Pandemic set to crush developing economies, Israel’s World Bank envoy says

Poorer countries rocked by plummeting commodity prices, drop in remittances, skyrocketing debt and weak safety nets, with dire consequences for global public

Luke Tress is a video journalist and tech reporter for the Times of Israel

Members of a privately funded non-governmental organization working with county officials disinfect a street in the Kibera slum of Nairobi, Kenya, April 9, 2020. (AP/Brian Inganga)
Members of a privately funded non-governmental organization working with county officials disinfect a street in the Kibera slum of Nairobi, Kenya, April 9, 2020. (AP/Brian Inganga)

The coronavirus pandemic has wreaked havoc on developed economies, but that damage pales in comparison to what’s coming in the developing world, and the fallout from that devastation will ripple throughout the entire globe, Israel’s representative to the World Bank has said.

The vast toll the disease will take on health and economy in the developing world, from hundreds of millions of children out of school to broken global supply chains, will have dire implications for leading economies as well, Yovav Gavish told The Times of Israel in a recent interview.

“People don’t understand today the magnitude of the economic crisis and it’s bigger than what people can think about,” Gavish said. “It’s going to be much more similar to the Great Depression and World War II than to the financial crisis.”

“This is going to affect everyone,” he said.

The world’s spotlight has been trained on the countries that were first hit hard by the outbreak — China, Italy, Spain, the US — while the contagion has been slower to make inroads into poorer nations.

The reasons for the delay are not completely understood, but might relate to less travel into, and within, developing countries, as well as warmer seasonal weather in the southern hemisphere, which could hamper the virus’s spread. Less testing and weaker medical infrastructure could also simply mask the outbreak’s extent.

The Alexandra township of Johannesburg, South Africa, April 15, 2020. (AP/Jerome Delay)

The virus appears to have secured a beachhead in all of the developing world, however, with confirmed cases in nearly every country in sub-Saharan Africa, which will likely be the hardest-hit of the regions.

The pandemic’s spread and its ramifications will all be more pronounced in developing areas, said Gavish, who holds a board position with the bank, where he deals with international projects and handles bank issues related to Israel, including investments and international cooperative efforts.

Yovav Gavish, Israel’s representative to the World Bank. (Courtesy)

The bank, founded in 1944, counts 189 countries as members and seeks to alleviate extreme poverty, among other goals, by providing financial assistance to poorer countries.

“Think about a refugee camp in Djibouti. How are you going to practice social distancing? It’s impossible. Everything related to the pandemic is much worse,” he said.

The health and social effects of the virus on countries are already clear.

Advanced health systems, such as Italy and Spain, have been overwhelmed, and poorer countries’ medical infrastructure will be less able to cope with the crisis. The UN on Friday said that under a best-case scenario, Africa would likely see 300,000 virus deaths this year. Without intervention, the toll could reach 3.3 million. The continent recorded its first 1,000 deaths on Friday.

Some 1.7 billion children were out of school by mid-March, according to the World Bank, with students in poorer areas lacking access to computers and remote learning technology, which will likely have a long-lasting impact.

Children wait to receive free food distributed in a slum during a virus lockdown in Mumbai, India, April 18, 2020. (AP/Rajanish Kakade)

The UN report also warned of severe economic pain across Africa amid the pandemic, with growth contracting 2.6 percent in the worst-case scenario and an estimated 27 million people pushed into extreme poverty. The World Bank has said sub-Saharan Africa could fall into its first recession in a quarter-century.

Globally, the International Monetary Fund predicted last week that the “Great Lockdown” would cause GDP to contract by negative three percent, making the crisis the worst recession since the Great Depression. The organization estimated the crisis could cause a cumulative global loss of $9 trillion, with the GDP of advanced companies falling by -6.1 percent, and the developing world, which normally has higher growth levels, contracting by one percent, and by -2.2% without China.

The IMF said both advanced and emerging economies would partially recover in 2021.

The World Bank defines a country as low income if it has a gross national per capita income of under $1,025, and lower middle-income is under $3,995. Thirty-one countries are designated as low-income economies, and 47 are considered lower-middle income.

Developing economies will be less able to shoulder the economic burden of the crisis, said Gavish, who worked at Israel’s Finance Ministry in 2010 before moving to Washington, DC, to work at the World Bank in 2018.

“You see here all the big packages in the US, in Europe, Australia, Israel, everywhere, but in the developing world these countries cannot just increase their debt levels. Their debt levels are already very high,” Gavish said.

