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The Centre for Economic Policy Research (CEPR) and the International Development Policy journal (DevPol) have published an e-book titled COVID-19 in Developing Economies, summarising the current research on developing and emerging markets. The webinar, co-organised by the CEPR and DevPol, discusses some of the key issues highlighted in this e-book, focusing on the pandemic’s effects on the macro-economy, trade, and informal employment.The webinar was moderated by Professor Ugo Panizza, Editor-in-Chief of the International Development Policy journal, and the roundtable discussion involved three panellists: Dr Swati Dhingra, Associate Professor of Economics at the London School of Economics; Dr Caroline Freund, Global Director for Trade, Investment and Competitiveness at the World Bank; and Professor Andrés Velasco Brañes, Dean of the School of Public Policy at the London School of Economics.The panelists presented three main ideas for tackling the pandemic: introducing safety nets for informal workers (Dr Swati Dhingra), taking advantage of the supply-side disruption (Dr Caroline Freund), and improving funding from richer countries (Professor Andrés Velasco Brañes). The video below summarizes these ideas, and the full webinar is available here and at the end of this post. https://youtu.be/wlyxNef87dA1. Introducing the panellists and main themes of the discussionProfessor Ugo Panizza began the discussion by asking one question to each of the panellists.He remarked that many developed economies have responded to COVID-19 by expanding social safety nets, but doing so has been more difficult. He asked Dr Swati Dhingra, who has done research on informal workers in India, for her insights on why that was the case, the role of informal employment in contributing to these difficulties, and what governments can and should do to alleviate this problem in the short and medium run.Dr Dhingra explained that informal employment makes up the bulk of employment in developing countries. For example, in India, 75-90% of the workforce is informally employed, depending on the definition of informality used.[1] While informal employment enables the economy to be more flexible, it puts these workers in a more precarious situation than formally-employed workers.Regarding the issues with social safety nets, the infrastructure for programs such as Universal Basic Income (UBI) usually do not exist in developing countries. In India, most welfare payments are tied to where individuals come from, so they could not be accessed by migrant workers who were unable to return home because of the pandemic. The Indian government tried cash transfers and introduced a biometric banking system eleven years ago to improve access to social security, but these measures still suffer from the usual issues that cause exclusion from financial systems, and have proven inadequate in transferring funds for COVID-19.[2] Instead, Dr Dhingra recommended the adoption of a universal job guarantee. In India, the National Rural Employment Guarantee Act currently guarantees 100 days of paid work per year for rural households, but this program does not extend to urban areas. In a survey conducted by Dr Dhingra,[3] the average urban worker in India is willing to accept a 15% wage cut in exchange for a guaranteed number of days of work each year. Based on these results, the estimated cost to extend the jobs guarantee program to urban areas is around 0.8% of GDP, a “miniscule sum … to restore a life of dignity to those who have often fallen through the cracks of the nation’s safety nets”.[4]Professor Ugo Panizza then asked Dr Caroline Freund about the impact of COVID-19 on trade in both developing and developed economies, and if there was a “silver lining” to this collapse in trade for well-prepared countries (as discussed in her e-book chapter).Dr Freund explained that the pandemic-induced trade shock initially emanated from China, raising concerns about supply chain disruptions, but became (primarily) a global demand shock as the virus spread worldwide. The nominal value of global trade declined by 10% year-on-year in March and 20% in April, with even larger declines of 30-50% in developing regions outside of Asia.[5] This decline was driven by consumer and capital goods, while trade in intermediate food, beverages and medical goods increased from last year. However, from real-time data on ships’ container capacity, there is evidence of an uptick in trade values for May and the beginning of June, which is a positive sign.According to Dr Freund, the pandemic is a systemic crisis that can reshape supply chains, as firms realise their over-reliance on specific countries. As a case study of how shocks affect global value chains, she cited her research on the effects of the 2011 Japan earthquake, which severely disrupted automobile supply chains. While the shock did not result in reshoring, nearshoring, or diversification, importers of Japanese automobile components did switch towards developing countries that had a revealed comparative advantage.