1. COVID-19 impacts through the lens of exposure and resilience
COVID-19 has rapidly exposed countries to multiple high-impact socio-economic risks relating to health, employment, economic structure and international linkages. While several factors determine the severity of these impacts, it is clear that building resilience through strategic policy efforts could help mitigate impacts in the event of future global crises. Applying exposure and resilience lenses to shocks could reshape future development co-operation to leverage higher returns for individual countries, across regions and globally.
Across COVID-19 responses, resilience has emerged as a key factor in reducing the severity of impacts and supporting more rapid recovery, suggesting that resilience-building should be a greater priority in future development co-operation.
The socio-economic impacts of COVID-19 have exacerbated existing differences and vulnerabilities between countries and regions. They have hit some societal groups particularly hard, such as informal workers who lack social protection and children whose access to education has been affected.
Exposure and resilience are key concepts to understand the potential impact of shocks on a given country or region and to forecast the potential speed of recovery. They can be measured by applying a framework of indicators. The nature of the shock determines the most appropriate indicators.
Strategic sequencing of public spending is key to response, recovery and resilience-building
In the event of a pandemic on the scale and scope of COVID-19, immediate health impacts and containment measures quickly trigger broad socio-economic impacts, amplifying risks to well-being and livelihoods across all sectors of society and indeed for all citizens. While the most pressing question might be how well prepared a government is to contain the pandemic, in reality that is only one part of the equation in managing recovery and a return to stability.
While it is much too early to draw conclusive lessons from the handling of COVID-19, important insights and lessons can be drawn through analysis of the channels of exposure that put a given country at risk in certain areas and the drivers of resilience.
While it is much too early to draw conclusive lessons from the handling of COVID-19, important insights and lessons can be drawn through analysis of the channels of exposure that put a given country at risk in certain areas and the drivers of resilience. Applying the lens of “exposure and resilience” to responses to date in Asia, Latin America and Africa highlights key differences and vulnerabilities, in turn demonstrating the need for customised development co-operation strategies to build resilience such that future risks will have lower impacts.
COVID-19 has exacerbated existing differences and vulnerabilities
The COVID-19 pandemic has hit the world unexpectedly and hard. As of mid-October 2020, deaths from the virus account for roughly 2% of 46 million total global deaths from all causes so far this year (Worldometer, 2020[1]). The epicentre of the pandemic has shifted several times. Following the outbreak in the People’s Republic of China (hereafter “China”) in late 2019 and early 2020, it moved to Western Europe with a first peak in the spring of 2020. The virus then spread across the Americas, which have experienced the highest incidence and death rates, with the United States (247 000 deaths on 12 November 2020) and Brazil (163 000 deaths) being the epicentres of the two hemispheres. Beyond Latin America, most of the developing world has been less affected in terms of the actual health impact. Africa counts a total of 46 000 confirmed deaths. At the time of writing, a second wave has taken hold in Western Europe.
Measures taken to respond to COVID-19 have shattered what was largely a positive outlook for the global economy at the start of 2020 (Figure 2.1). Experts now project that global gross domestic product (GDP) will contract by 4.5% in 2020 (OECD, 2020[2]). China and the ASEAN (Association of Southeast Asian Nations) region have (relatively) the best outlook, reflecting effective, early containment. Africa is likely to suffer a recession in the order of -3% of GDP while Latin America will see a 5% decline. A diverse range of countries and regions, including developing Europe, the Middle East, Central Asia and the United States, are all expected to suffer GDP contractions of around 6%, while the euro area will decline by 8% (Figure 1). These regional averages mask drastic outliers, such as -11% for both Argentina and South Africa, and -10% for India, Italy, Mexico and the United Kingdom (OECD, 2020[2]).
Sources: Author’s elaboration based on IMF (2020[3]), World Economic Outlook, October 2020: A Long and Difficult Ascent, https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020; IMF (2020[4]), Regional Economic Outlook Reports (REO), http://datahelp.imf.org/knowledgebase/articles/500086-regional-economic-outlook-reports-reo.