A Cuban doctor conducts a medical screening in a slum in Caracas, Venezuela, April 17, 2020. (AP/Ariana Cubillos)

The International Monetary fund said in February that 44% of developing countries were in debt distress or had high debt-related risk. The World Bank’s hefty $160 billion economic aid package for developing countries is a trifle next to the US stimulus of $2.2 trillion.

Many developing economies have already been hit by falling commodity and oil prices due to decreased demand amid the economic downturn and an oil price war between Russia and Saudi Arabia, which has been resolved.

“In Africa, you take Angola or Nigeria, or central Asia — Azerbaijan and other countries — most of their GDP is oil. Other countries like Congo, DRC, Ghana, many African countries, it’s commodities, and you see a huge decrease in commodity prices,” Gavish said.

The US crude benchmark WTI has seen staggering declines since the start of the crisis, with prices per barrel falling to -37.63 on Monday, meaning the supply glut has forced traders to pay others to take crude off their hands.

The loss of remittances will be a severe blow to some areas as migrant workers employed in service sectors lose work. Global remittances reached $706 billion in 2019 and for 66 countries the payments amount to over five percent of GDP and can exceed 20%. For Haiti, remittances in 2019  were 34.3% of GDP, for Nepal, 29.9%, according to the World Bank.

Some of the leading countries for remittance-senders, including the US, France and Italy, have been hit hard by the crisis, with service sector jobs often among the first to go. Many of the workers employed in hotels, restaurants and salons, for example, do not have government support, and cannot return to their home countries.

For those who retain their jobs, sending cash home is a challenge during lockdowns due to mobility restrictions and closed offices.

In other developing countries, the informal economy is crucial, especially in Africa. A farmer selling crops at an open air market does not have  health benefits or a savings program provided by an employer.

“The informality is a big amplifier of these challenges, so if I’m employed informally, I don’t have a social safety net, I don’t have medical services,” Gavish said.

A street trader sells cabbages by the side of the road after the government ordered the closure of the main open air market in the Mathare slum of Nairobi, Kenya, March 24, 2020. (AP/Brian Inganga)

The currencies of some developing economies have taken a hit due to the crisis, including the Brazil’s real, Mexico’s peso, and South Africa’s rand, which have declined 20% against the dollar since the start of the crisis.

The reason for the decline is that risk-averse investors are seeking safe havens, including safer currencies, mostly dollars and euros, leading to an outflow of capital from the developing world.

Most countries’ foreign debt is nominated in dollars, since as a safer currency, it is more attractive to investors. As the local currency weakens, the government debts increase.

“Let’s take Mexico. The government has external debt that they owe that is nominated in dollar terms. Their currency is weakening against the dollar which makes their debt more,” Gavish said. “It’s very significant. If you have a 20% increase in debt that is dollar denominated, that has a huge impact.”

Compounding the problem is developing countries’ limited access to financial markets, especially during the crisis.

Day laborers and informal workers who usually eke a living in Peru’s capital are blocked from returning home by a cordon of police on the outskirts of Lima, Peru, April 17, 2020. (AP/Martin Mejia)

Why should all this matter to citizens of developed countries, many of whom are beset by their own virus-related woes?

Deteriorating economic conditions in the developing world will likely spur waves of immigration to stronger economies in the US and Europe, even as those countries struggle to cope with the health and economic fallout from the virus.

The disease could linger longer in poorer countries, and itself migrate between the northern and southern hemispheres as the seasons change, which happens already with the flu.

Developing countries will likely start defaulting on debts, and global supply chains will be further damaged. Several hundred million people will likely join the ranks of the global poor, according to the World Bank.

The bank worries that decades of development could be lost due to the pandemic.

The bank last month said it was fast-tracking $14 billion in funding to developing countries. Normally, projects require months or years of review before gaining approval, but now dozens of initiatives worldwide are being approved within two months, Gavish said.

For the second phase of the recovery, the bank announced $160 billion in grants that will be doled out over the next 15 months. Roughly two-thirds will go to the public sector, and the remaining third to private enterprises, especially areas hit hardest by the virus including tourism and agriculture.

The bank has also called for a moratorium on debt for developing countries to free up resources for their response to COVID-19.

The UN on Friday said under a best-case scenario, Africa would require $44 billion for virus testing, personal protective equipment and treatment. The worst-case scenario would cost $446 billion.

The virus has infected over 2.4 million and killed over 166,000, according to Johns Hopkins University. Over half of humanity — some 4.5 billion people — is under some form of lockdown.

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