[6] The pandemic’s silver lining is therefore that developing countries have the opportunity to enter supply chains, though policy reforms and having a revealed comparative advantage are both important for success.Professor Panizza asked Professor Andrés Velasco Brañes, who was Minister of Finance of Chile during the 2008 financial crisis, to share the challenges faced by a finance minister dealing with such a crisis; and to discuss the ways in which the 2008 crisis differs from the current crisis, in particular how different Latin American countries are dealing with this economic shock.Professor Brañes emphasised the distinction between the initial shock, which policymakers cannot do much to prevent, and the multiplier effect of the shock, which can be contained with a suitable macro-policy response. The current shock is a gigantic supply shock caused by governments telling workers not to work and firms not to produce, which is very different from the 2008 crisis. The challenge that policymakers face is preventing the supply shock from becoming a demand shock, which in part requires maintaining firm productivity. There are multiple possible equilibria depending on the level of optimism, and governments can influence outcomes via non-conventional fiscal and monetary policies. For example, furlough schemes and loan guarantees can help firms remain operative by retaining workers and remaining current on payments with suppliers and creditors.[7]According to Professor Brañes, the pandemic poses extra challenges for Latin America because it is not one shock but five: the pandemic, plus a collapse in world trade, commodity prices, other sources of income (such as remittances), and a huge capital outflow. Latin American countries are very heterogeneous in their ability to implement policy actions. Fiscal stimuli are possible in countries with relatively low public debt and unimpeded market access, such as Peru, Chile, and Paraguay, but not in countries with less fiscal space such as Brazil.[8] Unfortunately, many countries who would benefit from these policies may not receive the necessary finance. A conservative estimate of USD 2.5 trillion is required to support developing countries, assuming stimulus packages of around 3% of GDP (compared to 10-15% of GDP in developed countries), but the World Bank and regional development banks have “limited firepower”. 2. Follow-up questions on trade, informal employment, and macroeconomic policyPolicy reforms In light of the current debate on how to reform multilateral trading systems, the panelists were asked about the kind of reforms needed to support developing economies.Dr Dhingra believed that subsidies are a serious issue because developing countries do not have the financial capacity to implement the same types of policies that developed countries do, resulting in a reverse reallocation of resources across the world. The pandemic provides a “window of opportunity” for governments to discuss cooperative measures, such as tax havens. Most countries are currently fiscally constrained, so reforms are feasible and there will be “more appetite” to undertake them.Dr Freund agreed with Dr Dhingra about subsidies. Currently, developing countries are allowed to participate in trading systems without taking on reforms that developed countries have done, so the advantages of being in these systems (such as external pressures to make reforms, which in turn promote growth and lower trade barriers) are not being realised. Dr Freund also raised concerns about greater market power for firms that survive the pandemic, and conflicts on how to deal with data protection in the realm of e-commerce. Underlying all these issues is a lack of leadership in all international institutions, resulting in the failure to provide capital to developing countries. The World Bank, which is reliant on donor countries, has planned USD 160 billion to support developing countries, which is a “drop in the bucket” compared to developed country stimulus packages.Professor Brañes agreed that international organisations have the potential to be much more active. For example, the International Monetary Fund (IMF) could change the rules for Special Drawing Rights (SDRs), and the European Central Bank (ECB) could create special purpose vehicles to channel funds from developed to developing countries.&#160; Creating fiscal space In response to Professor Brañes’ earlier comments about the lack of fiscal capacity in some Latin American countries, he was asked what countries could do to create fiscal space, in particular whether measures such as modern monetary theory (MMT) and debt standstills might be effective.Professor Brañes did not think debt standstills that involve foregoing interest without foregoing the principal would help, unless countries have a large amount of debt. Debt standstills may result in countries’ receiving downgrades in their credit ratings, with potentially significant negative spill overs in asset price movements, especially for countries within the same region. Instead of helping to pay interest on old money, governments need “new money” to avoid running a current account deficit. When interest rates are zero, as is the case in developed countries such as the UK, the US, Japan, and Germany, issuing money is equivalent to issuing debt and is unlikely to cause inflation. Some emerging markets such as Colombia, Indonesia, and Turkey are also issuing money, but interest rates are not zero, so money and debt are not perfect substitutes. History also matters; investors are more reluctant if a country has had a hyperinflation episode in the past. It is therefore important to “dig deeper” to see what is feasible for a particular country.Alternatives to a job guarantee Referring to her earlier comments about informal employment in India, Dr Dhingra was asked why she supported a universal job guarantee scheme over other policies, such as relaxing rigid labour laws or a UBI.Dr Dhingra first clarified that labour laws only apply to 10% of the labour force and there is limited evidence that they actually constrain employment in India.