How COVID-19 has affected the fight against global poverty; discuss priorities for countries; and how the International Monetary Fund can help.
By Geoffrey Okamoto
Global Setback
Global poverty and inequality are rising again. Since the 1980s, global poverty fell because a strong and durable push of economic liberalization resulted in strong growth in emerging markets, particularly China. Inequality also fell globally, although it increased within some countries.
Growth slowed as reform agendas lost momentum, but now the pandemic is outright reversing these gains. According to the IMF’s Fiscal Monitor, the number of people in extreme poverty will increase by 80 to 90 million globally, despite all the emergency spending. They are informal and gig workers, those outside social safety systems, migrants and those receiving their remittances.
Our research on recent epidemics — SARS, H1N1, and others —found that they raised income inequality and hurt employment prospects of those with lower education. These events also increased social unrest and instability.
Besides destroying millions of current jobs, the COVID-19 pandemic threatens to leave deep scars in the next generation. According to the United Nations, about 1.6 billion students in 190 countries have been affected by school closings this year.
Children without access to a computer and internet are falling behind. The loss of educational attainment is one of the most perverse and longer-lasting scars of this crisis.
Those who achieved higher education are no better off. Graduating in a recession means fighting for fewer available jobs and lower salaries at the beginning of one’s career. Studies have shown that starting from behind can affect a person’s entire financial life, meaning lower savings, consumption and retirement.
All these factors worsen inequality.
Ballooning debt
Tackling these problems will be harder, because countries are in worse financial health. Countries are doing the right thing now: spending what is needed to support health and social protection.
But that spending, combined with the sharp output decline and the collapse in government revenue, will push public debt to record levels.
In October, we projected that this year global public debt will increase by 17 percentage points, reaching a record 100 percent of GDP. This will significantly limit countries’ margin for maneuver, particularly where borrowing costs are already higher. And some countries are unable to borrow from global capital markets at all.
The task ahead
Countries will have to do more with less fiscal resources, putting increased focus on improving the quality of government spending. In many cases too, monetary policy is constrained, because basic interest rates are already very low, even negative.
Governments will need to tend to several objectives. In the immediate future, public health should remain the priority: continue supporting health care and funding smart containment strategies, like intensive testing and tracing. This allows economic activity to resume faster.
We are all hopeful about the potential vaccines on the horizon. But we need to be realistic about when they might be available, and the formidable logistical challenges of vaccination at global scale. This could take most or all of 2021, meaning that economic support must be maintained to blunt the effects of future containment efforts.
Once the health emergency is controlled, our focus should turn to advancing reforms that can boost a country’s growth potential, generate better jobs and increase resilience. Digital infrastructure is an example. Expanding internet access in Africa by ten percent of the population could increase GDP per capita growth by as much as 4 percentage points. Public investment, when possible, creates jobs and stimulates private investment.
Role of the IMF
Finally, how is the IMF helping?
We have been active as never before . Since the pandemic’s onset, we have provided over 101 billion dollars in total financing to 82 countries. We extended debt service relief to our poorest members; and together with the World Bank, we support the G20’s Debt Service Suspension Initiative.
This relief is very important, because poor countries are least equipped to fight this economic battle. We estimated that advanced economies spent over ten times more than low-income countries to support their economies, as percentage of GDP.
Debt relief frees up resources for health and social spending. China and other countries commitments to participate in the restructuring of debts that can’t be repaid are to be commended for their generosity for being willing to provide relief. China and other countries must work quickly to operationalize this framework so that unsustainable debts are swiftly dealt with.
Another key area for the IMF is capacity development, to help countries improve their public finances management. The current circumstances are challenging for all countries, but even more so for low-income and developing economies. The Sustainable Development Goals, a set of targets established by the United Nations, will become even harder to achieve.
Our capacity development helps countries boost revenue in several ways: designing simpler, fairer and more efficient tax structures; improving revenue collection; controlling spending; fighting evasion and avoidance. This helps countries continue providing health, education and essential social services, as well as rebuild their finances and address debt problems.
The IMF follows economies at the national, regional, and global levels, so we can provide policy advice that benefits from the experiences of all countries. I joined the IMF in the beginning of the pandemic and have been impressed with the common sense of purpose among member countries and IMF staff to tackle this unprecedented challenge. Through cooperation, I have confidence that we will recover from this global crisis and resume progress towards the Sustainable Development Goals.
– Remarks at for CGTN Global Action Initiative Event, Geoffrey Okamoto, IMF First Deputy Managing Director