As could be expected, the impact of this pandemic exacerbates existing differences and vulnerabilities. In relation to poverty, it is expected that between 88 million and 115 million people who were just “getting by” will be pushed into extreme poverty (i.e. living on USD 1.90/day) (World Bank, 2020[5]). The number of people surviving on less than USD 3.20/day is expected to rise by between 170 million and 220 million (Mahler et al., 2020[6]). Additionally, millions of people who have lost employment have no access to income support: 55% of the global population has no or only partial social protection (OECD, 2020[7]). While advanced economies have quickly rolled out income support and furlough schemes, the impact – particularly the health impact – has often been hardest on the most vulnerable (See for example, Grooms, Ortega and Rubalcaba (2020[8]).
Workers in the informal economy have been hit particularly hard, confronting governments with the challenge of finding ways to deliver support to previously self-sufficient but unregistered households during lockdowns or the enforcement of distancing measures (Box 2.1). In all low-income countries, and even in many upper middle-income countries, the informal economy is the main source of employment and livelihood (ILO, 2018[9]). An absorber of labour force and even a source of some economic dynamism during economically good times (see, for example, AfDB et al. (2012[10]), most workers in this sector have no health insurance or social protection, no access to income support schemes, and only a small amount of savings to cushion loss of income.
Children everywhere will suffer long-term consequences from reduced skill development linked to COVID-19. For an advanced economy context, it has been estimated that losing a half-year in schooling, reduces lifetime consumption by 0.65% (Fuchs-Schündeln et al., 2020[11]). Children from poor family backgrounds, particularly in developing countries, will suffer even more (Engzell, Frey and Verhagen, 2020[12]). This is especially true for those with no access to online learning. In Latin America, for example, less than 14% of poor students (those in households earning less than USD 5.50/day, PPP 2011) in primary education have a computer connected to the Internet at home (Basto-Aguirre, Cerutti and Nieto-Parra, 2020[13]).
Past experience has underpinned effective responses
Two overarching lessons quickly emerge from early analysis of the COVID-19 response to date.
First, learning from previous epidemics has underpinned the most effective government responses. East and Southeast Asian countries, many of which built strong response protocols after dealing with severe acute respiratory syndrome (SARS/2003) and Middle East respiratory syndrome (MERS/2015), have been most effective in containing COVID-19. The experiences of Korea, Chinese Taipei and Viet Nam highlight the importance of effective test-trace protocols and communication campaigns (Tworek, 2020[14]). Similarly, African countries that have lived through Ebola outbreaks (2014-16) quickly deployed locally adapted responses and have fared comparatively well with COVID-19. To prevent the spread of infections beyond local hotspots, for example, Côte d’Ivoire quickly restricted movement in and out of its large cities. This proved effective while adapting to the reality that many citizens earn their daily living in the informal economy. In contrast, India’s early decision to impose a full lockdown of New Delhi forced hundreds of thousands of poor migrant workers, now deprived of their daily livelihood, to leave the city, possibly spreading the virus as they trekked back to their home regions (Biswas, 2020[15]). Many richer countries were less prepared and still struggle with implementing lessons from the past experience of others.
Second, the capacity of governments to respond with income support measures changes with income level. A stocktaking from June 2020 showed that while high-income countries focused support programmes on the self-employed, middle- and lower income countries sought to expand and adjust social assistance programmes to support informal economy workers (Figure 2). Often, support programmes targeting informal workers provide time-limited, targeted cash transfers to groups whose incomes were directly affected by compulsory confinement but who were (or still are) outside of existing welfare programmes (e.g. Colombia, Morocco, the Philippines). In some cases, cash transfers were complemented by temporary public work programmes (OECD, 2020[7]). Yet capacity constraints are evident. While 70% of high-income countries covered by the OECD Country Policy Tracker deployed support programmes for self-employed or informal workers, only two low-income countries in the sample had mounted support programmes for informal workers by June 2020 (Figure 2.2).
As of September 2020, a report from the World Bank shows that 212 countries have planned or put in place social protection measures in response to COVID-19. However, the divergence in response capacity remains clear: per capita, average spending on the COVID-19 social protection response has been USD 4 for low-income countries, USD 28 for lower middle-income countries, USD 57 for upper middle-income countries and USD 695 for high-income countries (Gentilini et al., 2020[16]).
Note: For each income group, the chart provides the exact number of countries that adopted the policy, as per data compiled in June 2020.
