This chapter evaluates the magnitude of the shock caused by the COVID-19 recession for the Sustainable Development Goals (SDGs). The direct shock is unprecedented, and by implication, the financing needs for developing countries to meet the SDGs have risen significantly. The first section describes the economic aspects of the crisis, given its speed, breadth and depth, and the major challenges remaining after the initial response from policy makers. The second section shows that the SDGs are unlikely to be attained by 2030 given that resources have collapsed and needs have increased. This gap will persist, not only in the short run, but also far into the future.
Global Outlook on Financing for Sustainable Development 2021
A New Way to Invest for People and Planet
1. Committing to Sustainable Development Goals in the aftermath of a global crisis
Abstract
In Brief
Following the outbreak of coronavirus (COVID-19), the world entered an historic global recession, which threatens to set back the achievement of the 2030 Agenda. In just a few months, at least two years of progress on poverty reduction were erased. In 2020, 100 million additional people are likely to be living in extreme poverty compared to the numbers projected in early 2020. With stringent lockdown policies in place, developing countries had to cope with a major economic shock in addition to the health shock. Within a span of weeks, previsions of global economic growth transformed into forecasts of the worst economic recession since the Second World War, dwarfing the global financial crisis. In the words of the United Nations (UN) Secretary-General, “What began as a health crisis has quickly become the worst human and economic crisis of our lifetimes.”1
The challenges of the financial crisis are unlike any before. After a period of financial panic, with stock indices declining by 25% to 30% in most Group of Twenty (G20) nations in March 2020, actions by central banks and governments dampened the immediate financial fallout. The spread of the virus, the impact of lockdowns, and the retrenchment in consumption and investment have also led to contraction of economic growth of 6% globally and job losses up to 200 million. Advanced economies have managed to implement large monetary and fiscal stimulus packages, allowing debt to gross domestic product (GDP) ratios to rise by 20 to 30 percentage points of GDP in OECD countries. More constrained fiscally, most developing countries do not have the ability to respond to the crisis with packages of similar magnitude. Based purely on the recession as forecasted, it is estimated that developing countries would have required an additional USD 800 billion to USD 1 trillion, including USD 100 billion in low-income countries. As a result, the competition for credit to respond to the crisis could increase the unequal distribution of resources. Financing for sustainable development plays a role to help mitigate the risks of increased inequalities and can help rebuild in countries most in need.
The COVID-19 pandemic magnifies the scissor effect of increasing needs and declining resource availability identified in the first edition of the OECD Global Outlook on Financing for Sustainable Development in 2019. Both tax and non-tax revenues of governments are under severe strain due to sharp contractions in economic activity and the global decline in commodity prices. At the same time, the crisis is setting back the Sustainable Development Goals (SDGs) in the short and medium term. Over the long term, global uncertainty on the future path of growth is likely to slow investment in sectors such as infrastructure and innovation, further increasing the overall long-term financing needs.
The SDGs offer a blueprint to recover better through fully integrating environmental, social and economic impacts and trade-offs. The gaps in the global system, the underfunding of global public goods and the unequal distribution of vulnerability across countries and individuals can be filled by the holistic approach of the 2030 Agenda. The crisis could lead to a rethinking of health systems and how people work, produce, live, earn and redistribute income. Aligning to the SDGs means taking into account the importance of these needs when making investment and budget decisions.
1. The Secretary-General’s comment is contained in a report on progress towards the Sustainable Development Goals (UN, 2020[45]). See https://sustainabledevelopment.un.org/content/documents/26158Final_SG_SDG_Progress_Report_14052020.pdf.
1.1. The global recession will constrain financing for sustainable development over the short, medium and long term
This section describes the main characteristics of the COVID-19 economic recession – it is unexpected, fast, deep and almost globally simultaneous – and demonstrates how it is increasing financing needs in developing countries in the short term and over the medium to long term. All public, private, domestic and external actors called upon in the Addis Ababa Action Agenda must mobilise their support to help narrow the gap between rising needs and declining availability of resources.
The recession is affecting the financing channels of both supply and demand, unlike during the global financial crisis of 2008-09 when an investment drought was the primarily driver of the recession. While the policy response in the wake of the pandemic was swift and massive, few developing countries were able to afford the kind of massive monetary and fiscal stimulus put in place in advanced economies. As a result, the economic impact is likely to be more concentrated on fragile contexts and on the poor and to widen the disparities across countries.
1.1.1. Short-term economic prospects plummeted globally
The immediate economic consequences of COVID-19 are the most dramatic in peacetime since the Second World War: a 6% decline compared to an average of -1% in the four previous global recessions (and -2% during the global financial crisis). In February and March 2020, when it appeared the world was passing through a history-changing event, three stunning aspects stood out: the speed, breadth and depth of the impact. This subsection looks at each aspect individually. It also describes the immediate policy response in the form of monetary and fiscal stimulus packages, which were necessary but could contribute to deepen inequalities across countries.
The dual supply-demand shock creates a loop where short-term and sector-specific losses of income will translate into long-term macroeconomic recession. Infographic 1 presents a simplified model of the COVID-19 recession that illustrates the dynamics in three steps. First, the spread of the disease led to a supply shock and the shutdown of some sectors, especially contact-intensive sectors (hospitality, entertainment, travel) but also government services (education and health, for example). These impacts led to increased uncertainty, wherein consumers and firms suspended their consumption and investment plans. In some countries, this initial shock also stemmed from an external demand shock that spread from countries under lockdown. Second, as jobs and incomes fell, the crisis quickly morphed into a demand-driven recession, as described by Guerrieri et al. (2020[1]). Finally, third, firms put their investment plans on hold given the broad uncertainty on current and future demand for their products and services.
