UN: COVID-19 pushes LDCs to their worst economic performance in 30 years

The COVID-19 pandemic has resulted in the Least Developed Countries (LDCs) this year experiencing their worst economic performance in 30 years, the United Nations Conference on Trade and Development (UNCTAD) has said.

In its Least Developed Countries Report 2020, released on 3 December, UNCTAD said that while the pandemic had (at least initially) a less-than-catastrophic health impact on the LDCs, its economic repercussions have been ruinous.

In 2020, the COVID-19 pandemic led to LDC economies experiencing their strongest economic shock in several decades.

This, in turn, resulted in a sharp economic downturn, brought about by the combined effects of a deep world economic recession, and the consequences of the domestic containment measures adopted by LDC governments.

According to UNCTAD, between October 2019 and October 2020, the economic growth forecast for LDCs was revised sharply downwards from 5 to -0.4 per cent.

This revision is expected to lead to a 2.6 per cent reduction in per capita income in LDCs in 2020, with 43 out of 47 LDCs experiencing a fall in their average income levels.

"This is the worst economic outcome in 30 years for this group of countries, and represents a significant reversal of the economic and social progress achieved in recent years, including in terms of poverty and social outcomes," said UNCTAD, adding that it also makes reaching the Sustainable Development Goals (SDGs) by 2030 a more distant prospect.

In order to rebuild the economies of the LDCs post-pandemic, UNCTAD called for their productive capacities to be drastically improved.

It noted that the LDCs with the most developed productive capacities have best been able to combat the fallout from the pandemic.

At a virtual media briefing, Dr Mukhisa Kituyi, Secretary-General of UNCTAD, said that the COVID-19 crisis is leading the LDCs to their worst economic performance in 30 years, with per capita GDP for the group expected to fall by 2.6 per cent this year.

This has come amidst widespread employment lows, widening fiscal deficits, as well as record current account deficits.

"We project that absolute poverty in the LDCs will expand by 32 million and the extreme poverty rate in these countries as a group will rise from 32.5 per cent to 35.7 per cent in the current year," he said.

The pandemic is reversing years of progress that have been made earlier on particularly on the SDG agenda and is casting doubt on the possibilities of achieving the goals that have been set out, he added.

Paul Akiwumi, Director of the UNCTAD Division for Africa and LDCs, said that the LDCs have been facing considerable challenges with regards to climate change, the economic recession and now COVID-19.

He said that because they are commodity-driven, we have seen through the COVID-19 crisis and the resulting lockdowns that the LDCs have been able to export less, their revenues and tax collection are down, and their economies have suffered considerably.

There is a need for the LDCs to focus on their productive capacities to be able to diversify their economies to be able to deal with shocks, and resilience is one of the most important issues that UNCTAD is focusing on, he said.

It is essential that productive capacities be the centrepiece of the work that the LDCs look to in the future with regard to policy decisions, he said.

He added that the state plays a very critical role, and must play that critical role, in steering the development strategies and plans in rule-setting as well as initial investment and coordination of the activities so that we can get the LDCs back on track.

Health and economic impact of COVID-19

According to the UNCTAD report, the first LDC to declare a case of COVID-19 infection was Nepal, already in January 2020.

By March 2020, the disease had spread widely throughout the LDC group, leading to a rapid increase - from three to 37 - in the number of LDCs reporting cases of COVID-19 infection between the beginning and the end of the month.

By mid-May 2020, 43 LDCs reported cases of infection.

However, in spite of the initial catastrophic forecasts, the health impact of the COVID-19 pandemic on LDCs during the first eight months of 2020 was considerably less severe than what had been initially feared, said UNCTAD.

Seventy-one ODCs (other developing countries) and 42 developed countries had higher infection rates than the LDC average on 31 August 2020.

Infection rates in the LDCs corresponded to one fifth of those prevalent in ODCs, and less than 10 per cent of those of developed countries.

Among LDC sub-groups, the most affected were the Asian LDCs, especially Bangladesh and Nepal, which had more than 1,000 cases per million inhabitants as of 31 August 2020. On average, African LDCs and Haiti as a group had the lowest infection rate.

The health outcome of the pandemic in LDCs during the first eight months of 2020 contrasts with that of ODCs, 64 of whom had a higher COVID-19 mortality rate than the LDC average, as well as developed countries, 50 of whom had more deaths relative to the population than the LDC average.

