Research & Policy Briefs From the World Bank Malaysia Hub No. 38 September 7, 2020 Recovery from the Pandemic Crisis: Balancing Short-Term and Long-Term Concerns Norman V. Loayza, Apurva Sanghi, Nurlina Shaharuddin, and Lucie Wuester The COVID-19 pandemic crisis combines the worst characteristics of previous crises. It features a simultaneous supply and demand shock; domestic, regional, and global scope; a projected long duration; and a high degree of uncertainty. What can be expected for recovery from the pandemic crisis across the world? This brief first assesses the projections of economic activity in 2020 and 2021 and the domestic and international conditions that will constrain and drive a possible recovery. It then discusses the potential shapes of the recovery (or lack thereof) for specific country conditions. Finally, it explores the need to balance short-term and long-term concerns, arguing in favor of policies that focus on sustained recovery, rather than quick but debt-fueled and short-lived gains. Drawing on the lessons from past crises, the brief concludes that sustained economic recovery is possible only when the underlying causes are addressed and the foundations of growth are protected. For the pandemic crisis, this implies mitigating the spread of the disease to manageable levels while keeping the economy sufficiently active. In the short term, economic policy should focus on preventing further poverty, averting unnecessary business closures, and avoiding lasting damage to human capital and productivity. In the long term, policy reform should address the structural vulnerabilities that the pandemic crisis has exposed. This includes reforms to expand labor and business formalization; to improve the coverage and adequacy of social protection; to extend financial inclusion to elderly, rural, and poor people; to promote digital transformation across society; and, most basically, to improve access to and quality of public health care. A Crisis Like No Other In this context, what can be expected for recovery from the pandemic crisis across the world? The magnitude and persistence The COVID-19 pandemic crisis shares some similarities with other of the economic downturn and the shape of the recovery will crises such as those stemming from natural hazards, wars, depend on smart public health policies to mitigate the pandemic, macroeconomic mismanagement, and international financial economic policy responses to support households and businesses meltdowns (World Bank 2020a). However, this pandemic crisis during the crisis, and the discovery and delivery of an effective arguably combines the worst features of all these crises. One way to vaccine or treatment. This brief first presents the projections on see this is by assessing the shocks that different crises create. Table economic activity in 2020 and 2021 and the facts that will likely 1 presents a taxonomy of crises and associated shocks, with the constrain and drive a possible recovery. It then discusses the latter organized by their mechanism, scope, duration, and certainty. potential shapes of the recovery (or lack thereof) under various The COVID-19 pandemic combines a simultaneous supply and conditions. Finally, it explores the need to balance short- and demand shock; domestic, regional, and global scope; a projected long-term concerns, arguing in favor of policies that focus on long duration; and a high degree of uncertainty. According to Global achieving resilience for sustained recovery. Economic Prospects, it is “the most adverse peacetime shock in over a century” (World Bank 2020a). Growth Projections: Rebound May Not Be Recovery Growth impacts and perceived uncertainty are two indicators of The pandemic crisis is affecting virtually all countries, though with crisis severity. The current crisis is expected to bring about the largest substantial differences across them. A comparison with the most contraction in global GDP per capita since World War II. In addition, it similar worldwide economic event in recent history, the 2009 global has the highest share of economies experiencing a recession in financial crisis, is striking—although that earlier crisis was lower in modern times (figure 1). Moreover, the pandemic is associated with magnitude and different in origin. Figures 3 and 4 compare the extraordinary uncertainty (Altig et al. 2020). The World Uncertainty global, regional, and national patterns of decline and recovery for Index shows that the level of uncertainty associated with COVID-19 the 2009 global financial crisis and what is expected for the 2020 exceeds that of any other crisis experienced since at least 1960 pandemic crisis. A look at global and regional averages (figure 3) (figure 2) (Ahir, Bloom, and Furceri 2018). reveals several disturbing observations. First, the decline in global Table 1. A Taxonomy of Crises and Associated Shocks Ranked by Severity and Uncertainty Characteristics of shocks Mechanism Scope Duration Certainty Types of crises Supply Demand Domestic/ Global Short Long Uncertain Very Regional Uncertain Pandemics X X X X X X Wars X X X X X Macroeconomic X X X X mismanagement (e.g. hyperinflation) International financial crises X X X X Natural hazards X X X X Source: Authors’ formulation. Affiliations: Norman Loayza and Nurlina Shaharuddin, Development Research Group, World Bank; Apurva Sanghi and Lucie Wuester, Macroeconomics, Trade, and Investment Global Practice, World Bank. Acknowledgements: Valuable comments, insights, and suggestions were provided from Ergys Islamaj, Young Eun Kim, and Aaditya Mattoo. Very competent research assistance by Izzati Ab Razak is gratefully acknowledged. Nancy Morrison provided excellent editorial assistance. Objective and disclaimer: Research & Policy Briefs synthesize existing research and data to shed light on a useful and interesting question for policy debate. Research & Policy Briefs carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent. Recovery from the Pandemic Crisis: Balancing Short-Term and Long-Term Concerns Figure 1. Crisis Severity and Growth Contractions, 1871–2020 The COVID-19 pandemic has the highest share of economies experiencing a recession in modern times and is expected to bring about the largest contraction in global GDP per capita since World War II. 100 -8 Post WWI & COVID-19 Depression The Great WWII Financial disruption, Depression exchange rate crisis -7 and end of Cold War GDP per capita growth contraction, percent (red) 80 Monetary Global Economies in recession, percent (blue) and fiscal -6 Oil price shock, global financial tightening inflation, monetary crisis Bank policy & Latin America -5 60 panic debt crisis -4 Oil price 40 shock -3 -2 20 -1 0 0 1876 1885 1893 1908 1914 1917-21 1930-32 1938 1945-46 1975 1982 1991 2009 2020 Source: Authors’ adaptation from World Bank 2020a. Data from Bolt et al. 2018; Kose, Sugawara, and Terrones 2019, 2020. Note: 2020 uses forecast data. Grey shaded areas refer to global recessions. Sample includes 183 economies, though the sample size varies significantly by year. For crises that last for more than a year, the annualized average of the cumulative contraction of GDP per capita growth during the crisis is used. GDP growth projected for 2020 is three times worse than the the pandemic and the ability of countries to manage the crisis corresponding decline in 2009. Second, whereas in 2009, three remains to be seen. Naturally, there are important differences large regions (East Asia and Pacific, South Asia, and Sub-Saharan across countries and regions. Advanced countries’ growth rates are Africa) experienced little change or even an increase in GDP growth, expected to drop the most in 2020 and expand the most in 2021, all regions around the world will experience a contraction in possibly because of the resilience of their economies and their economic growth in 2020. Third, regarding recovery, after the global capacity to secure a vaccine as soon as it is available. Developing financial crisis ended, a large increase in global and regional GDP countries that