Infographic 1.1. A simplified model of the COVID-19 recession
Source: Authors
A fast and broad recession is leaving no place untouched
In a matter of weeks, the world entered its worst global crisis since the Great Depression. In January 2020, the International Monetary Fund (IMF) expected world GDP to grow by 3.3%, as the COVID-19 risk appeared to be concentrated in the People's Republic of China (hereinafter China) with little potential for a spillover from health concerns to economic activity. While growth performance in developing economies had been disappointing in the past five years, 2020 was projected to continue the steady flat trend of slow growth. By March, this outlook was turned on its head: Chinese growth prospects collapsed and growth forecasts for OECD countries turned negative.
Growth forecasts in developing countries were hardest hit. Between March and April, IHS Markit’s global Purchasing Managers’ Index, a measure of companies’ optimism, collapsed, dropping from 50 to 25.5, a record low. In another illustration of this shift in confidence, financial market stock indices fell by 20 to 30% in most G20 countries; the VIX index, a measure of financial uncertainty, surged nearly to its 2008 record. As in previous confidence shocks, the ripple effects for developing countries were immediate: equity indices in emerging markets (MSCI EM) declined by 16% between January and the end of May 2020, while global indices declined by only 8%. For a period of a few weeks, bond markets in emerging and frontier markets were frozen. As discussed in detail in Chapter 2, these events translated into a sharp reduction of financing flows to emerging and developing countries that were more sudden than during 2008-09. This financial turmoil translated rapidly into lower economic growth projections. In April, the IMF was forecasting a 3% global GDP decline, and a 1% GDP decline in developing countries, before further downgrading its forecast in June to GDP declines of 4.9% globally and 3% for developing countries.
Because of the COVID-19 pandemic, more developing countries have entered into economic recession than at any time since the Second World War. This is in contrast to the global financial crisis, which resulted in negative growth, mostly in developed countries (World Bank, 2020[2]). As indicated in Figure 1.1 90 of 122 non-high income countries had negative GDP growth in 2020, among them almost all upper middle-income countries and 31 of 44 lower middle-income countries. The richer of these economies are forecast to experience the larger shocks. There are a number of reasons for this relatively optimistic outlook for the lower-income economies (Goldberg and Reed, 2020[3]). One is their better prospects for containing the disease (due to a less vulnerable demography and experience with past epidemics). A second is their less restrictive lockdowns and higher mobility; the fall in mobility is estimated at 40% in low-income countries against 70% in middle-income and developed economies. Third, they are less integrated in the global economy. IMF forecasts suggest the pandemic’s impact will be “significantly more muted” on emerging markets and developing economies than on advanced economies, according to Sandefur and Subramanian (2020[4]). Nonetheless, those assumptions could prove to be wrong and official projections for developing countries could turn out to be overly optimistic.
Figure 1.1. Growth forecasts amid the COVID-19 recession in 2020 by income group
Source: (World Bank, 2020[2]), Global Economic Prospects, June 2020, 10.1596/978-1-4648-1553-9; (World Bank, 2020[5]), World Development Indicators (database), http://datatopics.worldbank.org/world-development-indicators/.
According to the World Bank and comparing pre-pandemic and current forecasts, total global loss of GDP for 2020 could amount to USD 9 trillion, with 40% of the loss in developing countries; half of the developing country loss could be represented by China (World Bank, 2020[2]). In per capita terms, this is equivalent to a loss of about USD 600 per person in the developing world for both 2020 and 2021. In terms of regions, Latin America is projected to suffer the worst downturn, with a 7.2% decline of GDP followed by a tepid rebound. The Middle East and North Africa and Europe and Central Asia regions are both projected to experience declines of more than 4% of their GDP. As of writing, with a second COVID-19 wave apparent in several advanced economies, considerable uncertainty remains. A rebound could be followed by a new recession, leading to further losses (OECD, 2020[6]).
Decisive policy actions staved off collapse of the financial system and spending shortfalls in developing countries in the short term
Governments and central banks in developed countries quickly disbursed historic amounts of emergency spending. To mitigate disruptions in markets, central banks immediately adopted drastic easing measures. Collectively, central banks in developed countries added USD 6 trillion to their balance sheets, including USD 2.3 trillion in measures announced by the United States Federal Reserve in March 2020 that created an immediate inflection point for financial markets (IMF, 2020[7]). The fast reaction of policy makers staved off an immediate collapse of the financial system. Developing countries also adopted unconventional monetary measures early in the crisis. For example, central banks in several developing countries purchased government bonds to counter financial outflows and the need for fiscal deficits. This radical departure from conventional wisdom mitigated the freefall in investor confidence and allowed firms continued access to finance in the short and the medium run (Arslan, Drehmann and Hofmann, 2020[8]).