As of late August 2020 the COVID-19 mortality rate of LDCs corresponded to 13 per cent of that of ODCs and 3 per cent of that of developed countries.

The fact that the health impact of the pandemic on LDCs was less severe than initially feared (at least during the first eight months of 2020) has to be regarded with caution, said UNCTAD.

It is possible that the picture of the less serious health impact of COVID-19 in LDCs than in other country groups is influenced by spurious factors.

First, it is likely that under-reporting of COVID-19 cases has occurred in some LDCs due to their lower COVID- 19 testing capacities, as well as less efficient casualty counting and reporting systems, as compared to other country groups.

Second, there may be a timing issue: typically, LDCs were affected by the pandemic later than other countries, and it cannot be excluded that they will experience a broader spread of the pandemic in the final months of 2020 or later.

Nevertheless, the fact that LDCs were (at least initially) less impacted than other countries by the pandemic has been attributed to different reasons, including policy action and demographic factors, said UNCTAD.

As most LDCs were affected by the pandemic later than countries in East Asia and Western Europe, they had the time to adopt containment and mitigation measures, such as confinement, quarantine, social distancing and travel bans, which prevented the pandemic from spreading further.

LDCs with a pre-existing manufacturing capacity have been the most capable of formulating innovative local manufacturing solutions in response to the pandemic, said UNCTAD.

Therefore, it said, those LDCs which had a relatively broader industrial base were better prepared to confront the medical emergency and implement innovative solutions based on local conditions.

It added that this indicates that a link exists between the preparedness of countries to face an epidemic and the level of development of their productive capacities.

Furthermore, it added, the demographic factors explaining why COVID-19 had a lesser impact on LDCs is that the proportion of young population - known to be more resilient in case of infection - in these countries is much larger than in the most affected countries.

Another demographic factor favouring a weaker impact in LDCs is lower population density, which reduces the likelihood of contagion.

It said that even if the pandemic does not spread in the LDCs to the same extent as other countries (both ODCs and developed countries), they are nonetheless being severely hit by its economic, social and environmental consequences.

In 2020, LDC economies suffered the strongest economic shock in several decades due to the consequences of the COVID-19 pandemic. This, in turn, has led to a sharp economic downturn due to the combined effects of a deep world economic recession and the consequences of the domestic containment measures taken by the LDC governments.

Worse still, these consequences are likely to linger in the medium term, said UNCTAD.

"The severe economic impact on LDCs is explained by their structural economic shortcomings and by their not having fully recovered from the shock of the 2008-2009 global financial crisis."

Since then, the economic performance of LDCs has been adversely affected by the "new normal" of sluggish growth in the global economy, persistently low international commodity prices, growing trade and current account deficits leading to rising external debt, and an exhaustion of the fiscal space available before the outbreak of the global financial crisis.

"Therefore, LDC economies started the current economic slump from a situation of heightened economic vulnerability," said UNCTAD.

The economic situation of LDCs was clearly different when the global financial crisis of 2008-2009 broke out as they had weathered the international turbulence relatively better than initially expected.

They were able to do so thanks to a combination of some degree of isolation from major international financial flows and the availability of policy space accumulated during the years of strong economic growth of the early 2000s.

The adverse economic impacts of the present COVID-19 crisis has severely affected the process of growth and development of LDCs, including a setback or reversal in their progress towards reaching their development goals, starting with poverty.

It is also likely to delay or extend the graduation process of several LDCs that had been scheduled to graduate as of December 2020.

The measures adopted by most LDCs, e.g. lockdown, movement restriction and travel ban measures, caused a sharp downturn in economic activity, and created a shock in both demand and supply, similarly to what also occurred in other economies, said UNCTAD.

It noted that between October 2019 and October 2020, the economic growth forecast for LDCs was revised sharply downwards from 5 to -0.4 per cent.

This revision is expected to lead to a 2.6 per cent reduction in per capita income in LDCs in 2020, with 43 out of 47 LDCs experiencing a fall in their average income levels.

"This represents the worst economic outcome in 30 years for this group of countries. It has not only led to a reversal in the economic and social progress achieved over recent years, including in terms of poverty and social outcomes, but also makes reaching the Sustainable Developed Goals a more distant prospect," said UNCTAD.

A protracted recession could cause permanent job destruction, threaten enterprise survival - with related losses in terms of tacit knowledge and productive capabilities - and potentially have a long-term effect on potential output.