suffered large contractions in 2020 but have strong growth occurred right away (in 2010), with only advanced countries fundamentals are projected to recover more strongly. Other experiencing a sluggish bounce-back. In contrast, the recovery for countries suffering from structural problems, declining growth 2021 is projected to be much less strong, with most regions and rates, or whose capacity to recover from a deep recession is countries regaining only a fraction of what had been lost during doubtful are expected to have a weak recovery or a further 2020. Fourth, focusing on the projected recovery during 2021, there contraction in 2021. Nevertheless, for nearly all countries, the are significant differences across countries and regions: East Asia bounce back in 2021 is expected to match only a fraction of the and Pacific is projected to be the best performing region in terms of decline in 2020 (as indicated by figure 3). absolute growth. Countries in this region as well as in Sub-Saharan Africa are expected to regain most of the losses incurred during the Early evidence on recovery based on community mobility crisis. On the other hand, although they are expected to grow data—Europe leads the pack. Exploring economic activity during during 2021, advanced countries and developing countries in the crisis is difficult because of limited production or income data Europe and Central Asia, Latin America and the Caribbean, Middle available across countries at monthly or even quarterly frequencies. East and North Africa, and South Asia are estimated to regain only a Real-time data (from cell-phone location and mobility patterns) can fraction of the losses they incurred in 2020. proxy some economic activity, but with caveats (The Economist 2020a). Figure 5 shows an index based on the Google COVID-19 Focusing on cross-country data (figure 4), one striking Community Mobility Report 2020, comparing mobility at the observation is the contrast in the correlations of the growth rates beginning of August 2020 with mobility in mid-April 2020 (during the year of the crisis and one year later. In the context of the global peak lockdowns), both relative to mobility during January and early financial crisis, countries that grew the most the year of the crisis February and adjusting for variation in temperature differences tended to grow more the year after, rendering a positive correlation across countries. Some observations arise. Although mobility picked in growth rates. The opposite is expected to happen in the up in late (Northern Hemisphere) summer, there is wide diversity pandemic crisis: countries that experienced a larger contraction in across countries. European countries have moved faster than the 2020 are projected to have larger expansions during 2021. Whether rest in recovering some of their pre-crisis mobility. They have been 2 these projections reflect excessive optimism on the resolution of joined by some countries from other regions that have dealt well Research & Policy Brief No.38 Figure 2. Crisis Severity and Global Uncertainty, 1959–2020 Global uncertainty has peaked with the coronavirus pandemic. 60,000 COVID-19 World Uncertainty Index US-China trade tensions, US recession and Brexit and political upcoming elections in tensions the US US presidential elections 50,000 International US fiscal cliff and sovereign debt Assasination of monetary crisis in Europe Brexit President John crisis Kennedy Sovereign debt crisis in 40,000 Weak prospects for the Europe global economy and exports Iraq war and Vietnam War outbreak of SARS Global financial 30,000 Gold US recession Black crisis crisis Monday and 9/11 OPEC I OPEC II Gulf 20,000 War I 10,000 FED tightening and political risk in Greece and Ukraine Uncertainty related to the US economy and UK joining the EEC 0 1959 1974 1989 2004 2020 Source: Reproduced from Ahir, Bloom, and Furceri 2018. with or have been relatively less affected by the pandemic, such as The negative external shock, exacerbated by other shocks, will Malaysia, South Africa, and Sri Lanka. Other countries with less linger for the foreseeable future. The global response to the successful strategies have remained constrained in their mobility, pandemic has been and is likely to remain chaotic and such as Bolivia, India, Panama, and Peru. Mobility restrictions uncoordinated, with cycles of outbreaks and lockdowns, until a increased from April to August in a few economies, notably Hong vaccine or effective treatment is made available. With the Kong SAR, China; and Tajikistan. continued threat posed by the pandemic, it is very likely that international borders will remain restricted and global economic The Inescapable Facts activity will stay low and volatile. This implies that negative external shocks will persist in the near future, affecting even countries that Certain inescapable realities constrain a rapid recovery from the are able to reduce the public health risk posed by COVID-19. Box 1 pandemic and will eventually drive the shape of the recovery. The provides a summary of the various external shocks facing countries following section outlines three key facts. around the world. The adverse external situation is aggravated by the ongoing and worsening trade and technological disputes Public health concerns will remain paramount. The rate of between China and the United States. Global coordination and infection has grown exponentially and remains out of control in cooperation could greatly reduce the human and economic cost many countries around the world. Map 1 presents a graphic implied by the pandemic by providing financial support to representation of the status of the pandemic and related responses governments in need, facilitating trade and capital flows, and across countries. Whether by regulations or self-constraint, developing and deploying a COVID-19 vaccine (Athey, Hoyt, and economic activity will remain depressed as long as the threat of the Kremer 2020; OECD 2020a). The latter benefit is worth disease is present, particularly where infections are rampant and underscoring: even when an effective vaccine is discovered, the health care systems are overwhelmed. Voluntary distancing, logistical and political challenges of securing and administering it at predominantly in high-income countries, seems to have taken place scale in the developing world could delay the recovery and should in the absence of containment regulations, implying that the effect not be underestimated (IMF 2020a; World Bank 2020a; WHO 2020). on economic activity will persist in the absence of a credible reduction in public health risks (Demirgüç-Kunt, Lokshin, and Torre Pre-existing conditions matter. On the domestic front, countries 2020; Maloney and Taskin 2020). Smart mitigation with favorable demographic profiles and those able to implement strategies—targeted quarantines, testing, tracing, and sustainable measures to deal with the pandemic will fare better on isolation—can in principle minimize losses of both human lives and health and economic dimensions (see map 1). Developing countries the economy (Acemoglu et al. 2020; Loayza 2020). However, many will have to navigate the crisis with lower health care capacities, governments have been unable or unwilling to implement them at larger informal sectors, smaller scope for home-based work, and scale, resorting to indiscriminate lockdowns of questionable efficacy dwindling fiscal space (Hevia and Neumayer 2020; Loayza and and high cost, especially in developing countries. Pennings 2020). 3 Recovery from the Pandemic Crisis: Balancing Short-Term and Long-Term Concerns Figure 3. Comparing the Decline and Recovery in GDP Growth for the 2009 Global Financial Crisis and the 2020 Pandemic Crisis The decline in global GDP growth is much worse than the corresponding decline in 2009 and affects all regions, not just some. Recovery is projected to be much less strong and take much longer, and to vary considerably by region. 