As we have all discovered, life continues even under COVID-19 as people adapt and adjust to the new normal. Many usual things are getting unusual meanings and importance. The same must be true for development economics. It is hard to read a text in development economics without thinking how relevant it is in the context of COVID-19.
There is a practically unanimous consensus in the academic community (and a lot of divergence among the politicians, which is quite unusual) that the impacts of COVID-19 are ultimately defined by the existing social and economic cracks. The deeper the cracks (such as prevalence of gender violence, job precariousness, income and non-income inequality including access to social services), the stronger is the impact. COVID-19 strikes first and foremost those who a particularly vulnerable and disadvantaged: people with disabilities and chronic medical conditions, the poor, jobless, and homeless, women and girls. Speaking a few days ago on CNBC, the Nobel-prize winning economist Joseph Stiglitz said: “The coronavirus is particularly nasty to people with pre-existing conditions … and America is distinguished in having more health inequality than any of the other advanced countries. So as bad as our income inequality is, health inequality is even worse, and the pandemic is really exposing how bad it is.”
If the situation is so desperate in one of the most developed of the world, it must be even more precarious in the developing world. Africa where most of the global poor live has not been affected to the same extent as the developed economies. As of mid-May, over 75,866 cases of COVID-19 and 2,570 deaths have been reported across 43 countries in the region. South Africa, Cameroon, and Burkina Faso are the most affected. In many African countries the infection curves have been flattened although the total number of cases continues increasing slowly. For African countries and developing world in general, the main impact of COVID-19 is luckily not a health toll but the economic hardship that it brings.
The recent analysis by the IMF and UNECA (Economic Commission for Africa) leave little space for optimism. The most recent UNECA report warns that anywhere between 300,000 and 3.3 million African people could lose their lives as a direct result of COVID-19, depending on the intervention measures taken to stop the spread. The impact on African economies could be the slowing of growth to 1.8 per cent in the best-case scenario or a contraction of 2.6 per cent in the worst case. This has the potential to push 27 million people into extreme poverty. Overall, GDP is expected to contract by -1.6 percent in 2020, a downward revision of 5.2 percentage points compared to six months ago, the IMF says in its latest Regional Economic Outlook: Sub-Saharan Africa. Our own UNCDF analysis of the COVID-19 impact on Uganda’s economy (especially its micro, small and medium enterprises) predicts a massive loss of jobs affecting about 5 million people, and contraction of the GDP from 3.17 per cent to 3.91 per cent, about one half (or more) of the projected GDP growth of 6.2 percent in 2020/2021.
In a certain sense, this blog continues the discussion I started in my earlier blog Life After Corona: Business as Usual? (https://deveconhub.com/life-after-corona-business-as-usual/). This time, however, I do it through the prism of the recent book by Abhijit Banerjee and Esther Dufflo, two recipients of the 2019 Nobel prize in economics (together with Michael Kremer). The title of the book “Good Economics for Hard Times” (Allen Lane, 2019) reflects the two concerns that preoccupy the authors. One is dissatisfaction with the state of economics as a science and a profession. The other is concern about the course of socio-economic development in the contemporary world.
I’m quite sympathetic with the cautioning by Banerjee and Dufflo about the strength of economic prescripts and forecasts. There is a reason why the general public trusts weather forecasters twice as much as economists, as the authors report. There is hardly an issue on which the economic profession would totally agree. President Truman reportedly asked for an “one handed economist” who wouldn’t be able to say ‘…but on the other hand…” Disclosing multiple theoretical assumptions underlying proposed economic solutions and grounding them in empirical observations become critical under the conditions of an “intellectual capture” (to borrow from Fred Bloch) by certain economic discourses. Whether indeed economists should be “plumbers” as the authors suggest rather than “prophets” is a different matter.