In parallel, governments adopted fiscal measures totalling USD 11 trillion (IMF, 2020[9]). Advanced economies, with the greatest capacity to react, adopted various policies of economic support: credit guarantees, tax credits and unemployment benefits, among others. In total, it is estimated that they injected 9% of their collective GDP. In contrast, middle-income countries injected about 3% and low-income countries only 1% of their GDP in stimulus packages. A broad range of other support measures – equity injections, guarantees, etc. – also were used, again disproportionately so in developed countries. The results of these are mixed in terms of resources available for developing countries. On one hand, by staving off the panic and stabilising markets, these measures avoided an economic depression globally. On the other, the increase in long-term debt levels could reduce funds available for development, especially if monetary policy is normalised in the future.
In terms of financing needs, the difference between developing and developed countries is evident from the magnitudes of stimulus packages. Monetary and fiscal policies in advanced economies have targeted several main objectives: minimise the impact of the coronavirus (COVID-19) crisis on firms by supporting them through provision of credit (often through guarantees) and tax deferrals and minimising the impact on incomes through insurance and subsidies (IMF, 2020[9]). Developing countries have sought to do the same; their lack of social protection policies is one of the main reasons that poverty and inequality are likely to rise as much as anticipated. Therefore, the amount needed by advanced economies can be a useful proxy for the financing needs of developing economies in the short run.
Stimulus packages have been highly unequal. Fiscal measures documented by the IMF amounted to about 18% of GDP for advanced economies and about 6% for G20 emerging economies1 (IMF, 2020[9]). African countries’ stimulus packages, in contrast, represent only about 1% of GDP (Overseas Development Institute, 2020[10]). Stimulus packages are correlated positively with income level and negatively with bond yields and sovereign rating (Alberola et al., 2020[11]). This is a strong indication that such packages are not determined by needs but by financial constraints linked with access to finance (through market or central banks’ demand for bonds or quantitative easing) and future tax streams.
A credible assumption is that total financing needs for the policy response is that it needs to be proportional to the size of the economic shock. Such a benchmark would result in estimates of needs of about USD 1 trillion for developing countries. This estimate is based on a simple parameter: the correlation between the depth of the recession and the size of packages as established in G20 economies. Indeed, if one assumes that those are less financially constrained due to their size, it is reasonable to think that they determined their response according to economic needs and to an external constraint. G20 economies have mobilised between 1.5% and 2% of GDP in fiscal support. It should be noted that this excludes automatic stabilisers, which tend to be larger in advanced economies. Applying this parameter to the expected growth decline in other countries provides a possible benchmark for the appropriate size of the response, which can then be compared to the actual stimulus put in place in those countries. For developing countries as a whole, the resulting gap would amount to between USD 850 billion and USD 1 trillion (2020[2]), or 5% to 6% of the GDP of these countries; low-income economies represent about USD 85 billion of this gap, or 6% of their GDP. Sub-Saharan Africa, as a whole, would have increased its packages – of about 1% of GDP – by about 6% of its GDP, or USD 100 billion, in line with the magnitudes found by the United Nations Economic Commission for Africa2 and others.
Figure 1.2. Stimulus packages: Comparing the financing needs
Note: Stacked columns display stimulus financing needs using International Monetary Fund (2020[12]) projections for 2020 by region and income level. Diamonds display aggregate regional needs using the World Bank (2020[2]) Global Economic Projections, June 2020. The difference stems from large differences in growth prospects.
Sources: Center for Strategic and International Studies (2020[13]), CSIS G20 COVID-19 Fiscal Relief Tracker Dataset (database); International Monetary Fund (2020[12]), World Economic Outlook: A Crisis Like No Other, An Uncertain Recovery, https://www.imf.org/en/Publications/WEO//; World Bank (2020[2]), Global Economic Projections, June 2020; Hale et al. (2020[14]), Oxford COVID-19 Government Response Tracker, https://www.bsg.ox.ac.uk/research/research-projects/coronavirus-government-response-tracker.
International institutions and the global community also mobilised in response to the pandemic to increase and complement available resources to meet the financial needs of developing countries. Multilateral institutions rapidly adopted new initiatives, closely followed by bilateral donors. The IMF eased the access to some of its USD 1-trillion lending capacity and broadened its emergency lending windows to USD 100 billion, including a zero-interest facility for low-income countries, of which about USD 88 billion had been used by the end of September 2020. The World Bank mobilised USD 14 billion between March and June 2020, mainly to the health sector but also to other sectors. More broadly, multilateral development banks pledged to mobilise USD 200 billion over the course of 2020. The G20 Meeting of Finance Ministers and Central Bank Governors on 15 April supported this mobilisation and adopted the Debt Service Suspension Initiative, whereby official bilateral lenders pledge to defer debt service payments from 73 poor countries.
Tourism and commodities suffered the greatest immediate losses, particularly jobs
Lockdowns had an immediate impact on a wide range of sectors in developing countries. The most drastic lockdowns occurred in developing countries such as India, leading to extensive migration and impact on livelihoods. Consumption was impacted more than investment, contrary to during the global financial crisis. The pandemic also affected services, usually a more resilient sector. Even if the direct health impact of the coronavirus (COVID-19) crisis is limited, these forces are creating the following dynamics:
a shock to exports and production through physical distancing, which leads to
a reduction in labour and income, which leads to
a permanent drop in consumption.