Source: Authors’ work based on OECD (2020[17]), OECD Country Policy Tracker, https://www.oecd.org/coronavirus/country-policy-tracker.
Support to businesses during the pandemic shows a similar pattern. Almost all high-income economies applied credit guarantees to help firms survive during lockdowns and in the face of heavy losses. Among lower income countries, only a few mounted such schemes (OECD, 2020[18]). This reflects that formal credit plays a much smaller role for largely informal economies with limited access to banking. Where actors have launched such measures, subsidised credit lines and guarantees, tax deferrals, and utility relief have supported the most affected businesses. To prevent bankruptcies and facilitate salary payment, most government measures have focused on small- and medium-sized enterprises and the tourism, aviation and public events sectors. Despite these efforts, in Latin America and the Caribbean, some 2.7 million firms – mostly microenterprises but making up 19% of the total – are likely to close (OECD et al., 2020[19]). Asia shows a similar pattern, with 68 million jobs at risk (OECD, 2020[20]; ADB, 2020[21]). The African Union estimates that approximately 20 million jobs could be lost (AU, 2020[22]).
Note: For each income group, the chart provides the exact number of countries that adopted the policy as per data compiled in June 2020.
Source: Authors’ work based on OECD (2020[17]), OECD Country Policy Tracker, https://www.oecd.org/coronavirus/country-policy-tracker.
As noted, a key element of successful responses was the ability to quickly identify who needed help – whether individuals or businesses – and then disburse assistance in a timely manner. The countries that have digital systems in place (e.g. mobile money systems) clearly fared better, prompting the Mutual Learning Group of the OECD Development Centre to make this a priority area (Box 2.1).
The Mutual Learning Group is a subsidiary body of the OECD Development Centre; its membership of 56 countries has representatives from all income levels. The group is dedicated to evidence-based learning on sustainable development, with members discussing policy experiences, successes and challenges. The Development Centre’s Multi-dimensional Country Reviews (OECD, n.d.[23]) provide the basis for mutual learning sessions. In June 2020, the Mutual Learning Group convened for a special meeting dedicated to the response to COVID-19 (OECD, 2020[24]). Targeting and reaching those in need, as well as digital solutions, emerged as challenges and areas of innovation.
Targeting and reaching those in need: Members emphasised the importance of creatively using all databases, registries and cadastres (legal documents describing the dimensions and location of land parcels) to reach out to many people living in vulnerable conditions, who did not qualify for support before the crisis, but do now. This involves creating new links among databases and agencies. Boosting financial inclusion is an additional objective in some contexts. In Costa Rica, the government deposited subsidies in bank accounts and made it possible for those who did not have an account to make an online request to open one. Switzerland has set up a simple online form through which private companies apply for public loans through their bank; the form can be completed in only 15 minutes and funds are provided within 48 hours. This facilitated broad access to effective help for many firms while avoiding administrative burden.
Digital solutions: Digital technologies have softened negative impacts on many economies. The government of Viet Nam is increasingly focusing on a digital transformation and has seen the rate of online transactions in public services double (from 12% to 24%) during the lockdown. Kazakhstan has used digital platforms to provide emergency support to people, including those who lost jobs, entrepreneurs and many others. Morocco has adopted a digital tracking tool for COVID-19 cases and is using digital tools to target income support to vulnerable households and workers, particularly in rural areas.
Exposure and resilience are key concepts to understand the potential impact of shocks on a given country or region and to forecast the potential speed of recovery. Each can be measured by applying a framework of indicators. The nature of the shock determines what indicators are most appropriate for measuring these characteristics. Pandemics such as COVID-19 require health and demographic indicators. Natural hazards would require indicators more related to weather, climate and infrastructure. The determination of which economic indicators to include depends partly on the nature of the shock and partly on its global extent. The strength of a country’s banking system, for example, is relevant in both the case of a local financial crisis and the current situation of a global pandemic. In a global pandemic, a massive economic fallout transmits through trade and financial channels, ultimately affecting all countries, even those not severely touched by the pandemic itself.
The indicator frameworks for exposure and resilience presented here have been calibrated to COVID-19. To fully grasp compound risks, experts should undertake a more comprehensive analysis of channels of exposure and drivers of resilience for each region and country.