Good economics for Banerjee and Dufflo is a kind of empirical economics based on observations and experimentations (after all, their Nobel prize was awarded “for their experimental approach to alleviating global poverty”). The theory makes too many unrealistic assumptions that do not pass the test of reality, claim the authors, whether they discuss globalization (and particularly global trade) or immigration. The authors rely on behavioral economics to explain why standard economic assumptions do not work in reality. Thus, the claim of the universal benefits of global trade liberalization assumes momentous reallocation of factors to the areas of comparative advantage based on free movement of labor and capital. Banerjee and Dufflo give many real-life examples from the US to India where resource (workers, but also capital) did not move easily. If they did, wages everywhere would have been more or less the same. If workers are slow to move across district boundaries, it is plausible they are also slow to move from one kind of job to another. There is also a body of solid evidence showing that, at least in developing countries, land does not easily change hands. Capital is sticky and bankers are slow to cut credit to firms that are not doing well, but also to lend to those firms that are doing well.
The big question hanging on the mind of many experts is how COVID-19 will affect global trade and liberalization in general in the long run. The pandemic cut global trade values by 3% in the first quarter of this year, and the downturn is expected to accelerate in the second quarter, with global trade projected to record a quarter-on-quarter decline of 27%. Does it point to the end of world trade and globalization as we know it? Hardly so, as I argued in my previous post https://deveconhub.com/life-after-corona-business-as-usual/. Supply can be restored relatively quickly as China’s experience demonstrates where 60 percent of micro enterprises and 40 percent of small enterprises already recovered by end of March.
There are no credible signs of import substitution: imported goods disappear but are not replaced with local substitutes. Demand, although suppressed, is still there as evidenced by hundreds of trucks crossing into Uganda daily to deliver imported goods. In contrast to the dramatic drop in passenger demand, air cargo operations are actually surging to respond to calls to move essential supplies to tackle the COVID pandemic. Hence, the key question is demand and how quickly it can rebound. With many governments around world offering direct financial support to population to maintain purchasing power and demand, there are hopes for a relatively quickly recovery until the end of this year. So, global trade will remain with us, and so will all its pains, which Banerjee and Dufflo highlight.
The other big theme that the authors of Good Economics for Hard Times tackle is migration, particularly its international dimension. This has been heavily affected by COVID-19 and, unlike for trade, this impact may be more longer-term. Banerjee and Dufflo argue that the real migration crisis is not that there is too much international migration (but rather perception of international migration in developed countries). According to them, most of the time, migration comes at no economic cost to the native population, and it delivers some clear benefits to the migrants. Problem is that people are often unable or unwilling to move, within and outside the country of birth, to take advantage of economic opportunities.
The book offers a fine analysis of international migration using behavioral economics concepts, such as aversion, to emphasize the internal constrains to international economic migration in the countries of birth. The aversion factor may play even a bigger role, at least in the short-term as we still do not have a vaccine against COVID-19. Any potential migrant from the developing world would think twice or thrice about leaving the relative safety of his or her country for the developed world heavily affected by COVID-19. Also, the existing data indicate that businesses operated by migrants in developed countries have been hit particularly hard because these are predominantly micro and small businesses and personal services requiring direct interaction with customers, which is obviously difficult under COVID-19 restriction measures even as a number of countries are cautiously opening up. So, there may be some reverse migration to the countries of origin (although aversion will act as a counterbalance in this case, too).
Furthermore, it now seems almost certain that international travel will become much more challenging. International borders have been closed and checks have been intensified. A recent article in Bloomberg (https://www.bloomberg.com/opinion/articles/2020-05-04/say-goodbye-to-the-in-flight-magazine-chris-bryant) claims that our air travel experience will never be the same. It vividly describes the multiple challenges of a future air travel involving strict document checks (including immunity passports), lengthy pre-flight and post-flight screening procedures (possibly involving COVID-19 testing), disinfection of passengers and their cargo and long processing times of up to four hours before and as much or even more after the flight. No doubts that all other means of transportation will adopt similar measures to minimize the risk of infection. And as we know form the post-9/11 experience, additional security measures, once introduced, become institutionally entrenched and difficult to lift. This will make international migration even more difficult than it is now.