Unlike the global financial crisis, which primarily affected investment and industry, consumption and services have been the most affected in the current crisis (Djankov and Panizza, 2020[15]). Sectors that suffered the greatest losses include the following:
Tourism: Tourism overall accounted for 10% of global GDP in 2019 and could decline by 60% to 80% in 2020. The sector is particularly labour intensive, which means that the impact on jobs will be even larger. The effect will be felt especially strongly in countries where tourism activities represent a large share of the economic activity, including small island developing states. In countries such as Jamaica and Thailand, unskilled employment could fall by more than 20% due to direct and indirect effects of the pandemic. The tourism sector also is important for small and medium-sized enterprises (SMEs) and often linked (not always positively) with biodiversity and cultural conservation.
Commodity exports: The price of commodities fell sharply in the early months of 2020, especially for energy. As a result, commodity exporting countries – most notably Botswana, Equatorial Guinea, Iraq, Peru and Zimbabwe – are projected to experience growth decline of more than 8% (World Bank, 2020[2]). While activities in this sector are capital intensive and tend to have little direct employment impact, they will have disproportionate consequences on the exports, revenues and poverty levels of commodity exports.
Manufacturing: As China has moved to the centre of global value chains, the impact of its slowdown spread faster through developing countries. From the investment side, China has become the largest foreign direct investment exporter to Africa, representing 16% of inflows, according to the OECD (2020[16]). On the trade side, the World Trade Organization (2020[17]) estimated a slowdown in trade of 18.5% for Q2 2020. The pandemic severely affected countries such as Bangladesh and Cambodia, which rely on garment manufacturing and saw an 80% decline in exports in April 2020 over April 2019. These impacts also have strong gender dimensions, as most employees in the garment-producing sector are women from rural areas. Ethiopia and Kenya also experienced an initial reduction in demand during spring 2020, but have rebounded in the summer (Mold and Antony, 2020[18]). Unemployment risks are particularly high for self-employed workers, of whom close to 100 million work in the manufacturing sector worldwide.
Services: In urban settings, most activities require contact and very few services can be delivered remotely, as Internet connections are less reliable. Personal services, which represent a large share of unskilled employment in developing countries, had a month-long interruption that opportunities to work from home are unlikely to compensate for.
Agriculture: The crisis is affecting agriculture employment and production in complex ways that vary across countries. India is a case in point. While sowed areas increased, all other inputs declined, and by May 2020, employment had decreased by 30% and earnings by 60% before recovering in July. At the same time, tensions over agriculture inputs and provision of credit led to a reduction of the use of inputs (Renita Pinto, Bhowmwick and Kapoor Adlakha, 2020[19]). As a result, poverty in rural settings could increase as migrants to cities return home, compounding the risks for many SDGs.
Job losses were severe across these sectors, with obvious consequences for SDG 8 (Decent Work and Economic Growth). The International Labour Organization (2020[20]) estimated that 10.5% of global working hours were lost in Q2 compared to Q1 2020, the equivalent of 305 million fulltime jobs. These losses will be concentrated in lower middle-income countries (International Labour Organization, 2020[16]) and on informal workers, possibly reaching 60% in income losses in April 2020.
Unemployment is higher in developing countries due to a lack of social protection. Unemployment insurance exists in fewer than half of developing countries and its coverage is often limited (Gerard, Imbert and Orkin, 2020[21]). Other social protection systems are also limited. In South Asia, the region with the largest existing safety nets, social protection tends to be based on public works programmes, which are harder to maintain in times of physical distancing.
1.1.2. Over the medium and long term, developing countries face growing financing challenges
In addition to the immediate consequences of the coronavirus (COVID-19) health risks, the lockdowns and the drop in external demand and finance, the medium and long-term perspectives of developing countries have been changed irremediably and in a way that could seriously derail attainment of the SDGs. The growing financing needs and increasing budgetary constraints on official development assistance and all other sources of financing require all actors in the financing for sustainable development landscape to step up to avoid major development setbacks and collective backtracking on progress towards the SDGs.
This subsection outlines the most salient challenges for developing economies. Globally, the health uncertainty remains a key unknown for the medium term. Additionally, developing countries face limits in their ability to recover from the COVID-19 recession. In the longer run, the levers of growth that allowed millions to exit poverty are likely to change.
Medium term: Facing a second wave in a narrow policy space
In its Economic Outlook in June 2020, the OECD highlighted the possibility of a “double-hit” scenario (OECD, 2020[6]), wherein a second wave of the virus would delay the recovery. Under such a scenario, the rebound in 2021 would be tepid, with growth only slightly above pre-crisis trends for most OECD countries. For non-OECD countries, not only would the recession be starker under the double-hit scenario than under a single-hit scenario (-6.1% versus -4.6%, respectively), but the recovery of GDP growth would be shallower (+3.2% in 2021 against +5.6%).The economic recovery thus continues to hinge on successfully taming transmission of the virus. In addition, while the current situation is hardly comparable to past crises, the consequences of other disasters can serve as a guide to possible medium-term consequences. Epidemic events are rare, with only five major ones since 2000, and none had the health impact of COVID-19. They can nevertheless be indicative of possible future impact. Indeed, the World Bank (2020[2]), in a study of epidemic episodes since 2000, finds a decline of 6% in labour productivity five years after the onset of an epidemic due to lower capacity utilisation as well as less investment, which declines by 11%. A broader analysis of natural disasters shows a -8% impact on GDP after five years.