Exposure to shock within a given country or region depends on the channels through which this shock can reach the country and exert its impact. In the case of COVID-19, three channels are relevant to shock exposure: health and demography; household income and employment; economic structure and international economic linkages. The first, health and demography, includes basic factors of susceptibility to and morbidity from COVID-19, such as the median age, and comorbidity factors including (among others) obesity and smoking (WHO, 2020[25]; CDC[26]). Household income and employment measures vulnerability at the household level. High poverty rates and high levels of unemployment suggest that vulnerability to a shock is high while also indicating that the government’s ability to support all those in need may be limited. Economic structure and international economic linkages measure the main transmission channels through which a global economic shock affects national economies. Most of the vectors considered – such as remittances, foreign direct investment and trade (particularly commodity exports) – transmit economic shocks suffered by partner countries that provide investments, generate demand for a country’s products and serve as host economies for the diaspora.
Resilience can be defined as the ability of a system (a country, for example) to overcome a shock, including the potential for transformation through the shock itself. The main drivers of resilience with regards to the COVID-19 pandemic are: the state of public finances, which determines capacity for countercyclical spending; the state of the financial system; and the level of capabilities in health, social protection and government more broadly. In the case of COVID-19, readiness for digitalisation has emerged as the major accelerator of transformation induced by the pandemic in both business and the public sector (Kharas, 2020[27]).
The expected speed of economic recovery is an additional element of resilience. Here it is measured simply as the average growth rate of the five years preceding the crisis. This can help to assess the probable longer term impact of the crisis on an economy. Taking poverty as an example, current data suggest that India has the largest cohort – 85 million – of people who will fall into extreme poverty due to recessions triggered by COVID-19 in 2020 (Kharas, 2020[27]). However, given the strength of India’s pre-pandemic growth rate – and the speed with which it is expected to return to that growth rate – by 2030, it will most likely not even feature among the top 10 countries in terms of additional poverty induced by COVID-19. The Democratic Republic of Congo will likely show the highest long-term impact, followed by Nigeria, Mali and the Bolivarian Republic of Venezuela (Kharas, 2020[27]).
Applying the concepts of exposure and resilience to ASEAN (Association of Southeast Asian Nations), Latin America and Africa highlights different vulnerabilities and strengths.
ASEAN - Association of Southeast Asian Nations
Exposure: The ASEAN region has fared comparatively well in terms of exposure and direct health impact of the pandemic. Although its median age is the highest among the regions compared in this section, the fact that comorbidities (such as obesity) are rarer than in Latin America might explain the lower level of exposure. In addition, having experienced previous infectious disease outbreaks, many ASEAN countries put in place effective response plans: as noted above, prior experience that triggered enhanced planning has been a key determinant of effective response to COVID-19. The region’s main exposure is economic, concentrated in the trade and investment channels.
Resilience: The ASEAN region boasts strong pre-pandemic growth and moderate debt levels – key factors of economic resilience. Overall, the region’s health systems have limited capacities. As social protection coverage is also limited, sizeable informal sectors are likely to be at risk should the pandemic’s economic impacts persist over a long period.
Latin America and the Caribbean
Exposure: Latin America’s higher exposure to the direct health impact of COVID-19 is likely linked to higher than average obesity rates, which also points to a prevalence of non-communicable diseases and comorbidities with COVID-19. In terms of economic impact, the region is vulnerable across all potential channels, particularly through dependence on tourism, remittances, commodity exports and foreign direct investment, all of which declined significantly due to COVID-19.
Resilience: Latin America has stronger resilience scores in terms of social protection, medical capacity and general government performance. While Latin American and Caribbean health systems seem more advanced than in other developing regions, they are struggling with the load of the pandemic. Mounting debt and moderate growth before the pandemic suggest that, in terms of economic resilience, the region will struggle to recover quickly.
