Radar | Dec 21,2019
Feb 6 , 2021
By Andrés Velasco
A tsunami watcher’s job is thankless. If an earthquake hits Australia or an underwater volcano erupts near Java, naval stations in Japan, Vietnam, the Philippines, New Zealand, and even far-away Peru and Chile go on alert. Residents of coastal areas are warned that a big wave may be coming. Get it right, and tsunami watchers save millions of lives; get it wrong, and they try to ignore the scorn, knowing that next time may be the big one.
In 2020, the COVID-19 tsunami was expected to devastate poor and middle-income countries everywhere. The wave did come, and its consequences were painful, but less so than anticipated.
Contrary to most forecasts, rich Western Europe and North America have suffered much worse loss of life and economic damage. Former World Bank Chief Economist Pinelopi Koujianou Goldberg and Tristan Reed report a strong positive correlation between income per capita and deaths per million inhabitants. As of late January, deaths per million in the United Kingdom were twice as high as in South Africa, 13 times higher than in India, and approximately 30 times higher than in Bangladesh, Pakistan, Syria and The Gambia. The United States is little different.
Countries with more deaths have suffered larger declines in income. The much-feared trade-off between lives and incomes has failed to materialise; on the contrary, fewer deaths have meant greater economic activity, so per capita incomes dropped by more in richer countries.
As a result, the expected tsunami of increased global inequality did not arrive. Within countries income distribution in all likelihood became more skewed (restaurant workers and taxi drivers lost their jobs, while lawyers and bankers worked from the safety of their homes), but as the Nobel laureate economist Angus Deaton has shown, the gap between rich and poor countries actually narrowed.
No one is sure why poorer countries have suffered proportionally fewer infections and deaths: weaker health systems, worse nutrition, and larger numbers of people with pre-existing medical conditions suggested the opposite outcome. Some early assessments point to the alleged advantage of warmer weather, but there is little evidence of that. Having younger populations is thought to help, yet that explanation does not explain why health outcomes diverged in countries with similar age distributions (India and Bangladesh, for example, or Nigeria and Zimbabwe).
Aging populations may help explain Latin America’s dismal performance. Peru, Mexico, Brazil, Argentina, Panama and Colombia all have death rates above 1,000 per million inhabitants – among the highest in the world. Snobby Latin Americans who long thought of themselves as misplaced Europeans had their wish fulfilled: the region now resembles Europe not just demographically (particularly in South America), but also in its appalling inability to control the pandemic.
Therefore, who are the heroes of this tale?
Not the International Monetary Fund and the other multilateral lenders, which once again offered too little, too late. The quarter of a trillion dollars lent by the IMF represents just a quarter of its lending capacity and a pittance compared to what countries needed and to what rich countries spent on pandemic relief for themselves. And former US President Donald Trump’s administration vetoed an expansion of the IMF’s reserve assets, special drawing rights, which would have allowed poorer countries to borrow more.
China, the only major economy to record positive growth last year, has propped up demand (and prices) for developing countries’ commodity exports, bolstering these countries’ finances. But China’s role is secondary compared to what the world’s major central banks accomplished.
We knew from the 2008 global financial crisis that keeping interest rates low for long is a powerful tool for recovery. Plus, this time around, investors’ search for yield has caused the newly printed money to percolate to remote corners of the world. Markets did experience a tantrum in March and April 2020, withdrawing unprecedented quantities of funds from emerging and frontier economies. But the outflows soon ceased (and sometimes were reversed). Investors had nowhere else to go.
This set the stage for the real paladins of this tale: the macroeconomic authorities in many emerging and developing countries. A dozen years ago, few had the monetary and fiscal space to mount a robust response to the crisis. During the COVID-19 episode, by contrast, central banks and finance ministries took advantage of ultra-low world interest rates and created policy space where none was thought to exist.
Central bankers in countries like Chile, Colombia, Hungary, India, the Philippines, Poland and Thailand engaged not just in interest-rate cutting but also in quantitative easing and local-currency asset purchases – not as large as those carried out by their rich-country counterparts, but large enough to make a difference, reducing funding costs and easing market strains. The prevalence of flexible exchange rates also helped, allowing the local currency to depreciate when adjustment to external shocks required it.
