 recessions.

Cooperative efforts to secure much more tests, equipment, treatments and vaccines must be quickly stepped up. Meanwhile, the UN system, including the BWIs, needs to urgently expand developing countries’ means to finance measures to ‘build forward better’. - Mkini

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ANIS CHOWDHURY, a former professor of economics at the University of Western Sydney, held senior United Nations positions from 2008 to 2015. 

JOMO KWAME SUNDARAM was formerly assistant director-general and coordinator for Economic and Social Development, Food and Agriculture Organisation of the United Nations.

The views expressed here are those of the authors/contributors and do not necessarily represent the views of MMKtT.

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