The next big theme of the book is growth, growth determinants and the role of innovation, topics very dear to any development economist. Of course, since development economics has become a discipline in its own right some 50 years ago, we have not been able to concoct the “magic potion” for growth, and there is no guarantee this will happen in the next 50 years. As the authors honestly admit, “we don’t know very much about how to make growth happen and we know very little about why some countries get stuck but others don’t or how one gets out”. This admission makes the growth discussion in the book somewhat pessimistic, and the lack of a one-handed economist is felt stronger than in other parts of the book. But an informed debate like the one the book offers is always inspirational.
Whereas we may be pretty ignorant about what causes growth, we are relatively creation about what does not. The authors point to a number of issues that impede growth in developing countries. Two of them merit particular attention (also because of their potential impact on post-COVID-19 recovery): misallocation of factors (particularly in the labor market), and access to, and uptake of, information and innovation. Developing economies demonstrate a pervasive misallocation problems, which in particular manifests itself in labor market distortions divided between valuable and much sought-after government jobs with their job security and other benefits and a huge informal sector with precarious jobs, with a small formal private sector sandwiched in between and offering jobs, many of which paying marginally above jobs in the informal sector. As Banerjee and Dufflo document, the small number of quality jobs results in the late joining of the labor market by more educated young people in hope of obtaining a better paying job in the near future. But with a slow growth of quality jobs, these hopes remain mostly unfulfilled, with many of the young graduates eventually accepting after a few years the jobs they rejected in the beginning. At the same time, private companies complain about the lack of qualified staff and with the right skills and attitudes. Even more surprisingly, many government jobs, particularly in remoter areas remain vacant. In Uganda, the public sector had 34 per cent of vacant posts across ministries, departments, authorities and local governments in 2018. The vacant posts included key staffing posts such as doctors, clinical officers, professors, theatre staff, human resource officers, legal officers and commissioners among others. The government blamed it on inadequate budgetary allocations, high turnover in some careers, and unfavorable policies among other issues.
But misallocation in developing economies extends to the other factors of production, such as capital and land. The authors cite several examples when the financial sector and private investors prefer less productive and less profitable businesses to more dynamic ones due to a combination of information asymmetries and cultural factors. All in all, we cannot take it for granted that resources will flow to their best use. According to the authors, part of the reason poor countries are poor is they are less good at allocating resources. But the flip side is that it is possible to grow just by allocating the existing resources to more appropriate users.
Lastly, authors focus on the challenge of uptake of innovation—a problem well known to us at UNCDF as well as to any other development partner. The reason for this is two-fold. First, it is not easy to invent appropriate technologies that are also profitable in a poor country. A good part of what impact investors fund fails. A rule of thumb in the social investment world is that 10 per cent of the venture work out (the rest fold) and only 1 per cent reach significant scale. Second, efforts to introduce innovations (be they efficient cookstoves, off-grid energy solutions or digital wallets) often encounter frustrating lack of interest from the people whose lives are supposed to be changed. In addition to usual factors of inertia and conservatism, lack of understanding about the advantaged offered by those innovations as well as lack of understanding how such innovations can be accessed and used and what effort it takes play a big role in the spread of innovations, particularly among the so-called “last mile population” who are the usual target of many development agencies. But this is also true for businesses. In a situation when most companies use relatively simple technologies, have limited assets and operate at low profitability margins, staying in business is more important than taking the risks of a (potentially failed) innovation.
What implications does it all have for post-COVID-19 recovery? In a way, COVID-19 has been beneficial by brining to light the importance of technology and innovation. Companies that use innovative supply and delivery channels, including various digital solutions and e-commerce platforms have fared much better during the crisis. This hopefully bodes well for the future uptake of innovations. But as we talk about supporting the recovery of SMEs through dedicated funding facilities that would offer access to liquidity, the risk is that we will perpetuate the existence of inefficient businesses at the expense of potentially more efficient ones.