2009 global financial crisis a. World and regional output growth b. Extent of national recovery worldwide and by region 100 Percent of countries by degree of recovery 12 11.43 90 24.14 5.71 25.71 10 80 37.79 8 50.00 22.86 6.90 57.15 70 60.00 GDP growth, percent 11.43 6 13.79 72.73 60 5.81 11.43 4 50 15.12 5.00 2 40 22.86 7.14 37.93 0 51.43 20.00 30 27.91 3.03 -2 21.43 20 40.00 -4 20.00 28.57 18.18 10 17.24 7.14 13.37 -6 8.57 5.00 7.14 6.06 World Advanced East Asia & Europe & Latin America Middle East & South Asia Sub-Saharan 0 Pacific Central Asia & Caribbean North Africa Africa World Advanced East Asia & Europe & Latin America Middle East & South Asia Sub-Saharan Pacific Central Asia & Caribbean North Africa Africa Preceding 5-year average Global recession Year after global recession <0 0-<50% 50%-75% >75%-100% >100% 2020 COVID-19 pandemic crisis c. World and regional output growth d. Extent of national recovery worldwide and by region 100 2.86 8.00 Percent of countries by degree of recovery 14.75 12.50 12.50 8 90 21.87 8.00 29.17 6.25 6 80 14.21 6.25 37.21 4 70 60.00 GDP growth, percent 25.00 2 60 25.00 48.00 30.06 20.93 0 50 75.00 -2 40 68.75 20.83 16.28 30 -4 53.13 37.70 20 37.14 36.00 -6 20.83 18.60 10 -8 12.50 6.98 World Advanced East Asia & Europe & Latin America Middle East & South Asia Sub-Saharan 3.28 4.17 6.25 Pacific Central Asia & Caribbean North Africa Africa 0 World Advanced East Asia & Europe & Latin America Middle East & South Asia Sub-Saharan Pacific Central Asia & Caribbean North Africa Africa Preceding 5-year average Global recession Year after global recession <0 0-<50% 50%-75% >75%-100% >100% Source: World Bank 2020a; World Bank 2020g World Development Indicators; IMF 2020a, 2020d. Note: “Advanced” represents countries that are advanced economies based on IMF grouping. Regions follow the World Bank classification excluding advanced economies. Growth data in 2020 and 2021 are projections from World Bank (2020a). Countries that were not featured in the report use projections data from IMF (2020a, 2020d). For panels a and c, regional aggregates are weighted averages using GDP in constant 2010 US dollars. Panels b and d include only those countries that experience a decline in GDP growth from the preceding five-year average. <0 shows the percentage of economies that experience negative growth after the corresponding recession year. 0–50% shows the percentage of economies that recovered less than half of the losses they incurred in the contraction in the recession year. 50%–75% and <75%–100% show the percentage of economies that recovered 50% to 75%, and more than 75% to 100%, of losses they incurred in the contraction in the recession year, respectively. >100% shows the percentage of economies that recovered more than 100% of the losses they incurred in the contraction during the recession. On the external front, countries that depend more on reduction in travel and transport, with international arrivals international merchandise and services trade and financial flows estimated at 3 percent of 2019 levels (World Bank 2020d). Globally, will be more affected by the global dimension of the crisis (see box the loss in tourism receipts is estimated to amount to 1.5 percent to 1). Against the backdrop of subdued trade performance in 2019, the 4.2 percent of GDP, with countries such as Jamaica and Thailand sharp downturn of trade caused by the COVID-19 crisis will hit those losing about 10 percent in the most optimistic scenario (UNCTAD countries with disrupted global value chains and with high 2020). Developing countries involved in global value chains may dependence on a limited range of products and markets especially experience a lasting decline in participation as advanced countries hard. This group includes most developing countries, many of which reshore and source internally, posing a risk of early will also suffer the brunt of plummeting revenues from tourism and deindustrialization (UNIDO 2020). Commodity exporters have seen remittances (Bossone and Natarajan 2020; Monahov 2020; UNCTAD prices falling to record lows, further eroding their fiscal positions, 2020; World Bank 2020b, 2020c; WTO 2020b). Services trade external balances, and foreign exchange buffers (UN DESA 2020). 4 continued to decline globally in April and May 2020, driven by the For oil exporters, having drawn on their buffers during the oil price Research & Policy Brief No.38 Figure 4. Comparing GDP Growth Contraction and Recovery for the Global Financial Crisis and the COVID-19 Pandemic Crisis Unlike after the global financial crisis, countries that experienced a larger contraction during the crisis are projected to have larger expansions the following year—but recovery is expected to be limited and vary widely by country. a. Global financial crisis, actual b. COVID-19 pandemic crisis, projected 10 10 Difference between GDP growth in 2010 and preceding Difference between GDP growth projections in 2021 and SGP GAB PRY TGO AFG PNG 5 TLS FRA GNQ LVA ALB preceding five-year average, percent COG NER YEM ITA SLE 5 TCD KEN LTU JPN THA ERI y=0.47x +1.55 GBR GRC CZE LSO TTO BWA SWE BRABFA ZMB GMB PER LBR EST DEU ECU five-year average, percent TUR MEX TCDDOM KOR GHA PSE LBN URY PRI AGO DEU URY t-stat(x)=10.57 ESP CAN DNK ARG MYS QAT GIN PHL IRN LKA BDIIND GNB MUS SWEBEL BRA TLS MDA CHLITAPER ISR ETH IDNLAO COD MLI NGA MWI CAF HRV PRT NZLNLD AUT MYS ARG TUN NERUKR BDI HKG SAU NAM BEL PRT NPL OMN SVN ZWE ZAF CHE HKG NAM GMB FIN NIC GBRDNKCHE USA FRA DZA 0 MUS CIV BWA PSE SVK USA RUS QAT CIV AZE CRI SLV SWZ SLE LBR TZA VNM BOL UZB ISR KGZ SLVNOR AUS JPN JAM PRY BEN -30 -20 -10CAN AUTCOL CMR PRI NZL CHNBGD EGY 0 10 CYP MEX XKX TUR FINCOL KWT MKD KAZ SEN MAR MOZ CHLSAU SRB UZB BLR SVK GEO HUN LBY IRL NLD TKM TJK GTMPOL AUS GTM MDAMRT GIN MNG SWZ UKR BLR ZAF MKD NOR RWA ECU TUN XKX BEN ROU BGR HUN THA MAR ARM BIH CHNKOR NGA MMR VNM MWI RUS MNG HND CYP BHR ALB HND GEO PHLCRI SGP JOR IDNHTIBFA 0 ESP JAM MMR UGA DZA NIC PAN KENCAF MOZ EST SVN CZE PAN MRT LSO -20 -15 -10 KHM BHR KAZ COG MDG OMN PNG -5RWA ZMB TZA 0 5 TTO CMR KHM PAK HTI POL AFG COD TGO UGA ARE IRQ BOL ARE SDN LAO MLI MDG BIH -5 LTU JOR GNB TKM SEN GHA EGY HRV SRB CUB IRN NPL BGR KGZ IRL TJK y=-0.54 -2.19 IND DOM AGO LKA t-stat(x) = -9.71 IRQ ETH SDN PAK ARM GRC LBN GAB -5 KWT -10 BGD VEN LVA ROU AZE -15 -10 Difference between GDP growth in 2009 and preceding Difference between GDP growth projections in 2020 and preceding five-year average, percent five-year average, percent Advanced East Asia and Pacific Europe and Central Asia Sub-Saharan Africa Latin America and Caribbean Middle East and North Africa South Asia Source: World Bank 2020a, World Bank 2020g World Development Indicators; IMF 2020a, 2020d. Note: “Advanced” represents countries that are advanced economies based on IMF grouping. Regions follow the World Bank classification excluding advanced economies. Data labels use the International Organization for Standardization (ISO) country codes. Growth data in 2020 and 2021 are projections from World Bank (2020a). Countries that were not featured in the report use projections data from IMF (2020a, 2020d). Being above (below) the 45-degree line (gray) indicates that the difference of growth and the average of the preceding five years improved (worsened) in 2010 and 2021. The red line represents the linear trendline. plunge in 2014–16, the current crisis hits them when they are Reinhart and Rogoff 2014). It may, however, be a common feature of especially weak (Wheeler et al. 2020). the pandemic crisis, reflecting the risks associated with renewed outbreaks and an exceptionally volatile international situation. The Shape of Recovery: An Alphabet Soup of L, W, V, or U? Quick recovery (V): A quick, V-shaped recovery is in theory the best Although there is a great deal of uncertainty regarding when and scenario after a shock. It is, however, unlikely for most countries how economic recovery will take place for various countries, a basic because of the depth of the crisis (which has affected growth taxonomy of recovery patterns may be instructive. The type of fundamentals) and the high degree of uncertainty surrounding the recovery will depend