COVID-19 Makes the Case for Private Sector Reform

The World Bank Group (WBG) has released its ritualistic report on global economic prospects recently. Broadly, it talks about the continued effect of COVID-19 and the resulting growth prospects that are projected to be less than encouraging. A number of economists had predicted a “V” shaped recovery in the immediate future; the Group’s report does not indicate this.

Global output is expected to expand by four percent in 2021. These projections are below the pre-pandemic growth figures. Developing economies (EMDEs) are expected to perform below their historical growth figures. A frightening analysis is a 90pc fall in the growth rate of per capita income in their economies, resulting in mass poverty.

There is no doubt that the pandemic has re-drawn the economic exigencies. Policymakers the world over are grappling with resource shortages. The WBG insists on investment in human capital as the key to the revival of developing economies. However, the statistical data reported shows that fiscal expansion through structural reforms is a better option that will indirectly expand human capital investment.

Let us accept that the pandemic is here to stay for at least a year. Rich countries are easily winning the vaccine race in their attempt to arrest the spread of the virus. Developing countries like China and India, on the other hand, have embarked upon the development of low-cost vaccines and other conventional methods. Both strategies have their virtues. Still, the whole exercise puts pressure on resource mobilisation and public spending.

What is the prescription for sustainable growth?

Several African countries have moved from least developed country rankings to emerging and developing economies classification. This very change is putting huge pressure on public spending, resource mobilisation and private investment.

This is in contrast to the economies of the likes of India, Singapore and South Korea that need little or no support from the public sector except sound fiscal policies, because a large part of growth and investment activities are spearheaded by the private sector. The formal services sector in these countries contributes above 50pc to their economies. Informal labour is also well directed and productive to contribute as micro, small and medium enterprises.

These fundamental issues are missing in Africa’s emerging economies. The early 2010s saw a massive increase in public debt and the creation of unproductive assets. It meant lower credit ratings that led the IMF and other multilateral institutions to tighten debt screws. These governments were grudgingly forced to explore hybrid pathways like public-private partnerships (PPP), which do not have a proven record on the continent. Neither were reforms in the service sectors very much on the agenda.