How will developing economies rebound from the effects of COVID-19? As an unparalleled global pandemic, what evidence can we look to for guidance on this issue? Professors Esther Duflo and Abhijit Banerjee – who won the 2019 Nobel Prize in Economic Sciences for their experimental approach to alleviating global poverty – discuss findings from their latest book “Good Economics for Hard Times” with Professor Elias Papaioannou, Co-Academic Director of the Wheeler Institute for Business and Development and Professor of Economics at London Business School.
- Developing countries have not experienced the same level of loss of life as the developed world, but they have experienced a much more severe loss of welfare;
- Because lockdowns were so severe and businesses could not keep employees on payroll, it has been harder to reboot these economies;
- We can look to post-war recovery for guidance, which points to the need for a new Marshall Plan funding vaccination, economic stimulus, and innovation;
- Developing countries will have different challenges in rolling out their vaccine programs, but corporations can play an integral role in overcoming logistical problems;
- If rich countries come together to aid in pandemic recovery, it will set a new standard for how the world can address global issues like climate change and income inequality.
Covid-19 is called a global pandemic, yet its effects differ in rich and poor countries
Beginning on a positive note, Banerjee stated that Covid-19 death rates are significantly lower in developing countries than in the developed world. While the reason for this is not yet certain, some have speculated that it could be because developing nations have younger populations, because people in these nations are exposed to more infectious diseases so they have built stronger immune systems, or because of a transferred protection from some vaccine that children in developing countries receive.
While the treacherous health effects of Covid-19 were quickly quelled by strict lockdowns, many developing countries have continued to struggle with the painful economic effects of the pandemic. From Q1 to Q2 2020, India’s GDP fell by nearly 24%, its most precipitous drop on record. Since the country started to reopen, the economic recovery has floundered, as Banerjee then described.
The Indian lockdown went into effect within a few hours. As a result, many people who were working away from their homes were left stranded, and they were stuck in places where the local welfare system was unable to process them. So, they were left without work, without government support, without food, and without an operating train system. These workers were literally starving so, in desperation, they walked back to their home villages. When companies started reopening and rehiring, they could not find willing employees, because people had been scarred from the abandonment in the first lockdown and worried about another.
A rebound is possible in developing economies, but it will require coordinated intervention
Professor Papaioannou then referenced Banerjee and Duflo’s articles from The Economist in May and Le Monde in December to inquire about how they propose inducing a rebound in the Global South. The economists said we can look to the past to see how to restart devastated economies. This pandemic is akin to a war in that the levelling of these economies was caused by external forces. Therefore, we can look to the speed with which Germany, Japan, Britain, and France recovered after the second world war for guidance on what to expect.
However, the V-shaped recovery after WWII would not have happened without the right circumstances: massive economic aid, little inequality within populations, and stable, legitimate governments. It is therefore no surprise that in countries where institutions collapsed during wartime, such as the Democratic Republic of Congo, Somalia, and Afghanistan, chaos, rather than economic rebound, ensued after conflicts ended.
The Marshall Plan was an American initiative transferring the equivalent of 130 billion 2019 dollars in economic aid to Western European economies after the end of World War II. Duflo has been outspoken in her support for the creation of a new “Marshall Plan” to aid the revival of poor countries in the aftermath of Covid-19.
How would this Marshall Plan be funded?
Rich countries’ governments have already deployed trillions of dollars in emergency stimulus. Duflo believes this “whatever it takes” mentality was the right approach to pursue, because it lessened the pain during the crisis and eased the path to recovery. Emerging countries have not been able to follow the same strategy because they cannot access enough credit to prop up their economies. Emergency aid to prop up economies during the pandemic averaged 20% of GDP in rich countries, 6% in middle-income, 2% in poor countries, according to Banerjee. As Duflo put it, Europe and the US can borrow essentially for free, for Togo, it’s almost impossible.
While some may imagine that this call for additional international aid is unreasonable, the professors corrected that we tend to vastly overestimate how much poor countries rely on the generosity of rich countries in normal times. Aid is typically a small fraction of developing countries’ budgets. Even the poorest, tiniest countries, receive c.15% of their annual budget from aid.
This is all to say, it would cost very little for the Western world to borrow the additional amount to provide aid to the developing world in the current interest rate environment, but it would make a world of difference for poor, small countries. Therefore, Duflo asserted, financing is not a legitimate concern in the present circumstances.
What should be prioritized if Western countries do fund a Marshall Plan?
Banerjee and Duflo then detailed the elements in need of funding for this Marshall Plan to succeed:
- Vaccination – At the current pace, Africa would finish vaccinating their population in approximately 80 years. This is not only unethical but also illogical for Western countries. If COVID-19 exists in Africa, it will persist in Europe and the US because vaccination in these countries is not mandatory and therefore far from universal. For their own self-interest, from a public health point of view, US and Europe should fund as many vaccinations as possible.
- Economic Stimulus – Even if they resisted doing it before, richer countries can still help poor countries rebound. The fastest and cheapest way to do so is to spend money on the poor countries the same way we spend it on ourselves, via direct cash transfer. A universal cash influx can help people start consuming and producing, so economies can be restarted.