on how severely countries have been hit by crisis. This is true even if a vaccine becomes available in early 2021. the pandemic and the external shock and on the policy responses Moreover, attempting a quick recovery by opening without proper that governments are deploying (macroeconomic, financial, and public health measures in place and by pumping government social protection policies). Although the following taxonomy is a stimulus packages where fiscal multipliers are low can be conceptual exercise, it is based on the lessons from previous crises counterproductive (Loayza and Pennings 2020). Evidence indicates (see box 2) adapted and applied to the characteristics of the current a disconnect between expectations in the financial market and pandemic crisis. patterns in the global economy, whereby the former suggests a V-shaped recovery while indicators for the latter portend a Lack of recovery (L): This is unfortunately possible for countries that deeper-than-expected downturn (IMF 2020a; World Bank 2020e). are not able to get the pandemic under control and that squander their public resources with failed attempts at mitigation and Gradual recovery (U): A gradual recovery may be the most recovery, allowing the pandemic crisis to morph into a pragmatic scenario for most countries in the next few years. It may macroeconomic, debt, and financial crises. In this case, the require a period of resilience, where smart public health measures COVID-19 crisis may have a permanent effect on GDP via lost are in place and economic activity resumes, albeit at a lower level, investment during and after the crisis, a loss of human capital, a and where vulnerable households are supported and excessive deterioration of fiscal capacity, and a slowdown in productivity destruction of firms is prevented. Recovery would occur based on growth (Sheiner and Yilla 2020). resilient fundamentals, at a pace driven by the resolution of the pandemic (vaccination or effective treatment) and the Volatile recovery (W): A volatile recovery may occur in countries normalization of global conditions (Furman 2020). that address public health concerns with strict but unsustainable measures, leading to a cycle of openings, outbreaks, and lockdowns. Box 3 applies this conceptual framework to data on the This may also happen to countries that, because of their structural evolution of the pandemic, the public policy response, and the characteristics, are very dependent on external conditions, which social and economic vulnerabilities in order to assess the possibility are likely to be volatile. A recovery with a double-dip recession has and shape of economic recovery for various countries and regions been relatively rare (Barthélemy, Binet, and Pentecôte 2020; around the world. 5 Recovery from the Pandemic Crisis: Balancing Short-Term and Long-Term Concerns Figure 5. Comparing Community Mobility between mid-April 2020 (Peak of Lockdowns) and Early August 2020 Mobility has increased in some economies, remained constrained in others, has been restricted even further in a few. Percent change in mobility relative to the baseline 60 Percent change in early August 2020 with respect to January - HRV February 2020, adjusting for temperature differences 40 DNK SWE GRC LVA 20 LTU FIN EST NLD POL TZA NOR FRA SVK CZE BFA CMR ZMB CIV DEU PNG BEN 0 NZL GHA -30 FJI TGO MOZ MNG -80 -70 -60 PRT -50 BGR -40 AGO HUN RUS -20 -10 0 NAM MLT UKR BLR MUS ITA MYS LUX MMR IRL NGA SVN GAB AUT URY THA KEN AUS NER YEM TTO ZAF CAN BEL BIHLAO BRA CHE MLI LKA GEO ZWE UGATUR RWA BWA PRY IDN KOR MKD ABW ISR GBR HTI NIC KHM ESP SRB ROU SGP BLZ MDA VEN USA GNB -20 JAM EGY VNM JPN ECU BRB BGD PRI QAT LBY JOR ARG NPLMAR ATG KAZ LBN MEX SEN CHL TJK DOM CRI CPV GTM PAK AFG HKG PER SAUPHL COL KGZ BHR -40 ARESLV IRQ BOL LIE IND HND PAN KWT OMN BHS -60 Percent change in mid-April 2020 with respect to January-February 2020, adjusting for temperature differences Advanced East Asia and Pacific Europe and Central Asia Sub-Saharan Africa Latin America and Caribbean Middle East and North Africa South Asia Source: Google 2020; Weather Underground 2020; The Weather Channel 2020. Note: “Advanced” represents countries that are advanced economies based on IMF grouping. Regions follow the World Bank classification excluding advanced economies. Data labels use the International Organization for Standardization (ISO) country codes. The percent change in mobility is the average daily percent change in movement taken over one week. The average is taken from April 15–21, 2020 (peak of lockdowns globally, based on Hale et al. (2020) stringency index) and August 1–7, 2020. The daily percent change is the average daily percent change across six different categories: retail and recreation; grocery and pharmacy; parks; transit stations; workplaces; and residential. All categories measure the percent change of total visitors, except for residential, which measures the percent change in duration in residential. For consistency, residential values were multiplied with -1. All percent changes are taken with respect to the baseline day, which is the median value from the five-week period, January 3–February 6, 2020, corresponding to the same day of the week. To adjust for variation in temperature differences across countries, the percent change in mobility in April/August is regressed on the difference between the average temperature in January and in April/August. The residuals from the regression are added with the constant and then plotted. Monthly average temperatures are taken from capital cities of each country, and data unavailable from Weather Underground are complemented with data from the Weather Channel. The dotted-line represents the 45-degree line; being above (below) the line indicates mobility has increased (decreased) from April to August. Beyond Quick Recovery, Long-term Resilience as a Goal Second, a pursuit of quick recovery can result in large fiscal deficits without a significant and steady increase in economic While a quick resumption of growth is everyone’s wish, a gradual activity. The debt overhang can be large. In severe cases, this can recovery may be a more sensible policy goal. This approach would lead to an unsustainable fiscal situation, resulting in debt and consider both the uncertainty of the pandemic crisis and the limits financial crises. Central banks and governments have quickly of what can be achieved by active government interventions. It ramped up large-scale monetary and fiscal measures in response to would set long-term resilience as its goal (Hammer and Hallegatte 2020). the economic downturn (World Bank 2020a). This is justified to the extent that it serves to prevent a collapse in household income, Why would the pursuit of a quick recovery be misguided? First, it widespread business closures, and mass unemployment. It is not can lead to repeated waves of the pandemic. Abandoning justified, however, to stimulate the economy while it is naturally containment and mitigation measures prematurely may lead to an constrained by the pandemic and mitigation policies (Loayza and initial upsurge in economic activity but at the cost of rising infection Pennings 2020). In this case, increased spending and reduced rates, as is happening in Australia, India, Mexico, and Spain (The revenues can exacerbate the fiscal risks posed by worsening Economist 2020b). This, in turn, raises the risks of a persistent macroeconomic conditions amidst plummeting commodity prices, recession (Acemoglu et al. 2020; Eichenbaum, Rebelo, and Trabandt currency depreciations, and widening sovereign spreads (IMF 2020). Hence, after implementing supply-restricting containment measures, the turn toward recovery needs to highlight the dual 2020b). Even as financial pressures are easing, risks of challenge posed by economic decline and the continued risk of unmanageable debt levels persist (Alberola et al. 2020; IMF 2020c; contagion. In order to preserve lives and livelihoods, the World Bank 2020e). Emerging market economies face greater combination of pragmatic and effective economic and public health vulnerabilities and more binding borrowing constraints, implying measures is crucial, in line with the realities and conditions in each painful postcrisis adjustments that can be exacerbated by a debt 6 country. overhang (Daly, Gedminas, and Grafe 2020; Kose et al. 2020). Research & Policy Brief No.38 Map 1. Evolution of the COVID-19 Pandemic and Public Health Policies around the World, July 10 - August 10, 2020 a. Confirmed infection rate, by quintile b. Case fatality rate, by quintile Confirmed infection rate Case fatality rate High High Medium High Medium High Medium Medium Medium Low IBRD 45283 | AUGUST 2020 Medium Low IBRD 45284 | AUGUST 2020 This map was produced by the Cartography Unit of the World Bank This map was produced by the Cartography Unit of the World Bank Low Group. The boundaries, colors, denominations and any other information Low Group. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of the World Bank Group, shown on this map do not imply, on the part of the World Bank Group, any judgment on the legal status of any territory, or any endorsement or any judgment on the legal status of any territory, or any endorsement or No data acceptance of such boundaries. No data acceptance of such boundaries. c. Testing, tracing, and isolating index d. Lockdown stringency index Testing, tracing Lockdown and isolating stringency High High Medium Medium Medium Low Medium Low IBRD 45287 | AUGUST 2020 IBRD 45286 | AUGUST 2020 Low This map was produced by the Cartography Unit of the World Bank Low This map was produced by the Cartography Unit of the World Bank Group. The boundaries, colors, denominations and any other information Group. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of the World Bank Group, shown on this map do not imply, on the part of the World Bank Group, No data any judgment on the legal status of any territory, or any endorsement or No data any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. acceptance of such boundaries. Source: Authors’ preparation. Data for panels a and b are from European Centre for Disease Prevention and Control 2020 (via Our World in Data by University of Oxford, https://ourworldindata.org/coronavirus-source-data, accessed on 12 August 2020); data for panels c and d are from Oxford COVID-19 Government Response Tracker 2020 (https://raw.githubusercontent.com/OxCGRT/covid-policy-tracker/master/data/OxCGRT_latest.csv, accessed on 27 August 2020). Note: Country-level data represent the corresponding average from July 10 to August 10, 2020. Lightest to darkest color represents lowest to highest quintile or category. Third, pursuing a quick resumption of growth may transform What does long-term resilience require? Long-term resilience and emergency measures into regular practice. While these measures sustained recovery require that the fundamentals of economic may have been necessary at the peak of the crisis, they are harmful growth remain solid, even during the crisis. This requires restoring or risky in normal times. For instance, the practice of central banks “wealth,” which broadly understood includes physical, human, buying sovereign bonds to provide stimulus could do away with natural, social, intangible, and financial capital. In this framework, central bank independence and inflation control, the cornerstones economic growth is an annual return on this cumulative wealth of macroeconomic stability for most developing countries. Another stock, mediated by how productively it is used. Lange, Wodon, and example deals with lax financial policies. Regulators have “eased Carey (2018) provide a measure of national wealth that includes prudential limits on banks and allowed lenders to indulge in creative physical, human, and natural assets. According to their calculations, accounting” (The Economist 2020b). These measures have for advanced countries, human capital is the largest component of wealth (70 percent, in high-income OECD countries), and for interrupted or even reversed reforms for better micro- and low-income countries, it is natural capital (around 47 percent). On macroprudential practices in financial markets. Rescuing firms and the path to recovery, it is crucial to preserve all these forms of financial institutions is necessary when governments are forcing capital while grasping opportunities to boost productivity growth. In supply restrictions to contain the spread of COVID-19. However, this way, the path to recovery can also lead to long-term resilience. policy makers need to write off certain loans and allow some firms to fail when their solvency beyond the current crisis is questionable First, human capital needs to be preserved and strengthened (The Economist 2020b). throughout and after the crisis, focusing especially on children’s and 7 Recovery from the Pandemic Crisis: Balancing Short-Term and Long-Term Concerns young adults’ health and education. Indiscriminate lockdowns and areas with high social capital registered between 12 percent and 32 school closures of several months lead to learning losses that could percent fewer COVID-19 cases from mid-March until mid-May last a lifetime, resulting in an earnings shortfall of about US$10 (Bartscher et al. 2020). Anecdotal evidence from various corners of trillion, or 11.4 percent of GDP globally (World Bank 2020f). It is the world underscore the importance of community structure, unlikely that online and remote learning in general can be adapted trust, and family and kinship structures in providing essential food to prevent large human capital losses, especially for children in poor and supplies, as well as monitoring and implementing social and disadvantaged households. Reopening schools, as safely as distancing measures. possible, should be seriously considered. Human capital formation in the workplace has also been curtailed. Although adaptation to Finally, productivity, which determines how effective factors of new and largely digital working processes offers opportunities for production are in yielding growth, faces a drastic fall because of the development, early evidence suggests that the transition to new destructive nature of the pandemic crisis. This can be mitigated only business practices and the associated productivity effects are by avoiding excessive business closures, providing continuity of uneven (Bartik et al. 2020; Baldwin, and Forslid 2020; Financial public infrastructure and services, and maintaining macroeconomic Times 2020). stability. The adaptation of innovative and digital business practices Second, physical capital can be preserved by maintaining could offer a boost to productivity growth, offsetting some of the projects of high-quality public investment and by encouraging inherent losses that are resulting from the crisis. For instance, private investment by reducing policy uncertainty and avoiding Argentina, China, Italy, Japan, and South Korea, among other crowding out by large fiscal deficits. The type of investment matters countries, have introduced measures (such as subsidies, credit lines, in its effect on long-term resilience: rushed decision making to toolkits, and free advisory services) to encourage the adoption of boost demand in the short term can lead to dubious technologies for a range of new online-based business practices, investmentprojects (Foster et al. forthcoming). Moreover, excessive especially in small and medium-sized enterprises (OECD 2020b). debt borrowing raises concerns over sovereign credit risk and However, the current pressure against globalization, labor mobility, results in an increase in sovereign bond yields and borrowing costs, and small firms pose serious threats to such growth (di Mauro and crowding out private investment (Corsetti et al. 2013; Huidrom et al. Syverson 2020). In the long term, structural reforms are needed to 2019). High-quality public investment, policy certainty, and fiscal promote a growth-friendly macroeconomic, regulatory, and moderation may be at least as important as the credit guarantees institutional environment (Dieppe 2020; Kim and Loayza 2019). and interest rate reductions that dozens of developing country governments have implemented to boost investment since March Conclusion: Leveraging the Crisis to Promote Necessary 2020 (The Economist 2020b; World Bank 2020a). Reforms Third, natural capital captures both nonrenewable sources (such Although it is hard to see the positive side of an ongoing crisis, crises as fossil fuels) and renewables sources (such as forests). Commodity have begot reforms with lasting beneficial effects in the past and exporters have borne the brunt of the crash in oil and gas prices may do so again now (Alesina, Ardagna, and Trebbi 2006; Bruno and during this crisis, affecting their stocks of natural capital. However, Easterly 1996; Drazen and Grilli 1993). The pandemic crisis has their large share of carbon-based wealth faces increased risk due to future price uncertainty and large-scale attempts at global exposed areas of great vulnerability in developing countries, and decarbonization. This puts a premium on deepening the role of reforms are needed to address them. Some of them include reforms nonrenewables, while managing volatility in commodity prices in to expand labor and business formalization; to improve the the short term through appropriate macrofiscal management. coverage and adequacy of social protection; to extend financial inclusion to elderly, rural, and poor people; to promote digital Fourth, the current crisis has demonstrated the role that social transformation in schools, businesses, and government; and, most capital plays in building resilience. In seven European countries, basically , to improve access and quality of public health care. Box 1. The Different Dimensions of External Shocks Facing compared with a 37 percent drop in North America and South Asia Countries around the World (World Bank 2020d). Yet, international tourism has collapsed in all regions, although the brunt of the shock will affect small island The COVID-19 crisis has brought about numerous shocks, via supply developing states, which are most vulnerable not only because of and demand channels, which have affected trade in goods and their high dependence on tourism receipts, but also because a services—especially commodities, travel, and transport—remittances, shock of this magnitude is particularly hard to manage for small and capital flows, globally. Naturally, economies that are dependent economies (Coke-Hamilton 2020). Countries dependent on inflows on these sectors face greater vulnerabilities to these shocks. of remittances are located in diverse regions, with the largest Common characteristics among these economies include a low recipients, including Tonga, Haiti, South Sudan, Kyrgyz Republic, and degree of export diversification and—especially with respect to Tajikistan, receiving around 30 percent of GDP through this channel tourism—remoteness and small domestic markets (UNCTAD 2020). (World Bank 2020b). The loss of remittances affects households and The shocks have affected regions and income groups to different trade balances, also leading to a reduction in consumption, which extents, notably in line with infection “waves” and containment will hit countries that experience capital outflows and tight financial policies but also because of differences in economic structures (see conditions especially hard (Sayeh and Chami 2020). In turn, flows of figure B1.1). foreign direct investment (FDI) are projected to decline by more than 30 percent in 2020, especially affecting developing countries, The trade shock has differed across regions, with exports from where a larger share of FDI is accounted for by the primary and East Asia declining by 13 percent in May 2020, year on year, manufacturing sectors (OECD 2020c). 8 Research & Policy Brief No.38 Figure B1.1. External Exposure and Projected External Shocks related to the Pandemic Crisis a. Trade disruptions lead to lower export receipts… b. …with a particularly adverse effect on commodity exporters 2 IRL 1 G TM CYP NZL PRY CRI IRL GTM CRI BRAIDN PRY JPN CHE NZL -1 0 USA ARG AUS 20CHLSWE 40THA 60 80 100 Change in merchandise exports, Change in merchandise exports, 0 CYP GBR GRC DNK USA BRA IDN UKR CHE EGY SR CIO CHN L ECUISL MAR UKRKAZ 0 10 20 CHL 30 40 50 60 70 MNE MLT HRV KORAUT LVA NE JPN MEGY KAZ T HA -3 IND FRA ESPN O IF R IN TA PO L ISR AUS ARG DNK URYALB LUXPRT CAN IND CO L GBR URY C HN SWE -2 GRC PHL SLV EST ISL ECU -5 TUR ZAF B IH SVN ALBMLTMARHRV KOR ROU DEU 2019-2020 BGR 2019-2020 ESP AUT LVA BO L L TUR PHFRA TUN LTU -4 LUX SLV N OR CAN IN FPRT ITA P OL EST -7 PERRUS NLD ZAF BIH DEU MEX MYS BEL VNM BOLRUS ROU PER TUN BGR -9 -6 HUN LTU -11 BLR SGP MEX MYS CZE -8 -13 -10 -15 Merchandise exports 2019, percent of GDP Merchandise exports 2019, percent of GDP Advanced Latin America & Caribbean Europe & Central Asia Advanced Middle East & North Africa East Asia & Pacific East Asia & Pacific Middle East & North Africa Sub-Saharan Africa South Asia Europe & Central Asia Latin America & Caribbean Sub-Saharan Africa South Asia Source: World Bank 2020g World Development Indicators; WTO 2020a. Source: World Bank 2020g World Development Indicators; WTO 2020a. Note: Change in merchandise exports (percent of GDP) in annualized form based Note: Bubble size reflects the export values of fuels and mining products as on data available for January–May 2020. percent of GDP based on 2018 WTO and World Development Indicator (WDI) data. c. Dependence on tourism brings sharp losses in this crisis, d. Declines in remittances inflows are adding to income losses, with greater vulnerabilities for small economies especially in vulnerable emerging markets and developing economies 0 PAK CHN 0 CHL JPN USA SAU AUS H ARG CANKG BRA TUR URY IRL N O NZL GBR R BRA RUS ZAF F CK M NLD GRCC IN H DNK O H N YS ER DEU Projected change in tourism receipts, 0 2 4 6 8 10 12 14 0 I TA I DN 2 4 6 8 10 CHL JPN IND USA DEU -0.2 RUS S WCR AUT ESPE ITH A -1 ARG GT KCAN M O R NN ID FIN OR IRL FRA M PER COL EX BEL GBRI SR POL PER ISR Change in remittances inflows, SAU NLD -2 ZAF IDNK FRA PP TA CHE OHLL -0.4 CZE COL SWECZE PRT AUS URY -0.6 MEX IND -3 TUR HUN BEL TUN EGY HUN LKA -0.8 2019-2020 NZLAUT 2019-2020 SGP -4 M ESP YS -1 TUN CRI -5 MAR MAR -1.2 PHL HKG -6 PRT -1.4 -7 GRC -1.6 LKA -8 THA EGY -1.8 PAK -9 -2 Tourism receipts 2018, percent of GDP Remittances inflows 2019, percent of GDP Advanced Latin America & Caribbean Europe & Central Asia Advanced East Asia & Pacific Middle East & North Africa South Asia East Asia & Pacific Middle East & North Africa Sub-Saharan Africa South Asia Europe & Central Asia Sub-Saharan Africa Latin America & Caribbean Source: World Bank 2020g World Development Indicators; IMF 2020e. Source: World Bank 2020g World Development Indicators; World Bank 2020b; IMF Note: Projected change in travel receipts 2019–2020 (percent of GDP) estimated by 2020e. IMF 2020e. Note: Projected change in remittance inflows 2019–2020 (percent of GDP) estimated by IMF 2020e, based on World Bank 2020b regional estimations. e. On average, emerging markets and developing economies are f. Estimated current account changes reflect these external shocks and the expected to see FDI inflows decline by over 20 percent impact of dependencies on trade, tourism, remittances, and foreign capital flows 2 2 Projected change in FDI net inflows, ZAF ARG 1 I DN1 Estimated change in current LKA BRA POL OR KBGD PHL IDN AZE IND AUS ITA BEL IRQ PAK ZAF C HN TUR UKR GBR USA CHN account, 2019-2020 QAT THA KAZ POL RUS 0 NGA KW SAU I T DZA ND 0 FRAMEX M2ARMYS ESP KOR HKG -2 0 KEN OR EGYCZE JTUN 4 6 GEO 8 10 -5.0 0.0 JPN 5.0 10.0 15.0 20.0 ARG CHL BHR 2019-2020 -1 GTM H NDM EXSLV ARE COL GHA -1 TUR TTODOM BRASDN SWE DEU ZMB RO U CAN -2 OMN -2 JAM THL NLD LBN PER VNM MYS -3 CRI -3 CHE -4 -4 RUS SGP -5 -5 -6 PAN -6 FDI net inflows 2019, percent of GDP Current account 2019, percent of GDP East Asia & Pacific Europe & Central Asia Latin America & Caribbean Advanced East Asia & Pacific Middle East & North Africa South Asia Middle East & North Africa South Asia Sub-Saharan Africa Europe & Central Asia Sub-Saharan Africa Latin America & Caribbean Source: World Bank 2020b; World Bank 2020g World Development Indicators; IIF 2020. Source: World Bank 2020g World Development Indicators; IMF 2020e. Note: Projected change in FDI inflows 2019–2020 (percent of GDP) estimated by IIF Note: Projected change in current account 2019–2020 (percent of GDP) estimated 2020. by IMF 2020e. Note: Projected changes as percent of GDP. Actual changes may differ based on other factors and on the dynamics of the pandemic in 2H:2020. Estimations are provided by different sources (IMF 2020; IIF 2020; World Bank 2020a) and therefore include different country samples. Data labels use the International Organization for Standardization (ISO) country codes. “Advanced” represents countries that are advanced economies based on IMF grouping. Regions follow the World Bank classification excluding advanced economies. 