[9] However, India does have a relatively young population and a higher urban youth unemployment rate, so preventing de-skilling, crime, and negative effects on psychological wellbeing that arise from unemployment is a pressing issue. Despite the high degree of internet and digital penetration, many people are falling through the social security net because of the lack of information and infrastructure, especially in banking. While the Indian government did provide cash transfers, not all of them were successful, for the same reasons.[10] UBI is not the only solution to long-term unemployment. It works well if the government has a well-functioning tax system and can easily target people, but developing countries face fiscal constraints and lack the necessary information and infrastructure to target people. The self-targeting features of job guarantees make them more effective in these contexts. Arab countries The panellists were asked about the pandemic’s effect on the Arab world. Dr Freund made the distinction between net resource importers and net resource exporters. Gulf countries, who typically have the capacity to handle economic shocks, are also exposed to the crisis because of the sharp decline in oil prices.[11] The effect of losing remittances might be even larger than the decline in trade, as the losses to net resource exporters spill over to net importers, who depend on the former’s wealth for remittances.[12]Sub-Saharan Africa The panellists were asked about the pandemic’s impact on trade for sub-Saharan Africa, and the use of financial digital services in that region.Regarding trade, Dr Freund reported a large decline in exports from Africa (around 50% in April, according to mirror data from developed countries). This decline was partly a price effect because sub-Saharan countries are major resource exporters, but there were also some problems with trade facilitation. Dr Freund’s colleagues at the World Bank conducted rapid response surveys of firms in three African countries and found that instead of closing, firms reduced operations and workers reduced hours. They also found an increase in the use of digital technology, such as mobile payments, and firms are likely to keep using this technology after the pandemic. The permanent productivity effect of new technology adoption could be a silver lining.Professor Ugo Panizza remarked that the e-book (Chapter 17) contains more information about technology use and working from home.[13] Financing support for developing countriesThe panellists were asked how the USD 2.5 trillion needed to support developing countries would come from, given that all advanced economies were focusing on stimulating their own economies.Professor Brañes argued that there was an “ample supply of liquidity” because interest rates in many developed countries are currently zero, but it needs an intermediary such as the World Bank or the IMF to “help it go South”. He clarified that financial support for developing countries was not altruism or a subsidy, because emerging markets comprise 45-60% of global GDP, depending on how it is measured. During the 2008 financial crisis, many emerging markets continued to grow or contracted much less than developed economies, preventing a global decline, but now both types of countries are affected. It is in everyone’s interest to have a more dynamic world economy and allocate resources to where the largest return exists.An anonymous audience member commented that there are both economic externalities and health externalities associated with aid, because contagion from developing countries could spread to developed countries. Professor Brañes agreed and emphasised the need for a worldwide response, because “no one is safe until we are all safe.”Economy vs. PandemicProfessor Brañes was asked whether policymakers should first focus on the economy or the pandemic.Professor Brañes explained that there was a false opposition between the “nice people who care about health” and the “not-so-nice people who want to open the economy”. This trade-off between health and the economy is inaccurately described, if it exists at all: countries that took decisive action also did better economically compared to countries that were fairly lax in terms of their response to the crisis. Policymakers should reasonably care about both, because if the economy crashes it also threatens human life, especially in developing countries where many individuals would rather die from the virus than from hunger. There is strong evidence that harsh virus control measures are needed early in the pandemic, but also that these must be done via intelligent incentives, such as cash transfers that enable people to stay home.Policies to support SMEsGiven that funds previously allocated to development have been diverted to healthcare, panellists were asked how governments could help small businesses and entrepreneurs (SMEs) survive the crisis.Dr Dhingra proposed loan guarantees for SMEs and some degree of loan holiday, but acknowledged that the current situation was very difficult and some businesses would unfortunately be forced to close.Professor Panizza remarked that there is little evidence to support the premise of Schumpeterian creative destruction, and that entrepreneurial capital and productivity is often destroyed during economic crises.