Such financial support mechanisms should take into account not only the financial performance of a company but also its propensity to innovation and, where possible, work in tandem with innovation funds to integrate innovation into recovery (or support the continuous use of innovation). It is clear to me that the government should take the lead in financing recovery measures for SMEs (incidentally, Banerjee and Dufflo strongly argue against government-bashers and in favor of a more active role of the government to ensure quality of growth—exactly what we need at this time). The challenge and risks of financing post-COVID-19 recovery at scale are too much for commercial banks without direct government involvement and support (in the form of guarantees, for example), not to mention the significant transaction costs required to overcome information asymmetries.
Challenge of growth of inextricably linked to the quality of growth and its sustainability, the authors argue. They claim that the obsession with growth at the root of the Reagan-Thatcher revolution has caused lasting damage and is a recipe for a social disaster when the benefits of economic growth are largely captured by a small elite. smaller lead, growth can be a recipe for a social disaster. Better redistributive policies, progressive taxation of top wealth owners and high-income earners, and reining back financialization of the economy are what the authors suggest. There are a few other important topics that the authors raise, such as taxes and the impact of tax cuts for business on growth rates (the authors argue there is no firm evidence that the cuts produce a positive impact); impact of cash transfers and the concept of the Universal Basic Income (unconditional cash transfers are an effective way of supporting poor households); local development and the role of cities (inconclusive); climate change and the challenges and costs of decarbonization (in authors’ view, the technological progress allows minimization of such costs, should there be enough political will).
This last point is of particular interest at this time characterized by dramatic drops in air pollution in coronavirus hotspots around the globe. Over China there was a 50 per cent reduction in nitrous oxide and carbon monoxide due to the shutting down of heavy industries and factories. But many are concerned that this is just a short respite and when the lockdowns are lifted and life returns to what it once was, so too will the pollution that clouds the skies and with it the greenhouse gases that fuel global warming.
The book’s coverage is impressive although a lot of it focuses on the US and the current political debate in the country—an obvious nod to the American readership. It could have been less US-centric and included more examples from the developing world to strengthen and develop the book’s arguments. But really disappointing to me is the lack of a clear stance vis-à-vis the issues the authors discuss. The starting point of “we don’t really know what causes this or that, and the existing evidence is controversial” is a rather poor foundation for discussion. Yes, it’s in line with the author’s position that economists should be “plumbers” rather than “prophets”. But even this, very restrictive description of the scope of economics, is different from avoiding taking theoretical or moral positions. The issues highlighted by the authors are manifestation of structural features of modern capitalism. Yes, capitalism has demonstrated a remarkable degree of adaptability and flexibility under external pressures, such as wars and revolutions. (Un)fortunately, COVID-19 falls short of both. There are limits to how much can be done working on the margins without dealing with the underlying structural issues.
I agree with the patriarch of Western Marxism David Harvey that this is a moment of opportunity to think through what an alternative might look like (although I’m less optimistic about his other statement that this is a moment in which the possibility of an alternative actually exists). Here’s the question Harvey asks in his recent article (https://tribunemag.co.uk/2020/04/david-harvey-coronavirus-requires-a-collective-response): “Do we want to come out of this crisis by simply saying that there’s 26 million people who need to get back to work, in some of those pretty awful jobs they may have been doing before? Is that how we want to come out of it? Or do we want to ask: Is there some way to organize the production of basic goods and services so that everybody has something to eat, everybody has a decent place to live, and we can put a moratorium on evictions, and everybody can live rent free? Isn’t this moment one where we could actually think seriously about the creation of an alternative society?” This is indeed the question we should be asking. Given the evidence of growing inequality and inherently unsustainable production they cite, Banerjee and Dufflo could have asked this question too. But they didn’t.