9 Recovery from the Pandemic Crisis: Balancing Short-Term and Long-Term Concerns Box 2. Lessons from Past Crises reconstruction is often sensitive. Local context and economic potential should be carefully considered, with the aim of Several key lessons for recoveries can be drawn from past crises, strengthening domestic factors of production. In addition to the taking into account the nature of the shock (table 1). First, initial usual fiscal, monetary, and exchange rate policies, recoveries have conditions (such as fiscal space and governance capacity) can tended to be more successful where inclusive growth was driven by increase vulnerability and pose challenges to the implementation of employment and business environment policies (UNDP 2008). recovery measures (Bandaogo 2020; Felbermayr and Gröschl 2014; Kumar and Woo 2011; Panizza and Presbitero 2014; Romer and Natural disasters tend to have especially severe economic Romer 2018, 2019). Successful experience dealing with similar consequences for small, less-developed countries (Loayza et al. crises is an important condition. Second, before embarking on a 2012; Noy 2009). During the recovery phase, the central element is path of recovery, the underlying shock needs to be addressed and reconstruction, which should be phased and sustainable (Benson resolved to avoid a sudden return to emergency management and and Clay 2004). Especially in countries with frequent events, an inefficient allocation of resources. Third, once some degree of implementing forward-thinking risk management and response crisis resolution has been reached, economic management needs strategies can improve the speed and quality of reconstruction. This to focus on strengthening the factors of production most affected has proven successful, for instance, in Indonesia, where institutions by a crisis. Fourth, as crisis management turns into recovery and funds were prepared for this purpose following the 2004 policies, measures need to emphasize sustainability and future earthquake and subsequent tsunami (Hallegatte, Rentschler, and resilience to similar shocks. Walsh 2018). The availability of information plays a key role to promote prevention, which can reduce human and economic costs Pandemics and epidemics have been associated with a trade-off (World Bank 2010). between health and economic harm. Public health policies are crucial to protect society and the economy from further losses. In Financial and banking crises bring about severe output losses. In the recovery phase, long-term health and human capital impacts countries with high public debt levels before the crisis, lack of fiscal need to be addressed. In countries affected by past epidemics space not only constrains the government’s ability to implement (SARS, MERS, Ebola, Zika), investment and output per worker countercyclical policies, but also undermines the effectiveness of remained on average 9 percent and 4 percent lower, respectively, fiscal stimulus and the quality of fiscal performance (Botman and over the next three years relative to other comparable countries Kumar 2006). Importantly, the literature documents that (Dieppe 2020). In addition, past pandemics and epidemics have expansionary fiscal responses lead to sustained economic been associated with sharp productivity losses, which call for recoveries after the crisis only when the financial sector’s policies promoting investment in human and physical capital and a vulnerabilities are addressed without endangering fiscal productive reallocation of resources, as well as structural and sustainability (IMF 2009; Baldacci, Gupta, and Mulas-Granados institutional reforms (Dieppe 2020). 2012). During the global financial crisis, exchange rate flexibility acted as a shock absorber, while a shift to inflation-targeting Wars pose stark challenges to recovery, particularly through regimes in several emerging markets and developing economies weakened state capacity and destroyed physical, human, and social helped lower inflation in the run-up to the global recession. capital, as well as being obviously threatened by the recurrence of Countercyclical policies are no substitute for vigorous reforms in conflict (Collier 2009). Evidence shows that a gradual recovery from support of long-term growth, as shown by experiences of financial such a crisis is feasible once wars end and lasting peace begins and external shocks. Thus, structural and governance reforms are (Chen, Loayza, and Reynal-Querol 2008). Post-conflict important (Kose and Ohnsorge 2019). Box 3. Assessing a Country’s Ability to Start and Sustain a However, addressing the underlying problem is a necessary but Recovery from the Pandemic Crisis not a sufficient condition for sustained economic recovery. The two major threats to economic recovery are the recurrence of waves of Sustainable economic recovery is possible only when the underlying infection and adverse external and domestic economic shocks. problem has been addressed and has to a certain extent been These threats are, in turn, dependent on social and economic resolved. For the pandemic crisis, this implies mitigating the spread vulnerabilities to the pandemic crisis. of the disease to manageable levels (that is, preventing health systems from being overwhelmed and avoiding excessive deaths) Figure B3.1 attempts to combine all these factors—the while keeping the economy sufficiently active (that is, preventing evolution of the pandemic, the public policy response, and the worsening poverty, averting unnecessary business closures, and social and economic vulnerabilities—to help determine the avoiding lasting damage to human capital and productivity). The possibility and shape of economic recovery for various countries policy challenge is easing the difficult trade-off between saving lives and regions around the world. It relies on proxies—admittedly and livelihoods. imperfect indicators. For the evolution of the pandemic, the figure uses the infection rate, the case fatality rate, the rate of positive Saving lives and livelihoods requires a combination of tests, and the mortality rate of COVID-19 as officially reported. For supportive economic policies targeted at the most affected the public policy response, the figure uses indicators of lockdown households and businesses, along with smart public health policies stringency; lack of testing, tracing, and isolating; lack of economic that rely less on indiscriminate lockdowns and more on sustainable support; and infrequency of mask wearing. For social vulnerability mitigation measures (such as focalized quarantines; testing, tracing, to the pandemic, the figure uses measures of the prevalence of and isolating the infected; and wearing face masks in public places) elderly populations, labor informality, urban slums, and (Loayza 2020). overcrowded dwellings. Finally, for economic vulnerability, the 10 Research & Policy Brief No.38 Figure B3.1. Evolution of the Pandemic, Public Policy Responses, and Social and Economic Vulnerabilities (Averages by Group of Countries Weighted by Population) Infection 1 Infrequency of ratea Case fatality 100 Public policy mask wearing 