Developing countries, characterised by a poor health infrastructure, higher levels of poverty and malnutrition, as well as often precarious fiscal situations, will find it difficult to shut down their economies, flatten the curve, and soften the economic blow through various injection packages. This is particularly true for economies that do not have their own currency and cannot undertake the type of monetary policy interventions that we have seen in developed economies.
Developing countries, must therefore, unfortunately not just focus their efforts on prevention, as much as possible, but also aim to set the stage for future growth and recovery. For many economies, this is a time for reform.
...cash-starved developing countries will need to think about how to make their economies more attractive.
One place to start is to look at recognised inhibitors to economic growth collected by the World Bank as part of its Doing Business series. The aim of their data and accompanying reports it to look at various factors that make it difficult for business in a given country to operate or, importantly, to start. For example, there is data on procedures, time, and cost to build warehouses or enforcing contracts. As well as indicators highlighting how difficult it is to get credit or permanent electricity connections. These indicators can say a lot about a country’s business environment and to facilitate recovery, cash-starved developing countries will need to think about how to make their economies more attractive.
Additionally, many developing countries have very stringent labour market regulations. Although it may seem counterintuitive, policies aimed at protecting workers from getting fired, also tend to incentivise firms to limit hiring. The reasoning behind this is simple: if a firm must hire someone and after a short period of time, say three months, they must be treated as permanent staff, then the risk of hiring anyone is very high. Risk-averse firms are going to hold off on employment, trying to find as many references and indications as possible about potential workers before taking a chance on them. Like many of the regulations above, this can limit growth and employment opportunities.
Similarly, many developing countries maintain stringent regulations to curtail capital flight. Taxes on capital flight, for example, also create disincentives for foreigners to invest in developing economies. Foreign investors must choose amongst various activities in various economies and putting constraints on liquidity can force some investors to consider other opportunities. This is the case, even if opportunities in the heavily regulated country were otherwise attractive.
To sustain reform, in the short run, developing country governments must remember that the most vulnerable in their communities will be severely affected by the coronavirus. These are individuals in multigenerational households, with informal employment, who often share toilets and washing basis with other households and who live in neighborhoods without clean water. Many people in these situations must choose between staying at home and not making any money to put food on the table or going out and risking illness. To curtail disease people should aim to practice social distancing. To encourage that, governments need to use whatever funds they have toward substituting lost income of the poorest and most vulnerable. Countries could trial cash transfers, conditional on staying at home. To afford this initiative, reforms that focus on generating future growth will be imperative.
Alberto Posso, School of Economics, Finance and Marketing