Africa
Exposure: Africa has proven to be less vulnerable to the health impact of COVID-19 as the median age is very young and relevant comorbidities less prevalent. With trade and tourism playing a somewhat less important role than in other regions, Africa appears to be less exposed to the transmission of economic recessions compared to the ASEAN region and Latin America and the Caribbean. Poverty and undernourishment are, however, a major channel of exposure for Africa and the number of people in poverty is rising. This regional perspective must be adjusted at the country level, however, particularly for those countries highly dependent on commodity exports. Oil exporters will suffer substantial economic damage linked to the global glut arising from sharply lower demand (OECD, 2020[28]). Differences in demographic and health profiles are also evident, with richer countries tending to have greater exposure. Of the 46 000 confirmed deaths on the continent, almost half are in South Africa (20 500) and approximately another 25% in Egypt (6 500) and Morocco (5 400) – all middle-income countries (Worldometer, 2020[1]).
Resilience: Africa has low scores on resilience. Given lower GDP than in other regions, fiscal space is limited and debt levels are high; this limits the ability to engage in effective spending on economic life support and recovery. For some, the financial situation is dire: Zambia is the first country to suffer a COVID-19-related default (Stubbington and Fletcher, 2020[28]). Readiness for digitalisation stands out as a particular deficiency in Africa (See Case Study by Fafunwa).
Applying an exposure-resilience lens to the COVID-19 pandemic can be instructive for determining where to focus development co-operation for a phased approach to response and recovery. The first phase should focus on reducing high exposure. This phase should be followed by a stimulation of recovery while the final phase should be the long term project of strengthening resilience. Such a thorough assessment of channels of exposure and resilience drivers tailored to various threats could help to establish the most effective sequencing of response actions ahead of time in light of both the context and the potential crisis.
Reduce high exposure
In countries and regions with high exposure to the direct impact of COVID-19, the focus of response must be on the health crisis and economic life support. Health systems need support for both test-trace programmes and for treating COVID-19 patients. Beyond the direct COVID-19 burden, health systems in highly exposed developing countries are likely to be overloaded and in dire need of support to bolster capacity. In terms of economic life support, as lockdowns and the spread of the disease constrain economic transactions to a minimum, citizens and companies need financial assistance. Development co-operation support should be directed to efforts that help to identify the firms and households that are most exposed and hardest hit, with the aim of delivering support in a fast, effective manner.
Stimulate recovery
Once a lockdown is lifted, the situation becomes a more “traditional” economic crisis in which public support should be dedicated to recovery. Getting the sequencing right is particularly critical in this phase: if recovery-type spending is deployed too early, it risks being without effect and may deplete resources that would be needed at a later point. If life support to firms extends beyond automatic stabilisers (policies or programmes that are enacted automatically, without intervention by policy makers) or continues for too long, it risks keeping failing firms alive, preventing future productivity growth through reallocation of resources.
In countries and regions with low direct exposure to the COVID-19 health impact, i.e. much of Africa and Southeast Asia, the response focus should be on recovery-type investments. Assuming that government measures are adapted to the level of exposure, and that restrictions to economic and social activity remain limited, actors should direct their efforts toward strategic recovery spending, combining relatively fast disbursement with investments in strategic priorities. Disbursement and spending will be somewhat less urgent than in the life support case, leaving more time for thoughtful design. The focus should be on creating support programmes that build on data to reach those in need and can detect and include those made vulnerable by shocks, rather than ad hoc disbursements. It should be noted, however, that capital-intensive investments (such as infrastructure projects) often cannot be initiated fast enough to respond to economic downturns or stopped easily once the economy fully recovers (Weeks, 2009[29]), (OECD, 2020[18]).1
Strengthen resilience over the long term
Once the worst of a crisis has passed, development co-operation and investment should aim to strengthen resilience across five areas. As each country has a different profile, it is important to target available resources to strengthen the most important and the weakest drivers and aspects of resilience.
Health systems need strengthening everywhere. In terms of hospital beds and physicians, Africa and developing Asia have the greatest need, but large parts of Latin America are also lacking capacity. Actors can learn a great deal from humanitarian assistance in terms of strengthening capacities to create emergency response mechanisms that can be deployed quickly in a pandemic. COVID-19 has also highlighted the importance of detecting and testing for infections, and of launching effective communication programmes to build broad collaboration across society in fighting the pandemic (See Case Study by Mahmud).
