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Developing Economies Must Be Saved To Stop Global Economic Meltdown

It may well be that the corona pandemic has put the peoples of the rich industrialized nations to the test, but it is nothing compared to what is expected to happen in the world's poorest nations. They are being hit by two hammer blows and therefore desperately need help from the developed countries.

In case of health systems, in the 76 least developed countries and in many of the emerging market economies do not have the capacity to test and treat all patients of corona virus. Physical distance is impossible to maintain in the slums of megacities like Mumbai,Nairobi,Dhaka,Neza(Mexico)  and so on. Without a social safety protocols, huge number  of population are forced to go to work, which is increasing  the risk of infection.

Imperial College London recently estimated in a research that at least 900,000 people may die from COVID-19 in developing countries in Asia and 300,000 in sub-Saharan Africa - and that is a conservative estimate. So a humanitarian catastrophe lurks just around the corner.

Equally worst is that decreasing  economic activities in the  developed countries leading to lower demand for imports of goods from developing and least developed countries. Factories and agriculture is  going down. Flood is sweeping all out. Foreign tourists have stopped visiting the world. In this phenomena, it must be added that  remittances from immigrants working in the United States, Europe and the oil-rich states, many of them have lost their jobs. They will no longer be able to support their families at home with an extra income.

It is not only altruistic motives that should encourage developed countries to intervene with deferral of loans, debt relief and direct financial assistance. These  should be done also for their own interest.

As former US Treasury Secretary Lawrence Summers and former British Prime Minister Gordon Brown recently pointed out that developing countries and emerging market economies (including China and India) account for half of the world's gross domestic product.

So unless the developed countries realize the huge debt that these countries have accumulated since the financial crisis and recession of 2008-09, there is a risk that the entire international financial system can  collapse.

 Now the lack of deferral of interest and loan repayments will certainly put a damper on economic growth in the emerging market economies. This wave will certainly reach the rich countries with bad news.

Developing economies often considered as the pulse or heartbeat of world economy considering their huge contribution.     Therefore, a three-pronged strategy is needed. One is the sidetrack of installments and interest on loans from the International Monetary Fund (IMF) and the World Bank. The second is the couple of years of deferral with coupon interest on bonds issued in private investment funds. The third is an increase of liquidity in the IMF which will give  developing countries and emerging market economies the opportunity to attract on the IMF's reserves, partially to meet financial obligations and partly to finance emergency needs such as social services and extra costs to fight COVID-19.

The IMF and G-20 countries have already taken the first steps and postponed loans in 2020. But the United States and several other countries have opposed an increase in the IMF's reserves by up to $ 500 billion. It is not also clear  whether private equity funds in the US and Europe will be willing to buy coupon rates in 2020 and 2021. Such a waiver will affect millions of individual investors including employees' savings for retirement.

The situation is complicated by the fact that developing countries have used bonds to raise loan capital over the past ten years. It has changed the debt layout. During the financial and economic crisis of 2008-09, almost all of their debts were with the IMF and the World Bank. At the time, private investors owed $ 1,000 billion. By 2020, that is $3,200 billion. This  is why it is so important that the member countries of the IMF agree to increase their reserves and make them available to developing countries.

Interestingly, there is a broad political agreement on such an initiative. France's Macron and Germany's Merkel, like Brown and Summers support the idea. In a letter to the IMF and the World Bank , Senator Bernie Sanders and Congressman Ilhan Omar also called on them to indefinitely defer the 75 least developed countries with installments and interest throughout the corona pandemic.

At present, it is uncertain whether the United States and China will go that far even if it would be in their self-interest to avoid a humanitarian and economic catastrophe in the third world. Unfortunately, the relationship between the two economic superpowers is at the lowest. During the trade wars of recent years and the ongoing debate over the origin of the corona virus  have unintended consequences on their cooperation.

The bad luck of the world economy is that some developed countries  are drowning in debts such as Italy, Saudi Arabia, Greece and many more. Italy's debt is set to grow  over 160 percent of the country's GDP in this fiscal year. With the decreasing cash reserve Saudi's external debt is going to be nearly double as the oil price went at the lowest in the history. According to the country's financial minister Mohammed al- Jadaan, the Kingdom's debt may reach to 50 percent of their GDP from 30 percent. And Greece is in the sea of debt since The Great Recession of 2008 and now is under dispute with Turkey which is being more crucial for their economy. 

In this completely extraordinary emergency situation where only higher level of international cooperation on debt restructuring and assistance for developing countries can ensure that all ships arrive at port.

The author is a student at Department of Criminology, University Of Dhaka.