Is there any silver lining in the COVID-19 crisis?

By Bert Hofman, Director, East Asian Institute and Professor in Practice Lee Kuan Yew School of Public Policy, National University Singapore

This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.


The economic devastation that COVID-19 leaves in its trail is astonishing. The IMF projects that the world will fall into a deep recession, deeper than the one that followed the Global Financial Crisis.  Despite the unprecedented policy response that we have already seen, including a tripling of average fiscal deficits to almost 10 percent of GDP, and monetary loosening in similar orders of magnitude, world GDP is projected to decline by 3 percent in 2020, double the decline of 2009.

The IMF projects that low income countries would barely grow this year, only 0.4 percent compared to 5 percent last year, and 4.7 percentage points lower than projected only in January. Emerging and developing economies as a whole fare even worse: GDP is projected to decline with one percent in 2020, compared to 3.7 percent growth last year.  And all of that could be worse: the IMF’s downside scenario is far worse.

Even in an optimistic scenario, world trade is projected to decline by 13 percent according to the WTO, and by more than 30 percent in a pessimistic scenario.  Developing countries across the globe will see similar declines in their exports, but on top of that their terms of trade have declined sharply in the wake of sharply lower commodity prices. Further, in the first three months of the year, more than $90 billion in capital fled, pulling along exchange rates, and leaving interest rates in most of the developing world sharply higher than before. This, in turn, will make any fiscal action in those countries more expensive.

Further strains on the balance of payments of developing countries may come from remittances.  The World Bank projects that remittances, which amounted to some $554 billion in 2019, could fall by as much as 20 percent, to $445 billion this year. Though remittances often play a countercyclical role for developing countries, the sheer size of the shock in growth and employment in destination countries makes this projected decline look modest.  For low income countries, a sharp decline may be particularly painful, as remittances make up some six percent of GDP.

So are there any silver linings for developing countries in this crisis?

One silver lining is that the policy response has been swift.  A mere two weeks after the WHO declared a global pandemic, the G20 leaders met virtually at the end of March, and committed to massive, if not terribly coordinated policy action. The leaders pledged “to do whatever it takes and to use all available policy tools to minimize the economic and social damage from the pandemic, restore global growth, maintain market stability, and strengthen resilience.” The nominal amount to match this commitment was $5 trillion in fiscal and monetary measures, or some 10 percent of GDP of G20 countries.  Even since then, countries have gone beyond this, and according to the IMF’s Fiscal Monitor world fiscal deficits alone will add up to 10 percent of GDP, almost triple that of 2019.

At the annual meetings of IMF and World Bank in April, a debt standstill on bilateral debts of low-income countries was also agreed, and the IMF pledged to increase its rescheduling facility for low-income countries from $400 million to $1.4 billion. The IMF also doubled its emergency lending to $100 billion, and basically availed its whole balance sheet of $1 trillion to fight the COVID-19 crisis, and the World Bank Group availed some $160 billion for the same. There is a clear motivation for debt relief: this is an exogenous shock that puts a number of countries into an economic crisis not of their own making.  So unlike with “normal” economic crises, where bad policies may have played a role in causing the crisis, no moral hazard issues arise. Whether what is currently pledged is enough can only be determined after a debt sustainability analysis.

A second silver lining may be the way COVID-19 affects the population. The virus hits the elderly much harder than the young. Developing countries as a whole have a much lower average age than advanced economies, which could be a blessing. Low-income countries average age is only 19 years, compared to 41 for high-income countries, and the share of the population over the age of 65 is barely 3 percent, compared to 18 for high income countries. World Bank estimates taking age/impact of disease from an Imperial College study into account therefore suggests that the impact of the COVID-19 will be far less in developing regions than in developed ones (Figure 1).  This could offset the weaknesses in the health system of many developing countries, and the absence of sufficient ICU surge capacity. It could also change the strategy that those countries can take to fight the crisis—lockdowns as seen in many high-income countries may not be feasible, nor optimal as a study of the Yale School of Management suggests.

Figure 1: Younger regions will be hit less


Source: World Bank East Asia and Pacific Economic Update, April 2020 based on Imperial College estimates.

Finally, emerging economies and low-income countries may come out stronger in a post-COVID world.  Already before the pandemic, cost pressures in China and risks of the US-China trade tensions had led companies to search for an alternative production base—a “China+1” strategy. The pandemic may accelerate this search. While some essential production, notably medical equipment and medicine, may be reshored to developed countries, the cost advantages and demographic profile of emerging markets means that they stand to gain from a more diversified global value chain.  No doubt, resilience as a factor in investment climate will play a prominent role in the post-COVID world.  So investing in better public health systems now will pay off not only from a humanitarian perspective, but also from one of future competitiveness.