16 h rate 2 a Evolution of the 90 responses pandemic Lack of 80 Rate of positive 15b 3 economic support 70 testsa 60 Lack of testing, 50 tracing & isolating b Mortality 14 40 4 ratea 30 20 10 Lockdown13 0 Fiscal 5 stringency b deficith 12 Overcrowded Commodities 6 dwellingsc dependencef Urban 11 7 Tourism slumsd dependencef Social Economic Labor vulnerabilities 10 informality e 8 Remittances vulnerabilities Old9age dependence g prevalenceg Advanced Middle East and North Africa East Asia and Pacific South Asia Europe and Central Asia Sub-Saharan Africa Latin America and Caribbean Source: Authors’ calculation using data from European Centre for Disease Prevention and Control 2020 (via Our World in Data by University of Oxford, https://ourworldindata.org/coronavirus-source-data, accessed on 12 August 2020); ILO 2018; IMF 2020d; Loayza and Meza-Cuadra 2018; Oxford COVID-19 Government Response Tracker 2020 (https://raw.githubusercontent.com/OxCGRT/covid-policy-tracker/master/data/OxCGRT_latest.csv, accessed on 27 August 2020); UN DESA 2019a, 2019b; World Bank 2019 KNOMAD; World Bank 2020g World Development Indicators; WTO 2020a; and data collected from official sources by #Masks4All 2020 and Roser et al. 2020. Note: “Advanced” represents countries that are advanced economies based on IMF grouping. Regions follow the World Bank classification excluding advanced economies. a. Cumulative July 10 – August 10, 2020 c. Average last 10 years, 2009 – 2020 e. 2016 g. 2019 b. Average July 10 – August 10, 2020 d. 2014 f. 2018 h. 2020 figure uses the fiscal deficit and the dependencies on commodities pandemic is given by the country’s demographic profile, with older exports, tourism, and remittances. For ease of presentation, in all populations being more severely affected by the disease; and by cases a larger value denotes a worse outcome, policy, or working and living conditions, with higher labor informality and vulnerability. more overcrowded cities and dwellings being more conducive to infections. The economic vulnerability is determined by available How can this information help assess a country’s ability to start fiscal resources, depleted in the context of high deficits, and by and sustain a recovery from the pandemic crisis? First, we can dependence on external conditions likely to remain volatile. For consider the evolution of the pandemic: if rates of infection, case example, if a country has the pandemic under control and is starting fatality, positive tests, and mortality are comparatively low, the recovery, it would need to remain vigilant if its social vulnerability to country seems to have the pandemic under control, at least the pandemic is high and it would need to adjust its programs and currently. Second, we can check the public policy response, looking expectations if its deficit is projected to be high and is dependent on for evidence that lockdowns are easing, smart public health policies external conditions. are in place, and vulnerable sectors are receiving support. For example, if the pandemic is under control and public policies are This analysis can be applied to individual countries and groups conducive to a resumption of social and economic activity, then the of them. As an illustration, figure B3.1 presents the typical cases in country has the right environment to embark on the recovery from advanced countries (as a group, worldwide) and developing the crisis. In contrast, if the pandemic is raging and the country is in countries in various geographic regions. lockdown, the country is not ready for recovery and should focus on emergency and relief measures: that is, implementing smart • Advanced countries have been able to avoid the worst of the policies to mitigate the pandemic and alleviate the economic pandemic with a combination of public health and economic fallout. Third, we can assess the vulnerabilities that signal the risks measures but are still facing high infection rates. These countries of a sluggish or volatile recovery. The social vulnerability to the remain vulnerable to the disease because of their older 11 Recovery from the Pandemic Crisis: Balancing Short-Term and Long-Term Concerns populations. Recovery will be slow and erratic if they need to • Middle East and North Africa countries are struggling to resort to repeated lockdowns. These could be avoided with more manage the pandemic, with high rates of infections and intensive testing, tracing, and focalized quarantines. fatalities. There is a high uncertainty as to whether they will be able to control the spread of the disease. An important • Europe and Central Asia emerging and developing countries advantage is the youth of their populations. On the negative have been mildly successful in controlling the pandemic, side, the most remarkable feature for the region is the suffering, nevertheless, a relatively large number of infections deterioration in fiscal and external accounts, particularly for and fatalities. Their old populations are an important commodity exporters. Without these resources, it is doubtful vulnerability, though their relatively well-advanced working and that they will be able to continue their lockdown policies. Their living conditions can help control the rate of infections and recovery is likely to be volatile and erratic, not only because of fatalities with increased reliance on smart health policies. Their the pandemic but also because of their domestic political recovery will likely be tied to Western Europe and the rest of the conditions. world, particularly so for commodity exporters (such as Kazakhstan and Russia). • South Asia countries are also struggling to mitigate the spread of the disease, and their low testing coverage puts the reported • East Asia and Pacific countries have, once again, forged ahead numbers in doubt. The youth of their populations is a big of other developing countries in handling the pandemic crisis. advantage, somehow compensating for poor living conditions Their infection and fatality rates are among the lowest in the and high informality. Their lockdown measures would need to be world. The relative youth of their populations and, possibly, their replaced by more sustainable policies based on testing and experience with previous pandemics have been to their focalized quarantines. Their fiscal accounts are in a difficult advantage. Their fiscal and external accounts seem to be situation, and they may not have the resources to support low relatively strong. Their recovery will be gradual, linked to economic activity. Their recovery will be gradual and, given the external conditions for countries that depend heavily on trade large size of most economies in the region, dependent on (such as Vietnam), commodities (Malaysia), and tourism internal conditions. (Thailand). • Sub-Saharan Africa countries have low infection rates but • Latin America and the Caribbean countries have been unable to relatively high fatality rates. This is likely to indicate insufficient control the pandemic, with rampant and growing infections and testing. They have among the worst living conditions and labor fatalities. Their strict lockdown strategy, still in place in many informality, making them vulnerable to the spread of the countries, has not yielded the expected results. They remain coronavirus. Possibly more than in all other regions, the young vulnerable to the pandemic because of poor living conditions population in African countries plays in their favor. Some and high informality. Any hope of flattening the epidemic curve countries in the region have imposed strict lockdowns with and prevent a further collapse of the economy relies on being questionable results. All countries in the region would benefit able to implement more sustainable public health policies. The from more testing and focalized quarantines. Their fiscal and situation is especially difficult for countries with low fiscal space external accounts have deteriorated, though not as drastically as and high commodity dependence. 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