As noted, the progression of the disease is a source of considerable uncertainty. However, a second wave could particularly affect low-income countries. While initially present in China and then in developed countries, coronavirus (COVID-19) is now actively circulating in almost all developing countries. On the one hand, there are some reasons to believe that the direct health impact could be lower. The populations of these countries tend to be younger than those of developed countries, and young people seem to be infected less frequently, to be less contagious and to suffer less deadly consequences when they are infected. Furthermore, for some countries, the experience of Ebola has generated a higher level of preparedness for the COVID-19 pandemic. On the other hand, cohabitation across generations, which can add to vulnerabilities, is more frequent in developing countries while the deficiencies of their health systems will make it more difficult for them to manage an outbreak when it occurs. As a result, fatalities in developing countries are likely to be younger as the gradient of deaths is indeed worse per age (Ghisolfi et al., 2020[22]). Finally, COVID-19 will disproportionately affect poor households in developing countries, which have little space for distancing and lack access to clean water and other amenities for protection (Brown, Ravallion and van de Walle, 2020[23]).
Even for developing countries not affected by a second wave, monetary and fiscal policy may have limited ability to counteract second round effects. Four sources of limited ability to support the economic recovery can be highlighted in particular. First, the formal sector is small, and its failure would have disproportionate effect on economic activity in the medium run. Second, the informal sector is likely to be hit particularly intensely. Third, public indebtedness limits the fiscal space to implement support measures. Fourth, and finally, domestic banking sectors are fragile and can only offer limited support.
More specifically, the first constraint on policy action is the scarcity of formal firms in low-income countries. As described by Severino (2020[24]), only a few formal firms constitute most of the tax base in these economies and are often the only ones investible by foreign capital, either development finance institutions or private capital. Such firms often have a significant indirect impact on the rest of the economy including SMEs and households. Among G20 developing economies, most fiscal support has been geared towards SMEs, though to a lesser extent than in advanced economies, i.e. about 1% versus 5% of GDP (IMF, 2020[25])). In smaller developing economies, the lack of fiscal space compounds risks to large firms, in that governments’ arrears can weigh on the few firms they purchase goods and services from. Widespread failure of large formal firms could eliminate the few investment opportunities in those economies. Development finance has an important role to play to protect those firms from the worst effects of the COVID-19 recession.
The formal sector in developing countries is generally small relative to the large informal sector, which creates challenges for channelling financing where it is needed most. The informal sector also is harder to reach in terms of policy response. In response to the COVID-19 impact, all advanced economies have mobilised large amounts of credit and tax deferment to sustain firms during the supply and demand shock. OECD countries in particular have mobilised a range of tools on financial markets and through direct support to firms and especially to SMEs (OECD, 2020[26]). This kind of policy is more difficult to implement in a developing country context, as there are fewer formal firms and governments have limited ability to inject direct loans. Surveys conducted by the World Bank and other organisations have shown the deep shock suffered by firms in developing countries, where there is little available policy cushion (Woodruff, 2020[27]). Among surveyed firms in 12 countries, close to 10% of firms reported they had to close temporarily during March and April 2020 and about 3% had closed permanently (World Bank, 2020[28]).
In terms of the second constraint, informal sectors tend to be more contact-intensive and less amenable to working from home. Informal sectors account for a third of economic activity and two-thirds of employment in developing countries. Workers tend to be less educated and poorer. They are more prevalent in services than in manufacturing and will experience a larger decline in economic activity on average. Even within advanced economies, the drop in economic activity has disproportionately affected lower-income workers (Chetty et al., 2020[29]). People working in the informal sector will be less likely to be supported and more likely to see their activity curtailed by movement restrictions. Just in the Latin America region, 38% of all workers and 61% of informal workers do not have access to any kind of social protection. Increasing credit inclusion of informal firms is an important policy challenge (Arnold, Garda and Gonzalez-Pandiella, 2020[30]).
The third source of limited response capacity is the level of public and private indebtedness. Before the pandemic, the world was already going through the fourth wave of debt since the Second World War, with USD 2.5 trillion issued in 2019 against USD 1 trillion in 2000 for developing economies. Government debt has soared in the past on expectations of high growth, including in low-income economies where it rose by 20 percentage points on average after large declines in the 2000s. Of the 69 countries applying the low-income countries debt sustainability analysis in 2019, half were either already “in debt distress” or “at high risk of debt distress”, compared to 23% in 2013 (IMF, 2020[31]). Non-financial corporate debt also ballooned in emerging markets, from USD 1.6 to USD 3.8 trillion between 2009 and 2019, leading to vulnerabilities to “sudden stops” (Avdjiev, McGuire and von Peter, 2020[32]). Central banks’ decisions have mitigated the risk of an immediate liquidity crisis, but debt overhang can limit the propensity to invest and to stimulate demand in a context of a recession.
Finally, domestic banking systems enter this crisis with existing fragilities that could cause higher risk of default. In countries with weak banking systems, defaults as well as leniency over 2020 could translate into surges in non-performing loans and threaten financial stability if regulatory easing that postpones and redefines defaults is rolled back abruptly; in Africa, 22 central banks have introduced some form of loan deferral or refinancing framework (Rentsendorj and Schellhase, 2020[33]). This type of liquidity provision, as well as measures such as lowering capital requirements on banks, is important to bridge the short-term gap. However, they could also create a situation of overhang and bank fragility later, which would hamper normalisation of flow of credit to businesses and curb investment. Another frequently used measure has been to target the payments sector, mainly to encourage the use of digital channels and mitigate the shock to remittance flows (Garcia Mora, 2020[34]). Chapter 3 elaborates barriers to the domestic financial sector in developing countries and growing inequalities.