[14]Dr Freund agreed that crises did not bring about creative destruction, but rather “pure destruction”. Governments should think about ways for firms to operate safely, such as e-payments and plexiglass barriers, and keep central supply chains functioning. Measures are needed to prevent liquidity problems from becoming solvency problems, but they should be time-limited. Many countries lack the capacity to implement these policies, and even in developed countries such as the US, a very small percentage of firms are taking advantage of government programs. At the beginning of the pandemic, the World Bank started with relief (responding to the health crisis and keeping viable firms alive) but has switched to an economic response.[15] She predicted that ultimately, more funds will be spent on the economy than on health.3. Concluding remarksProfessor Panizza asked panellists to share their final thoughts. Professor Brañes appreciated the open discussion on issues such as informality, UBI, and labour market laws, but thought that these debates have become very toxic in political spheres, making it difficult to modify the labour code. While he was uncertain whether the political equilibrium will change because of the pandemic, he remained hopeful that there would be fewer “veto players” (people who can prevent changes from being made) in this area. Dr Freund remarked that the overarching theme of the webinar was externalities. What one country does spills over to the rest of the world, so we need a renewed sense of cooperation for the global economy, global wellbeing, and equity within and across countries.Professor Panizza concluded the webinar by thanking the speakers and reminding the audience that the e-book is available online at https://voxeu.org/content/covid-19-developing-economies.-––––––––––––––––––––––[1] For example, a 2019 report by the International Labour Organisation (ILO) estimates that 90% of the Indian workforce is in informal unemployment.[2] Drèze, J. and R. Khera (2020), “Getting cash transfers out of a JAM”, The Hindu, 13 May 13.[3] Dhingra, S. and S. Machin (2020), “The Value of a Job Guarantee to Workers”, Working Paper.[4] See Chapter 15 in Djankov, S. and U. Panizza (2020).&#160;“COVID-19 in Developing Economies”, a VoxEU.org e-Book, CEPR Press.&#160;https://voxeu.org/content/covid-19-developing-economies (produced in collaboration with the International Development Policy Journal).[5] World Bank (2020),“COVID-19 Trade Watch #2”. Accessed 10 July 2020.[6] See Chapter 22 in Djankov, S. and U. Panizza (2020).&#160;“COVID-19 in Developing Economies”, a VoxEU.org eBook, CEPR Press.&#160;https://voxeu.org/content/covid-19-developing-economies (produced in collaboration with the International Development Policy Journal).[7] The World Bank catalogues the policy actions that countries have announced to support firms, particularly SMEs.[8] For more details on the fiscal situation of Latin American countries, see the UN 2019 report ‘Fiscal Panorama of Latin America and the Caribbean’, and the OECD’s revenue statistics for that region.[9] For example, see Sharma A.N. (2006), “Flexibility, Employment and Labour Market Reforms in India”, Economic and Political Weekly, 41(21): 2078-2085.[10] According to Dr Dhingra, in a survey of 5000 urban individuals, at the lower end of the income distribution (those earning less than $2 a day), around 20% got what they were supposed to get from the government.[11] Dr Freund commented that the break-even price for oil is quite high. For example, in March 2020, the estimated break-even price of oil was $70 per barrel for the UAE and $83 per barrel for Saudi Arabia.[12] According to the World Bank, remittances to the Middle East and North Africa region are expected to fall by 19.6% in 2020, due to the global economic slowdown and lower oil prices in Gulf countries. For more details on this dual shock to Middle East and North African countries, see Chapter 4 of Djankov, S. and U. Panizza (2020).&#160;“COVID-19 in Developing Economies”, a VoxEU.org eBook, CEPR Press.&#160;https://voxeu.org/content/covid-19-developing-economies (produced in collaboration with the International Development Policy Journal).[13] Also, see Chapter 3 of the e-book for more details on the economic impact of COVID-19 in sub-Saharan Africa.[14] For example, see Chapter 10 of the e-book.[15] The World Bank tracker lists the COVID-19-related support given to developing countries.https://youtu.be/YdsNJqpnSHg