It is often said that governments “fight the last war” during times of economic crisis. But based on David Malpass’ remarks from last week’s G20 Finance Ministers call, it appears the World Bank is preparing to fight the wars of the 1990s by revamping old—and largely discredited—crisis policy prescriptions to address what is likely to be a severe economic downturn caused by the COVID-19 pandemic.
“Countries will need to implement structural reforms to help shorten the time to recovery and create confidence that the recovery can be strong. For those countries that have excessive regulations, subsidies, licensing regimes, trade protection or litigiousness as obstacles, we will work with them to foster markets, choice and faster growth prospects during the recovery.”
This call to address the economic fallout of the pandemic by asking countries to focus on their business environment is dangerously out of sync with the moment. Governments across advanced economies are launching massive and unprecedented programs—having learned from the global financial crisis that the cost of doing too little is higher than the cost of doing too much—to keep their economies afloat and protect the most vulnerable. Why should it be any different for the world’s poorest countries? As the premier development organization in the world, the World Bank should be using its voice in the global arena to encourage countries to enact bold economic policy measures that protect jobs and buttress social safety nets. Inserting structural adjustment conditionality is an unjustified distraction from the urgent policy issues at hand.
The coronavirus economic fallout threatens to be unprecedented in scope and magnitude. On top of the devastating human and health crisis, countries across the globe—rich and poor—are bringing large portions of their economies to a standstill. As a result, they face an output shock that threatens to wipe away a generation of micro, small- and medium-sized enterprises and established industries alike and cause a massive surge in unemployment. The sudden stop in economic activity will also exacerbate countries’ underlying macroeconomic vulnerabilities. In particular, many low-income countries face mounting external debt levels; as a result, a growth or external shock could trigger a debt crisis. This would in turn force harsh budget cuts to social spending and other programs, without which countries will fail to prosper.
But it does not have to be this bad. If the virus abates sooner rather than later—either because social distancing measures are effective, or scientists discover a cure or vaccine that is rapidly and widely distributed—economies could face a V-shaped trajectory where the recovery is as aggressive as the initial decline. But this V-shape largely hinges on being able to turn economic activity back on as fast as it was turned off. Unprecedented levels of government intervention will be critical to prevent a slew of job losses and bankruptcies. Governments in higher-income countries with efficient central mechanisms for distributing cash quickly—and the resources to do it—are announcing large fiscal packages alongside unorthodox policy measures so they have an economy to reopen when the pandemic ends. These policies are aimed at keeping temporarily closed companies in business, workers on the payroll, and vulnerable households solvent. For instance, Denmark announced that it will cover 75 percent of affected companies’ payroll with the condition that they maintain their workforce during the closure. Korea is providing wage and rent support for small merchants. Emerging markets like Thailand, Indonesia, and South Africa are providing direct relief to affected industries and SMEs and increasing cash support for vulnerable households (See the excellent IMF and the Overseas Development Institute online economic policy COVID-19 response trackers for a full picture of actions governments are taking globally).
As the coronavirus spreads across the globe, low-income countries (LICs) too are starting to grapple with lockdowns. And governments in these countries need to be prepared to deploy economic policy responses aimed at buttressing their social safety nets and protecting jobs in their burgeoning domestic private sectors. But they will also need to be tailored to their unique set of circumstances. Economies across sub-Saharan Africa in particular tend to be dominated by subsistence agriculture and informal urban sectors. And it is often difficult to implement targeted counter-cyclical financing in LICs because often they don’t have existing social transfer systems to scale up and/or they can’t rely on tax relief because their tax base is small.
Today’s economic crisis is ready-made for the World Bank to exercise the full might of its influence and reach. The Bank is not just the largest provider of international development finance. It is also a major source of policy counsel for countries around the world. It has 189 members countries and offices in more than 130 locations which gives it a unique window into on-the ground realities spanning the globe. And it has the instruments to help governments formulate and execute effective policies by providing evidenced-based recommendations and technical support.
The cost of bad economic policy advice for member countries is high given today’s stakes. The World Bank should be using is global pulpit to encourage countries to take big, bold, and—to the extent possible—targeted economic policy actions that protect lives and livelihoods. At the country level, it should provide guidance and technical input on national economic crisis response programs and help governments design and implement projects to implement it. And it can bring to bear its financial firepower to help government’s finance their economic and social relief programs. There’s no organization in the world better equipped than the World Bank to do this. But first, it must get its own policy house in order and comments such as President Malpass’ are a throwback to conventional wisdom when the world is in desperate need of anything but old orthodoxy.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
Image credit for social media/web: Photo by Ryan Rayburn / World Bank