Pre-existing mega-trends could also impair longer-term perspectives
Longer run implications of the crisis are, of course, more difficult to determine. However, it has been a long-standing empirical observation that developing countries tend to take longer to recover from a major economic shock. The greater long-term challenges facing developing countries further underscore the importance of all actors playing a role to protect against spillover effects globally. Declines in growth rates tend to be more persistent – in other words, they are not only parts of cycles of ups and downs but can affect overall growth (Aguiar and Gopinath, 2007[35]). Growth in advanced economies tends to look like “hills”, with long expansions over decades, while developing economies tend to grow in spurts and have frequent, protracted crises (Pritchett, 2000[36]). The implications for the 2030 Agenda of this finding, which is based on past data, are ominous: it is essential for low-income countries to find a new path to sustainable economic growth to meet the SDG targets.
Moreover, traditional levers of economic growth changed in the years prior to the coronavirus crisis. Trade slowed since the global financial crisis, and the recent wave of protectionism has made it harder for countries to participate in global value chains. These have been important engines of industrialisation, economic growth and poverty reduction (World Bank, 2020[37]). Nevertheless, they have weakened due to the instability of the global trade environment, which the COVID-19 crisis is compounding. New digital technologies (cloud computing, 3D printing, etc.) do not necessarily lead to “reshoring” and in the right policy environment, they can even reinforce participation in trade as a pathway to economic prosperity (Hallward-Driemeier and Nayyar, 2017[38]).
In another trend, barriers to migration will remain and could stifle remittances in years to come. It will take time to remove forced quarantines and entrance bans. The immediate decline of remittances (see Chapter 2) will reverse if growth of advanced economies rebounds, but it will likely take more time to remove the barriers to migration. As a result, the important migration channel for development, whether through studying or working, will be a brake on income growth of countries, both those traditionally sending migrants and those receiving them.
Developing countries, reliant on China for investment, also face an extended drop in external finance. In the 2000s, China emerged as one of the major providers of development finance for infrastructure in developing countries (OECD, forthcoming[39]). This led to a surge in infrastructure investment, especially in transport and energy. While many countries have struggled to transform this spending into sustainable growth, a reduction in those flows would reduce opportunities for developing countries to access external finance.
Finally, the cost of combatting climate risks is higher in developing countries. Global warming has increased inequalities between countries over the past 50 years (Diffenbaugh and Burke, 2019[40]). Climate change increases the variability of temperatures and rainfalls and the likelihood and intensity of natural disasters and social conflicts. Climate change could lead to losses of over 50% of potential GDP by 2100 in low-income countries (Burke, Hsiang and Miguel, 2015[41]). The financing for sustainable development needs are thus staggering. According to the Intergovernmental Panel on Climate Change (IPCC), limiting global warming to 1.5°C would involve annual investment in energy systems of around USD 2.4 trillion, representing about 2.5% of the world’s GDP, for the next 20 years. In addition, needs for adaptation could amount to between USD 140 billion and USD 300 billion per year in developing countries (Micale, Tonkonogy and Mazza, 2018[42]).
1.2. The coronavirus (COVID-19) pandemic, coming amid slow and uneven progress, is further hampering achievement of the 2030 Agenda
As discussed, the COVID-19 recession will not only have short-term repercussions but could potentially lead to a decline of growth in the medium and long term. This section uses the filter of the SDGs and the 2030 Agenda to assess its impact on the needs of developing countries. It first shows that progress towards the SDGs was uneven prior to the pandemic. Even where progress towards the target of reducing poverty was continuous, it remained too slow for the goal to be achieved by 2030. The section also describes the impact of the COVID-19 shock on the SDGs, acknowledging the deep uncertainty over what years leading up to 2030 will look like, and demonstrates that while needs have increased, there is still space for policy choices to shape the recovery towards more sustainable development. As discussed in detail in Chapter 2, the Addis Ababa Action Agenda highlights the need for all actors, including and beyond the traditional development community, to leverage their support to reverse the current trajectory towards an increased SDG financing gap.
1.2.1. Progress toward the global goals was uneven before the crisis
Before turning to the impact of the COVID-19 crisis, it is useful to take stock of progress towards the SDGs and the financing needs associated with them.
Developing countries were advancing slowly
As of 2020, and with up-to-date data limited, there has been some success on a handful of SDGs. Low income-countries’ aggregate index, as computed by Sachs et al. (2020[43]) for the 2020 Sustainable Development Report, is less than halfway met (below 50) for 10 of 17 goals. For lower middle income-countries, while only four goals had an index below 50 on average, 13 were below 75 (Figure 1.3).
In comparison, high-income countries are more than 75% close to the SDGs for seven of the goals, and more than halfway on all of them. They are lagging in climate-related goals, in particular SDG 12 (‘Sustainable consumption and production’) and SDG 13 (‘Climate action’).
Figure 1.3. The SDGs in 2020: Mixed success
Source: (Sachs et al., 2020[43]), The Sustainable Development Goals and COVID-19. Sustainable Development Report 2020, https://s3.amazonaws.com/sustainabledevelopment.report/2020/2020_sustainable_development_report.pdf.