Avoiding this dramatic outcome will be particularly crucial in LDCs, because of the structural characteristics of their forms of entrepreneurship, it added.

"With a plethora of mainly informal "me-too businesses", a pre-dominance of small firms, and limited access to credit for the private sector, a prolonged crisis would further damage the already weak entrepreneurial landscape of LDCs," UNCTAD cautioned.

It said the restrictive measures adopted by LDCs caused a shrinking of economic activity especially in wholesale and retail trade (including in the informal sector), transport and manufacturing.

Fiscal accounts were directly impacted by the slump in economic activities, which led to shrinking revenues at a time when expenditure had to expand due to rising health spending, personal and firms' income support schemes and other forms of expenditures deriving from the existing limited social protection schemes.

The latest deterioration of the fiscal situation comes on top of a trend of rising fiscal deficits in LDCs during the 2010s, said UNCTAD.

The fiscal situation prevailing prior to the outbreak of the pandemic prevented LDCs from taking more decisive fiscal measures to prop up their economies in response to the COVID-19 shock.

The median additional spending/foregone revenues implemented by LDCs amounted to just $17.8 per capita, less than one fourth of the corresponding figure for ODCs ($76), and just 1 per cent of the amount mobilized by developed countries ($1,365).

Likely stronger than the domestic demand shock was the impact of the world economic recession on the LDC economies.

This is the deepest downturn the world is undergoing since the Great Depression of the 1930s, with per capita output contracting in the largest fraction of countries since 1870. The downturn also brought about a sharp shrinking in the external demand for LDC goods and services, depressed the prices of their main exports, and caused a slump in inflows of external resources (remittances, capital).

The most deeply affected export commodities of LDCs during the first half of 2020 were fuels, which accounted for over one fourth of the group's merchandise exports before the outbreak of the pandemic, said the report.

It noted that fuel prices slumped by 36 per cent in January-July 2020, as compared to the corresponding period in 2019, while quantities exported also declined sharply following a worldwide shrinking of transport, travel and manufacturing-related activities.

In the context of this shrinking of world trade and plummeting LDC exports, it is unlikely that LDCs will meet their long-standing goal on trade, i.e. that of doubling their share of world exports of goods and services in 2020, said UNCTAD.

This goal was expressed initially in the Programme of Action for the Least Developed Countries for the Decade 2011-2020 (commonly referred to as the Istanbul Programme of Action - IPoA), and later reaffirmed in the 2030 Agenda for Sustainable Development (2015).

There had been no progress towards that goal before the present crisis, as the group's share of world exports had hovered around 1 per cent since the objective of doubling the share was adopted.

Moreover, it is unlikely that demand for LDC main export products (e.g. garments, fuels, tourism) will pick up faster than other types of goods and services when world trade recovers from the COVID-19 slump, UNCTAD said.

Rather, economic stimulus packages adopted in the major economies are expected to focus on products and sectors, such as high-tech services, green energy and construction. Long-distance tourism is also not expected to recover quickly.

The widening trade deficit and contraction in remittances receipts in 2020 are expected to lead to a further expansion of the total current account deficit of LDCs as a group.

It is forecast to deepen sharply from 3.8 per cent of GDP in 2019 to 5.6 per cent of GDP in 2020.

This will be the highest collective current account deficit of the LDCs, and it will exacerbate the trend towards widening current account deficits since the global financial crisis of 2008-2009, said UNCTAD.

"Widening current account deficits need to be financed by higher capital inflows and this will represent a major challenge for LDCs. This heightened financing need comes at a time when the major forms of capital inflows of LDCs are also shrinking," it added.

The foremost type of capital inflow into LDCs as a group is official development assistance (ODA), as LDCs are the most aid-dependent economies in the world. It could therefore be expected that ODA inflows rise in order to cover the rising external financing needs of LDCs.

However, this heightened need for ODA arises in a context in which the volume of the flows disbursed to LDCs has been roughly stagnating since 2013.

Donor countries are far from respecting their long-standing commitment to deliver ODA to LDCs at the height of 0.15-0.20 per cent of donor country gross national income (GNI). Moreover, this heightened need for additional ODA comes at a time when the national budgets of donor countries are themselves under pressure due to sharply higher fiscal deficits, said UNCTAD.

If donor countries were to maintain their ODA as a share of their own GNI constant, total ODA to developing countries (including LDCs) could decline by as much as 10 per cent in 2020, as compared with 2019. On the other side, the resources required for donor countries to honour their aid commitments are but a fraction of the value of stimulus packages they adopted in response to the COVID-19 crisis.

