The COVID-19 pandemic continues to have a devastating effect on public health and to rattle the global economy with structural shocks. The pandemic has killed nearly 1.4 million people, while the IMF expects global GDP this year to shrink by 4.4 percent.
However, the COVID-19 crisis could offer developing countries a path toward greater economic self-reliance.
This is partly because developed countries have so far borne the majority of the pandemic’s health effects. Many advanced Western economies have experienced more COVID-19 cases and deaths relative to their population size than developing countries of the Global South have, despite their superior healthcare systems and stronger social safety nets.
Illustration: Kevin Sheu
For example, India’s health system ranks 112th globally, while that of the US ranks 37th, but whereas India has so far reported about 6,400 COVID-19 cases per million population, the US’ tally is more than four times higher.
Some developing countries such as Vietnam effectively responded to COVID-19 at an early stage by introducing strict testing, tracing and quarantine measures — something most developed countries failed to do. Even after allowing for possible underreporting and data inaccuracies in poorer countries, the relative performance of developed economies remains a paradox.
Development financing has started to plummet as richer countries focus on engineering domestic post-pandemic recoveries.
The Organisation for Economic Co-operation and Development (OECD) estimates that external private finance inflows to developing economies this year could decrease by US$700 billion year-on-year, exceeding the effect of the 2008 global financial crisis by 60 percent.
Non-resident portfolio outflows from emerging markets totaled US$83.3 billion in March alone, the Institute of International Finance said.
The OECD expects global foreign direct investment this year to drop by at least 30 percent, with flows to developing economies likely to fall even more. Such trends imply a grim outlook for Global South countries that historically have largely relied on development aid from the Global North.
However, studies have shown that development aid and humanitarian assistance do not necessarily foster economic empowerment. An OECD survey found that 48 to 94 percent of respondents in developing countries did not believe that humanitarian assistance helped them to become economically self-reliant.
People want financial autonomy, not prolonged assistance.
The debate over the effectiveness of development aid is an old one, with critics claiming that rich countries use aid as a tool to exploit developing economies’ resources, and often attach conditions to ensure that donors reap the bulk of the export receipts.
However, many developed countries have lost much of their soft power because of their shambolic pandemic responses. Even before COVID-19 struck, many developing economies had been looking for ways to make a sustainable shift from aid dependency to self-reliance.
In 2018, Rwanda banned secondhand clothes imports with the aim of encouraging its domestic textile industry to produce higher value-added garments. The US responded by ending the country’s duty-free export privileges.
Last year, the British government allocated part of its ￡14 billion (US$18.6 billion) aid budget to capacity-building projects intended to help developing countries increase their international trade and attract foreign direct investment.
Developing countries today have more opportunities to become self-reliant.
For example, trade in developing East Asia has declined less sharply than in the West during the pandemic, the WTO said.
Industries producing high-value-added goods are usually more affected by downturns, while developing countries’ greater resilience, stemming from their reliance on low-value-added manufacturing, is evident in Vietnam’s textile and garments sector. It has remained operational throughout the pandemic and next year is expected to have a swifter recovery than its regional competitors.
Digitization is likely to play a crucial role in the post-pandemic recovery by significantly increasing e-commerce, which implies a fairer competitive playing field for producers around the world. Bangladesh’s e-commerce sector grew by 26 percent year-on-year by August, and other South Asian countries are showing a similar trend.
The healthcare and pharmaceutical sectors are expected to thrive in the post-pandemic economy, as people become more aware of the importance of health and fitness. Least developed countries can take advantage of WTO provisions by producing more generic drugs, which face no patent-related obstacles.
Governments in the Global South can mobilize domestic resources to offset the decline in external development finance — especially by transforming their tax policies to generate revenue from fast-growing digital economic activities.
Developing countries’ low levels of tax revenue as a share of GDP — typically between 10 and 20 percent, compared with 40 percent in high-income countries — hinder development by constraining governments’ ability to invest in public goods such as healthcare, infrastructure and education.
Developing countries face several hurdles on the path to self-reliance — not least poor governance, unfavorable business climates and civil conflicts — but they must break with the post-1945 paradigm of external development finance, which has been primarily driven by the Global North and shaped by its geopolitical agenda.
For far too long, developing countries have had to listen to lectures from those who think they know better. Today, developing-country governments must chart a development agenda that is free from donor conditionality.
Every crisis contains great opportunities, and the COVID-19 pandemic is no different. It offers developing countries nothing less than the chance to reinvent and reboot their economies — and to shake off the disabling legacy of external aid dependency.
Syed Munir Khasru is chairman of the Institute for Policy, Advocacy and Governance.
Copyright: Project Syndicate
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