In the face of an unprecedented recession that required an equally unprecedented response, governments have struggled to bring very much-needed economic relief to their societies. The responses have been different: While some countries have opted for timid fiscal and monetary policies, others have implemented strong economic aid measures for their citizens. Political will (to expand public expenditure) and economic capacity (of indebtedness and in terms of fiscal balance) are among the reasons that determine the extent to which different governments have been able to react to this crisis.
Prior conditions matter. It should not come as a surprise that the capacity to cope with the economic crisis depends on structural restrictions and important differences between high- and low-income countries. The US and Western Europe economies have been able to transfer universal emergency payments, extend broad-based tax relief, and support businesses as well as the unemployed. Meanwhile, low-income countries do not have the means to increase their public expenditure or refuse to do so because of its high cost. Moreover, it is the latter countries that have the most to lose in the midst of this crisis, as they suffer worsening deprivations related to education, health and living standards.
In a similar manner, countries with pre-pandemic welfare systems (such as unemployment insurance) have had an easier time implementing support measures than those countries without such systems. Prevalent informal economies, for example, make it more difficult to distribute relief in the form of tax cuts and salary contributions. Previous welfare structures have allowed rich countries to aid their citizens, while poor countries do not have the means to do so cost-efficiently and in a reliable manner. In turn, the incapacity of low and middle-income economies to secure universal income prevented sick and vulnerable people from staying home.
Unequal conditions before the pandemic explain the unequal recovery. We are seeing fast post-recession economic growth in rich countries, where vaccination is rapidly progressing and where emergency expending has been broad and timely. But in most middle- and low-income countries either the recession persists, or economic growth is incipient. Poor countries, which need the most generous economic measures to recover, have been the ones to spend a smaller percentage of their GDP on fiscal policies to address the consequences of the crisis.
Based on recent data from the International Monetary Fund and the World Bank, we find that most of the world’s fiscal resources have been invested in countries where poverty is scant. Low-income economies, where poverty rates are higher, where the consequences of COVID-19 have been more severe, have had rather small fiscal investments.
Gaps between rich and poor countries are enormous. In absolute terms, the most advanced economies have allocated 227 times more resources than low-income economies, even taking into account the financial aid that the United Nations organizations have invested in these countries.
Lack of resources will quickly become a Catch-22. Limited resources will, for instance, hamper vaccination efforts and the control of the Sars-CoV-2 virus, with the immediate negative effect on economic recovery. Lower economic growth will make it harder for middle and low-income countries to rebuild battered health systems and create much needed jobs. And the uneven growth rates will create new geopolitical realities. The income gaps between high-income countries and the rest are likely to increase –in a stark reversal of one of the most notable trends of the 21st Century, the reduction in global inequality between countries.
The consequences of these vast differences in fiscal responses will last beyond the pandemic. The World Bank has warned that the economic recovery post-COVID-19 will be uneven, even if on average the figures look strong with a global growth figure of 5.6%. The OECD has warned that countries like South Korea and the United States will end up 2021 with income levels similar to those before the pandemic started, while countries like Mexico and South Africa would need to wait between three to five years to return to pre-pandemic income levels.
The social consequences in middle and low-income countries of limited fiscal space can have devastating, long term-effects. Food insecurity and poverty rates have already risen. The education gap between the haves and the have nots will create a long-term crisis for the children who could not learn and develop during the pandemic –and lack of fiscal resources will limit the capacity of governments to implement successful learning recovery programmes.
The pandemic has already altered fiscal positions around the world. Creative and brave policymaking is needed to ensure that fiscal resources are available to protect vulnerable populations in every country, and that this fiscal expansion is used effectively to ensure a long-term sustainable development path for the world.