Between 2015 and 2019, the world had made significant progress to eliminate poverty (SDG 1): extreme poverty, while not eradicated, was trending downward, reaching 8.2% in 2019 due to rapid economic growth, especially in East and South Asia. Progress in health outcomes (SDG 3) and education attainment (SDG 4) was also notable, with strong investment in schools, immunisation campaigns and maternal health, though progress towards other targets, such as achieving reading proficiency, was slower. Infrastructure investment also increased significantly. For example, electrification rates (SDG 7) rose globally from 83% to 90% between 2010 and 2019, and industrialisation (SDG 9) was increasing slightly in least developed countries.
On the other hand, progress towards several other SDGs has stagnated or reversed. Food insecurity (SDG 2) rose between 2015 and 2018. Inequalities (SDG 10) have risen globally, even as extreme wealth and incomes have grown and protection of the most vulnerable has weakened. Progress for girls and women has been uneven (SDG 5). The global material footprint (SDG 12) continues to be on an unsustainable path, while current greenhouse gas emissions continued increasing between 2015 and 2019, with no sign of abatement (UN, 2019[44]). Biodiversity has been in decline. Fish stocks have continued to fall (SDG 14) and species extinction threatens sustainable development and compromises the world’s global heritage, driven primarily through habitat loss from unsustainable agriculture practices as well as trade, deforestation and invasive alien species (SDG 15) (UN, 2020[45]). In addition, the share of the urban population living in slums is now growing after years of decline, and access to water and sanitation is not improving due to rapid urbanisation (SDG 11).
The financing gap remains large
This slow progress underlined the need for more finance aligned with the SDGs. Despite using different methodologies and data sources, several estimates of the needs for global finance converged towards a consensus on a gap of USD 2.5 trillion. This corresponds to about USD 500 billion for low-income countries and USD 2 trillion for other developing countries, or respectively 15% and 4% of GDP of additional spending per year (Gaspar et al., 2019[46]). Even before the COVID-19 shock, closing this gap faced considerable challenges – not only to raise domestic revenues and allocate them to SDG-aligned expenditure but also to raise additional external finance. Richer economies tend to have larger governments, and state capacity – the ability to tax and finance public goods – tends to correlate with national income. To generate financing to attain the global goals, it will be necessary to raise both GDP per capita and tax rates.
Developing countries must raise the quantity of spending as well as its quality. There is a wide disparity in achievement of the SDGs even across countries of similar incomes. This gap reflects the (mis)alignment of spending to the SDGs and the efficiency at which this spending translates into impact. By improving efficiency to the level of the best performers and increasing necessary inputs, countries can meet the SDG targets.
Different studies differ on the composition of spending. Gaspar et al. (2019[46]), for instance, focus on five SDGs: the three related to water, roads and electricity, which together account for about half of the total estimated SDG spending needs, and the two related to education and health, which would account for the other half. Other studies take in a wider range of SDGs and include climate change spending needs, which could add up to 40% in infrastructure spending (UNCTAD, 2014[47]; UN, 2019[48]). Taking into account the potential of sustainable infrastructure could add 4% to 9% of GDP in needs, depending on the region (Rozenberg and Fay, 2019[49]).
1.2.2. COVID-19 widens the SDG financing gap to a chasm
The impact of COVID-19 compounds pre-existing financing difficulties by creating a short-term shock that will have long-term consequences on poverty and human development, with major setbacks to progress on narrowing the SDG financing gap. The USD 800 billion to USD 1 trillion financing need for an adequate stimulus is unlikely to be met in 2020 or in 2021, which will bear on future needs. While it does not fundamentally change the financing needs for long-term infrastructure or for climate change-related spending, the impacts of the pandemic will reduce available financing for sustainable development (see Chapter 2).
COVID-19 is derailing SDG targets in the short term
Poverty levels are rising again for the first time in decades and inequalities are likely to increase. In June 2020, based on new World Bank (2020[2]) GDP projections, the World Bank poverty estimates for 2020 were revised. About 100 million more people worldwide are expected to be in extreme poverty (below USD 1.90 per day purchasing power parity) than without COVID-19 (Mahler et al., 2020[50]). Both South Asia and Africa would suffer an equivalent increase in poverty headcount of about 30 million. Declining growth prospects are not the only factor. Inequalities are likely to rise significantly over the short term, with Gini coefficients increasing on average by 1.5% over five years, based on the experience of the previous five major pandemic events (Furceri, Loungani and Ostry, 2020[51]). Inequality is not only linked to income. The digital divide makes it harder to perform tasks from home, whether they are for work or schooling or simply to access information.
Additionally, food insecurity, which had already been increasing because of conflicts and the impact of climate change and disasters on food production, is increasing. In East Africa, for instance, the COVID-19 crisis, coming on top of the desert locust outbreak, will further reduce food supply. Acute food insecurity, defined as an emergency level of insecurity threatening lives or livelihoods, already affected 135 million people worldwide in 2018; that number could double by 2020 (Food Security Information Network, 2020[52]).
The economic shock provides some reduction in CO2 emissions in the short term: emissions fell by 25% in China during its lockdown in February and global greenhouse gas emissions are forecast to fall by 8% in 2020 (IEA, 2020[53]). Reaching the global objective of limiting temperature rises to “well below” 2°C would require emissions to be cut by the same rate of 8% each year until 2030. A green recovery, which could both achieve economic growth and lower emissions, is the key challenge for SDG-compatible growth.