Protection of the vulnerable will require the creation of support systems that will ultimately serve as automatic stabilisers. To be effective, support for households and firms must have the potential to cover all those in need and to be mobilised automatically when this need arises. This requires advanced data management that combines different types of data and collects information frequently. Merging existing databases for taxes, utilities, social protection, etc. is an important first step, which should be followed up with the inclusion of high frequency and big data. However, it should be noted that existing databases may not capture many of the most vulnerable groups; additional effort may be required to ensure inclusion. Many countries are now able to transfer support via mobile money: these systems could be extended to deliver mobile loans and to support data collection. Financial sustainability and alignment with existing systems are key considerations.
Digitalisation has been a defining feature of COVID-19 response and indeed a tool for transforming business and the delivery of public services. Development co-operation can further support this transformation – or launch it where digitalisation is low or lacking – including by building up the infrastructure for connectivity. To avoid co-ordination failures between public and private infrastructure investments, donors could propose awards for cost reductions and broadband connections of underserved areas. Africa is advanced in terms of mobile money and payments, but much behind on broadband connectivity (See Case Study by Fafunwa). Many countries in all regions need support to avoid the emergence of a digital gap.
Creating economic potential will help accelerate the speed of recovery. The resilience analysis presented here shows the stark differences in pre-pandemic economic growth among regions, which serves as a baseline for what type of economic dynamic to expect once the pandemic is over. Much of the ASEAN region shows little reason to worry, whereas the outlooks for Latin America and to some extent Africa are much more subdued. The need for recovery spending provides a unique opportunity to direct available resources to the most strategic priorities. Beyond digitalisation, the reconfiguration of international supply chains and green recovery are two key trends of global opportunity:
The reconfiguration of international supply chains – away from an increasingly divided situation of “one supply chain for China, one for everywhere else” – holds particular opportunity for Latin America (with its proximity to the US market) and for much of Southeast Asia (Hille, 2020[30]).
Support for a green recovery can also help create economic potential. Renewable electricity generation, for example, can help eliminate electricity constraints for all businesses. Opening up the energy generation and transmission market beyond monopolies can create new business opportunities. Recent evidence suggests that, per dollar spent, well-designed green projects can generate more employment and deliver higher short-term returns compared with conventional fiscal stimulus (Hepburn et al., 2020[31]).
Financial resilience underpins everything else. International debt restructuring and forgiveness, along the lines of the G20’s Debt Service Suspension Initiative, play important roles in making countries more resilient. The domestic savings rate, tax collection and domestic resource mobilisation, as well as prudent fiscal and public expenditure management, are other important determinants of resilient public finances. A solid yet nimble financial sector that can help firms absorb shocks and transmit government support to the economy is also vital. Finally, insurance mechanisms, at both household and national level, are important and, in many cases, need to be further developed.
To date, three key findings for development co-operation have emerged from the pandemic. First, the initial impact of COVID-19 on a country depended on its level of exposure to various health and economic channels and its ability to respond quickly. Second, preparedness and prior experience were decisive factors in terms of ability to respond. Third, even for countries with low preparedness, resilience – i.e. the set of factors that enabled government and society to respond effectively – made an important difference.
Building on these lessons, incorporating the lens of exposure and resilience into the design of development co-operation more broadly shows potential for enabling a more effective response to the next global crisis. With pandemics, as with other global crises, each effective response by one country carries positive externalities for all other countries; indeed, ineffective responses transmit negative externalities. A global commitment to resilience could help build the foundation for stronger responses and more rapid containment of similar crises in the future.
Creating resilience compacts, for example, could give this commitment a concrete form. Based on strong diagnostics and a commitment to strategic action and investment, such compacts can frame collaborations among development partners and recipient countries. Using exposure-resilience analysis as the basis for such a compact could help specify commitments, future objectives and instruments of co-operation.
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Note
← 1. An example is the European Fund for Strategic Investments (EFSI), launched in November 2014 by the European Commission as a policy response to support investment to counter the consequences of the 2008 economic and financial crisis and the 2011-12 sovereign debt crisis. By the time the EFSI was finally set up, investment in several EU member states was already back at pre-crisis levels. In the end, the design and delivery of projects supported by the EFSI was too slow to serve as a countercyclical fiscal stimulus for European economies. Nevertheless, supported projects did address important structural constraints (EIB, 2018[32]).