The fiscal response has been much more robust as well. The October 2020 IMF Fiscal Monitor reports that in Brazil, Chile, Peru, Poland, South Africa and Thailand, measures involving additional spending and forgone revenue reached more than five percent of GDP. Other countries mounting a sizeable fiscal effort include Argentina, Bulgaria, Colombia, China, Indonesia and Romania.
The 2020 economic contraction in the non-rich world will end up being much smaller than was once feared. In the January 2021 update to its World Economic Outlook, the IMF estimates that the GDP drop was nearly five percent in advanced economies, and only half of that in emerging and developing economies, where the 2021 recovery will be faster as well. Even in Latin America, where public-health conditions and lockdowns help explain a whopping 7.4pc contraction in output, the number is less dismal than the 10pc drop expected just a few months ago.
How long can this last, and how fragile will the underlying macroeconomic situation turn out to be?
Consider Brazil. The good news is that a vigorous fiscal and monetary response has contained the recession and job destruction. The bad news is that public debt will soon reach 100pc of GDP.
Debt has already hit that level in the US and UK, but the yield curve in those countries is flat, allowing governments to borrow at record-low rates for long maturities. In Brazil, by contrast, the yield curve is one of the world’s steepest, pushing the government into borrowing at ever-shorter maturities. Granted, Brazil’s debt is mostly in domestic currency. Still, conditions are building toward a run on Brazilian debt.
No one can be sure whether such a panic will occur. But more than a few tsunami watchers are again sounding the alarm – and not just in Brazil.
PUBLISHED ON Feb 06,2021 [ VOL 21 , NO 1084]
Radar | Dec 21,2019
Fortune News | Jun 19,2021
Agenda | Jan 07,2022
Commentaries | Nov 18,2023
Radar | Nov 20,2021
Radar | Mar 05,2022
Fortune News | Jan 01,2023
My Opinion | Jul 09,2022
Advertorials | Dec 06,2023
Commentaries | Apr 30,2021
Photo Gallery | 83039 Views | May 06,2019
Photo Gallery | 75194 Views | Apr 26,2019
Fineline | 58713 Views | Oct 03,2020
Fortune News | 58480 Views | Jul 18,2020
Commentaries | Dec 02,2023
Life Matters |
My Opinion | Dec 02,2023
Sunday with Eden | Dec 02,2023
Agenda | Dec 02,2023
Editorial | Dec 02,2023
Dec 24 , 2022
Biniam Mikru heads the department of cabinet affairs under Mayor Adanech Abiebie. But...
Jul 2 , 2022 . By RUTH TAYE
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activ...
Nov 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
Nov 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
Leaders of the National Election Board are in a charm offensive mood, of a sort. Last week, they organised a rare tour for members of the me...
When the country's most senior diplomats and envoys return back to their posts after two-week debriefings, they leave behind a point or two...
Dec 2 , 2023
The symphony of traffic noise in Addis Abeba is not just a sign of life, but a siren...
Nov 25 , 2023
Ethiopia's quest to develop a functioning capital market is a demanding yet not unach...
Nov 18 , 2023
Prime Minister Abiy Ahmed (PhD) has made a fervent call for landlocked Ethiopia to ga...
Nov 11 , 2023
In November last year, a ray of hope pierced the gloomy skies of Ethiopia as the Pret...
I have a love-hate relationship with my phone. It is my go to source for information. I enjoy interacting with text messages and browsing t...
Over the weekend, I attended a wedding where my husband was one of the protocols. Despite the typical joy...
Dec 2 , 2023 . By MUNIR SHEMSU
Mamo Mihretu, the governor of the National Bank of Ethiopia (NBE), has outlined a com...
Dec 2 , 2023 . By AKSAH ITALO
BGI Ethiopia, one of the largest brewing companies, is in the throes of a major trans...
Minister of Agriculture, Girma Amentie (PhD), is leading a charge to overhaul the fer...
Dec 2 , 2023 . By AKSAH ITALO
Amidst accession to a cross-regional trade, one of the oldest industries is strugglin...
Or see contact page