According to UNCTAD, historically, the incidence of extreme poverty in the LDCs had remained stubbornly high even prior to the coronavirus pandemic, and the pace of poverty reduction, which was moderately encouraging in the early and mid-2000s, has slowed down markedly in the aftermath of the global financial and economic crisis.

As a result, said UNCTAD, the share of people living in extreme poverty has virtually stalled at about 35 per cent of the population for most of the past decade.

Due to the combined effect of persistently widespread poverty and rapid demographic growth, this implies that the number of LDC inhabitants living in extreme poverty had been rising prior to the pandemic, and the LDCs were already accounting for a rising proportion of the world's extreme poor, it added.

In assessing the immediate impact of the COVID-19 pandemic on poverty rates in the LDCs for the year 2020, UNCTAD said the estimates reveal that the downward growth revision in the wake of coronavirus outbreak will lead to a three percentage points' increase - from 32.2 to 35.2 per cent - in the headcount ratio against the $1.90 per day poverty line.

This is equivalent to a rise of over 32 million people living in extreme poverty in the LDCs.

When measured against the $3.20 per day poverty line, the incidence of poverty will rise by 3.6 percentage points (corresponding to 38 million additional poor), while the impact is smaller when assessed against the $5.50 per day poverty line, as the overwhelming majority of the population in LDCs fell below this threshold even before the pandemic.

The LDCs have so far been spared from the most severe health impacts of the COVID-19 pandemic, they have nonetheless been among the worst hit by the economic and social consequences of this multi-dimensional crisis, said UNCTAD.

This apparent contradiction stems from the acute vulnerability of LDC economies and societies to shocks that are out of their control. The pandemic outbreak has exacerbated pre-existing LDC vulnerabilities.

The limited capacity of LDC policymakers to react to the shocks originating abroad, regardless of whether they are related to health, the economy or the environment, dramatically highlights the low level of resilience of LDC economies.

In sum, the combination of the health, human, economic and social aspects of the present crisis dramatically highlight the vulnerability of LDC economies to shocks beyond their control.

They will result in a sharp setback in the process of growth and development of LDCs, including an impediment or reversal in their progress towards their development goals, starting with poverty, said UNCTAD.

Short- and medium-term outlook

According to UNCTAD, the adverse health, economic and social impacts of the COVID-19 crisis currently faced by the LDCs and their long-standing development deficits call for urgent policy action by policymakers of these countries and their development partners.

The major economic priorities of LDCs fall into two time horizons. In the short term, these countries need to do "whatever it takes" to counter the present recession, support the incomes of their citizens, firms and farms, and buttress the activity level of their economy.

UNCTAD said any short-term measures to be taken should have the medium-to-long-term economic outlook for LDC economies in its sight and be coherent with the development policies implemented for longer time horizons.

"This entails addressing the enduring structural challenges of LDC economies, including their vulnerabilities, which can be overcome or compensated by building resilience."

It noted that in developed or mature economies, resilience is the result of prudent macroeconomic policies. In the case of developing countries, resilience can only be built over the medium-to-long-term, and is the result of a successful development process which enables economies to overcome the major structural features of under-development, such as concentration of output and exports, over-dependence on imports of critical goods and services, chronic current account deficits, etc.

Building resilience in the LDCs therefore entails tackling the underlying structural causes of their vulnerability, under-development and ingrained poverty, said UNCTAD.

"These long-standing development challenges of LDCs predate the COVID-19 crisis. While the economic, social and political context which gives rise to extreme forms of vulnerability and poverty are complex, these phenomena have a common underlying factor: the low level of development of their productI've capacities."

The expansion, upgrading and utilization of productive capacities results in overcoming the structural features leading to vulnerabilities, said UNCTAD.

In fact, it added, the reduction in the level of vulnerability achieved by some LDC economies since the beginning of the century is largely explained by the progress these countries have achieved in developing their productive capacities and thereby achieving structural transformation.

Nevertheless, there is a serious risk of a widening gap between the LDCs and other developing and developed countries. Such a divergence might be further accentuated in the future, considering that, broadly speaking, the best performing LDCs are those in the process of graduation, or close to that milestone.

Once this process is achieved, the LDC category will be composed of the most vulnerable countries.

