OPINION: Structural forces mean emerging economies can’t offer the necessary Covid-19 fiscal-relief packages.
Among the many inequalities revealed by the Covid-19 pandemic, one of the most striking is the dramatic divergence in governments’ fiscal responses. Economic activity has collapsed worldwide as a result of lockdown measures to contain the coronavirus. But although some developed countries have been able to deploy fiscal stimulus on an unprecedented scale, most have not.
By contrast, the fiscal response across most developing economies has been underwhelming, but not because the economic conditions facing these governments are any less challenging. If anything, the lockdown measures and disruption of global trade and investment have inflicted even greater damage on developing and emerging economies.
These differences are evident even within the G20. By the end of April, new public spending by the group’s emerging economies averaged about 3% of GDP, compared to 11.6% among the advanced economies. And even within that cohort, there was wide variation, with South Africa increasing spending to 10% of GDP, while India’s new public spending was less than 1%.
The widespread cessation of economic activity means that tax revenues are plummeting just when governments need to increase spending. For developed-country governments that can borrow directly from the central bank, this isn’t really a problem. But for most developing countries, the calculus is more difficult. Even those without immediate debt-repayment concerns are showing little inclination to raise public spending to anywhere near the levels needed to prevent a broader economic collapse.
In this self-imposed climate of neoliberal fear, the very idea of instituting capital controls is dismissed as crazy, on the grounds that it would frighten away foreign investors. Yet the economic fallout from the pandemic has made a substantial increase in public spending essential for most developing economies.
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