- Innovation – The pandemic exposed existing issues but also created new problems that never existed before. For example, how to vaccinate a billion people in India, how to handle education when a generation of kids have been out of school for nearly a year, et cetera. To solve these new problems, we need to fund organizations that can find, test, and roll out new solutions. Fortunately, France, the UK, and the US have already launched funds toward this end.
The speed and simplicity of universal cash transfers outweigh the concern over corruption
There have been publicized criticisms about fraudulent cash distributions in the US and Europe, so the economists addressed why this problem need not be such a concern in the Global South. Banerjee’s advice is to have policies that are as simple as possible, so that there are very few loopholes to exploit. If virtually everyone qualifies for support, there will be much less misdistribution, and because nearly everyone is poor, if you give people a little extra, it will still be put to good use. Banerjee also reminded that scale should also be considered. In developing countries, cash transfers amount to only a few dollars per week, as opposed to thousands. Universal basic income should be the route forward, not only because of the moral appeal, but because of the ease of implementation.
Vaccine rollout in developing countries needs infrastructure, and this is where businesses can shine
The speed of research and development of vaccines in the developed world was magnificent, but the logistics of getting shots into people’s arms has been horrendous. Duflo highlighted that this issue of “plumbing” piques her interest because that is exactly what won her the Nobel prize. She says we will need just as much ingenuity in the vaccine rollout as we needed for the vaccine development. Once countries begin learning what works, they need to share these findings and then scale them up.
Research thus far has been warped in favour of rich countries’ vaccine needs, which are primarily efficacy focused. Cost and temperature requirements, on the other hand, are paramount for the success of vaccines in developing countries. There are dozens of vaccines in production, and India is about to start their own vaccine program, which gives hope because, as Duflo put it, “India is the pharmacy of the world”.
Even if cheaper vaccines for developing countries are less effective, trust issues are no worse in developing countries than in developed countries. The primary issue for uptake in the Global South will be logistics. Even if someone is willing to get vaccinated, they must be able to access it and must remember to get it. This is described as a last metre problem. People need to be educated on the necessity of two doses and must be convinced that the vaccine should outweigh conflicting priorities.
Corporations can help intervene in the vaccine rollout because they have very long arms in these countries. There will of course need to be some government protocol to regulate, but Duflo and Banerjee see this as a win-win opportunity. Big businesses are all under pressure, there is a lot of political bile that’s sloshing around against them. They should just see this as an opportunity to step forward and take control of the entire supply chain as a powerful affirmation of their commitment to corporate social responsibility.
A global struggle can bring about global solidarity
The collective investment in a new Marshall Plan would set a template for the rich world’s responsibility to the poor world. Currently, Western countries see international aid as charity, meaning the circumstances must be right to justify it. Duflo thinks this is the wrong way to think of it. We should stop looking down at poor countries, because they have just as much talent and ingenuity as richer countries, they lack the financial capacity to develop innovative solutions. Going forward, if the West reclassifies international aid as a responsibility rather than a gift, the world can work together toward solving global issues like climate change, women’s empowerment, and income inequality.
Elias Papaioannou’s conversation with Esther Duflo and Abhijit Banerjee is part of the Wheeler Institute’s Rethinking Capitalism series. Please follow the link to view previous conversations as part of this series with leading academics including, Professor Thomas Philippon and Professor Rebecca Henderson.
Esther Duflo is the Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics in the Department of Economics at the Massachusetts Institute of Technology and a co-founder and co-director of the Abdul Latif Jameel Poverty Action Lab (J-PAL). In her research, Duflo seeks to understand the economic lives of the poor, with the aim to help design and evaluate social policies. Esther Duflo has worked on health, education, financial inclusion, environment, and governance. Duflo was awarded the 2019 Nobel Prize in Economic Sciences along with co-Laureates Abhijit Banerjee and Michael Kremer, for their experimental approach to alleviating global poverty.
Abhijit Vinayak Banerjee is the Ford Foundation International Professor of Economics at the Massachusetts Institute of Technology and co-founder of J-PAL with Esther Duflo and Sendhil Mullainathan. Banerjee is a past president of the Bureau for Research and Economic Analysis of Development, a Research Associate of the NBER, a CEPR research fellow, International Research Fellow of the Kiel Institute, a fellow of the American Academy of Arts and Sciences and the Econometric Society. He has been a Guggenheim Fellow, an Alfred P. Sloan Fellow, and a winner of the Infosys Prize. Banerjee was awarded the 2019 Nobel Prize in Economic Sciences along with co-Laureates Esther Duflo and Michael Kremer, for their experimental approach to alleviating global poverty.
Elias Papaioannou is Co-Academic Director of the Wheeler Institute for Business and Development and Professor of Economics at London Business School, focusing on international finance, political economy, applied econometrics, growth, and development. In the academic year 2019/2020, Elias held the Varian Visiting Professor of Economics at the MIT Department of Economics.
Liz Wolohan (MBA2022) is passionate about expanding London Business School’s reputation as a global leader in impact-focussed business education. In Autumn 2020, Liz led a London Business School Impact Consulting Club engagement with an Australian NGO and will chair Social Impact Week in March 2021. She is a Social Representative for her class and a member of the Women’s Touch Rugby Team. Liz is an intern for the Wheeler Institute, contributing to the creation of content that amplifies the role of business in improving lives.