However, UNCTAD stressed that an analysis of the Economic and Environmental Vulnerability Index (EVI) suggests that even graduating LDCs or recent graduates remain exceedingly vulnerable to exogenous shocks.

Lacking a sustained process of structural transformation of these economies, vulnerability factors, e.g. export concentration, limited domestic value addition, dependence on sensitive imports and foreign financial resources will likely linger on, making them more liable to fall prey to the so-called middle-income trap.

"As the world scrambles to cope with the fallout from COVID-19 and the ensuing global recession, there is an understandable temptation to prioritize in the policy discourse either domestic concerns or issues that are relevant to the global economic, social and political system as a whole," said UNCTAD.

This entails a concrete risk that LDC-specific issues will be largely treated by the international community as a second-order priority.

However, said UNCTAD, rather than face such an outcome, the LDCs need to receive special attention from the international community when addressing both their short-term priorities and their medium-to-long-term challenges, not only because of the severity of the current crises and their continuing vulnerability but also because these developments come at a time when LDCs and their development partners are discussing a plan of action to guide domestic and international policymaking for LDCs in the decade 2021-2030, to follow the Istanbul Programme of Action (IPoA) and expected to be adopted during the Fifth United Nations Conference on the Least Developed Countries (UNLDC-V, scheduled to take place in Doha, Qatar in January 2022).

UNCTAD added that both the international community and LDCs themselves are advised to concentrate their future actions and policies for LDCs on the expansion, strengthening and utilization of productive capacities in these countries, particularly as their deficit is at the root of their vulnerability.

"This response will bring about the structural transformation of the LDC economies, which they will need to achieve if they are to reach their development goals."

Against this background, it is all the more vital to highlight the continued relevance of the LDC category, not only during the "Great Lockdown" and its immediate aftermath but, equally importantly, over the course of the decade, which will witness the overlap between the remaining horizon of the Agenda 2030 for Sustainable Development and the next Programme of Action for LDCs, said UNCTAD.

In this respect, the reasons for reiterating that the LDCs are "the battleground on which the 2030 Agenda for Sustainable Development will be won or lost" go beyond the moral commitment to "leave no one behind", and reflect long-term considerations related to the notions of global public goods and the potential for positive and negative spillovers across nations in an increasingly interconnected world, it added.

Regardless of their small economic weight, part of the relevance of the LDC category stems from the fact that these 47 countries account for a significant and rising share of the world population.

It is estimated that 1.06 billion people currently live in LDCs, and that the population of these countries will expand to 1.31 billion by 2030, which will see them hosting 15 per cent of humanity. Nor are foreseeable cases of graduation from the LDC category likely to radically alter this picture.

Moreover, as demographic transition continues to progress at a sluggish pace, the population structure in the LDCs continues to be characterized by a high proportion of younger age cohorts - a trend which is expected to continue in the new decade.

As of 2020, 39 per cent of the population of LDCs was less than 15 years old, while the dependency ratio is forecast to decline from the current 74 per cent to 67 per cent in 2030.

In a global perspective, this implies that LDCs currently account for 20 per cent of the world's youth, and their weight is set to increase by four percentage points by 2030.

These long-term tendencies have wide-ranging implications in terms of potential market size and dynamism, and challenges in labour markets, education and health, but also with respect to prospects for urbanization, migration, and potential socioeconomic tensions.

According to UNCTAD, all of which adds further emphasis to the importance of fostering a sustainable and broad-based recovery in the LDCs - a recovery underpinned by the development of their productive capacities and the resulting structural transformation of their economy, as well as the generation of sufficient employment opportunities to accommodate the growing number of new entrants into labour markets.

Consequently, as preparations for the UNLDC-V Conferences accelerate, LDCs have come to represent the main locus of extreme poverty worldwide.

With barely 14 per cent of the world population, they are estimated to account for over 50 per cent of the people living with less than $1.90 per day at a global level, and about 34 per cent of those with less than $3.20 per day.

Evidence of this nature points to the ongoing geographic polarization of poverty and speaks volumes to the sheer magnitude of global inequalities, said UNCTAD.

"It also vindicates the argument that the LDCs represent the litmus test for the 2030 Agenda for Sustainable Development, especially in relation to the promises to "leave no one behind", reducing global inequalities and eradicating extreme poverty", it concluded.

By Kanaga Raja.

Source: SUNS - South North Development Monitor, SUNS #9247 Friday 4 December 2020.