Covid and the Cushion of Riches

Fair choices and unfair outcomes

Leks Quintero

Economics is not abstract; it is the most real. Economic policy has the potential to directly impact the livelihoods of millions of people. So, whilst human innovation has snowballed into abundance for some, our increasing interconnectedness highlights stark inequality that persists. Would it be possible then that the public health and economic decisions of wealthy nations to protect their own people throughout Covid negligently deteriorated the livelihoods of those in poorer nations? Not to mention that developing countries still face the challenge of Covid itself. What it means for a government to protect its ‘own people’ is also becoming blurred in a political and socioeconomic sense, and we can see this reflected in the growing importance of diversity. How can it be justified that in a global effort to manage Covid, fair decisions seem to have unfair economic outcomes in different nations? 

Economic Context

At the very least, global havoc was wrought as governments took extreme health and economic policy measures to combat Covid, constituting an unprecedented response. As Covid spread and sovereign authorities took protective and prospective measures, it would seem that a strictly nation-serving set of policies, in conflict with the reality of a globalised and interconnected order, was the norm for wealthier nations. People could sleep easy in developed economies where public health and economic outcomes were relatively secure, or at least there was not a thorny trade-off between health risk and poverty risk. But such risk-aversion from developed nations has had very real economic impacts on developing countries. Interestingly, poorer countries are systematically more risk tolerant than richer countries. Nonetheless, as global economic growth slows, external demand for goods and services in developing economies is decreasing. Therefore, the policy whims of developed countries regarding trade and investment could secondarily cripple developing economies, which was foreseeable as sweeping Covid measures were implemented. Of course, wealthy countries themselves were not free from economic hardship, but instead the background economic situation of social security and stable external debt levels enabled unprecedented responses. By contrast, external debt in the least developed countries (LDCs) had already risen from 24% to 32% between 2012 and 2019 before the pandemic struck. Furthermore, foreign direct investment (FDI) in LDCs was already beginning to wane pre-pandemic. Overall, there was a 12% debt increase in 2020 alone for low-income countries. The bigger picture in front of us indicates that countries are far from equal, and some are not equipped to effectively address sudden calamity.

External Debt

A good level of external debt, which most wealthy nations seem to have, can signify the absorptive capacity of an economy when unprecedented shocks occur. In other words, we can see that rich developed countries could bear the brunt of economic turmoil with a secure hope for recovery. The external debt-to-GNI ratio in developing economies was only exacerbated by the pandemic, as national incomes fell alongside demand, and debt rose to stimulate the economy. Whilst institutions like the World Bank are working on debt restructuring and transparency for these economies to aid them in sustainable growth, the situation is highly problematic. It is evident, in the calamitous pandemic situation, that without an economic cushion like healthy debt levels these economies have nowhere to turn. Developing nations faced the impossible task of balancing policy between public health devastation on one side and economic and poverty ramifications on the other. 

Covid Policy in Developed and Developing Nations

Having established the economic situations of countries along the development scale, it is interesting to compare how they approached Covid policy given their disparate health and fiscal standings. The Oxford Coronavirus Government Response Tracker (OxCGRT) utilises thirteen metrics ranging from restrictions on gatherings and movement to vaccine and mask policy in the Containment and Health Index to measure the strictness of countries’ Covid policy responses. What is crucial to note is that there is not a significant disparity between lower and higher income countries. They do diverge in the extent to which they provide income support, which only serves to strengthen the idea that poor countries’ already looming external debt distress inhibited a comprehensive economic response. Whilst rich countries utilised on average 20% of GDP in financial support during the pandemic, poor countries managed only about 2%. We thus witnessed economic devastation in developing economies in contrast with recovery in rich economies, despite countries implementing similar containment responses. It seems that the general economic situation relates to a nation’s ability to manage disaster. 

Credit: Sarthak Kwatra

Though beyond the scope of this article, please consider what you think constitutes the proper economic background for a country and the world, since it is so important. Can economic justice be achieved, is there such a thing, and what does it look like?

Economic and Humanitarian Ramifications

But this only serves to highlight that as Covid ramped up, a 49% decrease in FDI worldwide in the first half of 2020 was more than a major shock for developing countries, which need stability and consistency to grow sustainably. The majority of the service trade in LDCs is in tourism, which was ground almost entirely to a halt during Covid. The slowed growth has also led to an exacerbation of income inequality amongst the poor of the poor. Although poverty alleviation has been tracking relatively well since the 1990s, Covid has brought its first downturn since, potentially putting 207 million people into extreme poverty by 2030. This is tragically undoing decades of progress in low-income nations. 

Hypocrisy?

If we presuppose that all countries strive towards prosperity and stability, at least in an economic sense, then this article is by necessity normative. Economic policy analysis can only be done under a prevailing set of ideals and must always be contextualised. In the modern era, globalisation defines the economic order and has several implications. Our rights and obligations in a global context are only increasing, which acts as a reward for accepting higher risk in areas such as business or public health. Indeed, the blurring of the practical and political significance of international borders in a cosmopolitan world means a pandemic is endlessly complex to manage. Specifically, Covid has been a pertinent reminder of the global economic divide; so, whilst there is a trend towards internationalisation and equality, our actions may speak otherwise of our values and loyalty. 

What is Fair?

In 2021, $650 billion was mobilised in special drawing rights from the International Monetary Fund, however, 65% of this filtered through to developed economies. This represents aspects of the problem and the solution. Indeed, wealthy nations were quick to deploy life- and economy-saving policies at great expense. The very dilemma is that them doing so seems fair, yet developing economies subsequently experienced fundamentally bleak outcomes, despite taking the same policy measures. Wealthy nations, hinging on their comfortable external debt, took decisions that low-income countries could not. It is worth asking whether decades of humanitarian progress were worth sacrificing to the altar of risk-aversion in developed economies? Where was the support from wealthy nations in times of crisis? After all, we are now a global cosmopolitan community founded on equality.

Leave a Reply