Low-Income Nations Likely to Remain Deeply Damaged Five Years After Pandemic, World Bank Says

Date: Tuesday, June 2, 2020
Source: The Wall Street Journal

Severity of economic fallout suggests poor countries will suffer permanent loss of growth potential

The world’s low-income and emerging market economies will likely remain deeply damaged even five years after the coronavirus pandemic and associated lockdowns began, according to a new study from the World Bank.

The virus has already plunged the world into a severe recession, the World Bank said, and its research casts doubt on scenarios in which emerging markets bounce back quickly after the health crisis has eased.

“The exceptional severity of the pandemic and economic collapse” not only raises the risk of “a permanent loss of output levels but a permanent slowdown in potential output growth,” the World Bank said in a study released on Tuesday.

“The pandemic could alter the very structures upon which the growth of recent decades was built, since it could cause prolonged damage to global supply chains, global trade and financial flows, and global collaboration,” the study said.

The World Bank, collectively owned by 189 countries and based in Washington, lends to the world’s poorer countries to help their economies develop. Since March, much of the bank’s lending has focused on providing up to $160 billion of coronavirus relief around the world. But even with this support, World Bank researchers caution that the pandemic could leave lasting scars.

“The bottom line,” Ceyla Pazarbasioglu, a World Bank vice president, said in an interview, “is that most emerging market and developing economies started this crisis in a weak position, with a lot of vulnerabilities, and it’s the biggest shock since World War II.”

Compared with the global financial crisis a decade ago, emerging market economies entered the coronavirus pandemic with more debt, aging populations, weaker demand for commodities and trade tensions that had weakened the international flow of goods and services even before the pandemic started.

In the average emerging market, if a recession leads to a financial crisis, potential economic growth would be 8% lower in five years. For energy exporters, the toll could be more severe—a recession and oil-price plunge could leave economic potential 11% lower after five years.

Few emerging-market economies have the capacity to borrow heavily to fund the kinds of stimulus programs that are being carried out by rich economies like the U.S. and European Union.

And despite the fiscal and monetary policies of wealthier countries, it’s unclear how successful rich economies will be at resuscitating their economies after the pandemic

“What’s the second phase of this crisis and how much stimulus is needed, and is there a strategy to deal with firms not making it through the crisis?” said Ms. Pazarbasioglu. “In emerging market countries it’s an even bigger issue.”


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