The medium and long-term impacts of COVID-19 on the SDG financing gap
The short-term impacts will have indirect long-term effects through missed investments in education and health (Infographic 2). Beyond the direct health effects of COVID-19, lockdowns have significantly affected access to these services. While some education and health investments can be postponed and will translate into larger needs in the future, others cannot be delayed and will translate instead into deaths or permanently lower quality of life. A dramatic example is that of maternal health. As described by Robertson et al. (2020[54]), a 10% to 19% reduction in access to maternal care – their best-case scenario of the impact of the pandemic – would translate into 253 500 additional child deaths and 12 200 additional maternal deaths in 119 lower income countries. Lockdowns have also significantly disrupted vaccination services. For example, in May 2020 60% of countries had either stopped or significantly delayed vaccination campaigns. This is on top of considerable disruptions to other treatments, such as those for malaria, HIV/AIDS and tuberculosis. For instance, two-thirds of the countries where the Global Fund to Fight AIDS, Tuberculosis and Malaria operates experienced moderate disruptions of access to treatments and about 20% experienced high or very high disruptions, resulting in an estimated 1.4 million deaths from those diseases (The Global Fund, 2020[55]). The Global Fund estimates the additional cost of treatment at USD 28.5 billion. In general, additional investment will be needed in health systems to manage the impact of delayed basic care, overwhelmed hospitals and the direct human costs to healthcare personnel. Finally, the estimated cost of ensuring health security as a global public good is rising. The amount needed for global preparedness investment for future pandemics in light of the COVID-19 crisis is now estimated at USD 183 billion annually, including USD 95 billion for developing countries.
Infographic 1.2. The COVID-19 economic and social shock and its consequences for the SDGs
Source: Authors
For education, school closures will have a particularly high impact on future needs. School closures have occurred in 143 countries, affecting 1.2 billion students worldwide since April 2020, and schools in most countries were still fully or partially closed in August 2020 (UNESCO, 2020[56]). Kenya plans to reopen schools only in January 2021. As a result, and depending on the scenario, the World Bank forecasts a drop of 0.6 years of education, adjusted for quality on average, or 8% of the total of 7.9 years (Azevedo et al., 2020[57]). This drop will translate into significant lifetime losses of income for affected students, especially given that distance learning is an imperfect substitute. In addition to the direct impact on education, the crisis carries potential high negative externalities and impacts on SDGs other than those directly focused on education. For example, school closures are associated with a reduction in free school meals, and malnourishment can have a long-term impact on later achievements.
From these reports, it is possible to assume an increase of financing needs for health and education of about 8% to 10% per year. Applied to estimates of needs in these sectors and as calculated by Gaspar et al. (2019[46]), this amount would translate into additional needs of about USD 30 billion per year for low-income countries and USD 100 billion per year for middle-income economies between 2020 and 2030.
Beyond these medium and long-term impacts of the COVID-19 crisis on SDG financing, there remain two questions: first, growth trends to 2030 and, second, management of the debt overhang. Growth prospects will determine many SDG outcomes, for instance outcomes on eradicating extreme poverty to meet SDG 1. Under current growth projections, whereby developing countries revert to their pre-pandemic growth trend, extreme poverty would start declining again in 2021 but the decline would still fall short of the objective, with a global poverty rate in 2030 of 7% and close to 36% in sub-Saharan Africa (Mahler et al., 2020[50]). If growth were to decline to below its trend of the past decade, the global poverty rate could remain stagnant at 8% and rise to 40% in sub-Saharan Africa until 2030.
A resumption of growth would also provide the means to invest durably in infrastructure. This relates to the second question related to the debt overhand, as levels of public debt will prevent large infrastructure investments. While the nature of long-term investment in urban infrastructure, digital services, etc. has durably evolved with the crisis, it is hard to cost the nature of those changes. However, the ability of governments to finance future investment will be limited by high debt levels. The Debt Service Suspension Initiative frees up immediate liquidity (OECD, 2020[58]) but does not provide long-term debt relief. Restructuring the stock of debt in developing countries is an important role for development finance.
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Notes
← 1. These figures are based on data from the Center for Strategic and International Studies (2020[13]) that stop at the end of June 2020 and cover only fiscal measures. See https://datastudio.google.com/embed/reporting/92894631-b883-4140-a294-5d0ab65974fa/page/v7WYB. In some cases, these data are updated with the IMF Policy Tracker. For countries that are not G20 members, the authors use the Oxford COVID-19 Government Response Tracker. (Hale et al., 2020[14]), which has the broadest coverage in terms of countries but does not take into account all adopted fiscal policies. The tracker is available at https://www.bsg.ox.ac.uk/research/research-projects/coronavirus-government-response-tracker. As a comparison tool, the authors also use data from the Overseas Development Institute (2020[10]), available at https://set.odi.org/wp-content/uploads/2020/09/Country-fiscal-and-monetary-policy-responses-to-coronavirus_12-Aug-2020_updated.pdf.
← 2. This is indicated in the communiqué of the African Ministers of Finance on 13 March 2020, published by the United Nations Economic Commission for Africa (2020[59]). See https://www.uneca.org/stories/communiqu%C3%A9-african-ministers-finance-immediate-call-100-billion-support-and-agreement-crisis.