{"id":27087,"title":"Global North and Global South: Four suggestions to overcome disparate economic responses to COVID-19","link":"https:\/\/bst-europe.eu\/de\/globalization\/global-north-and-global-south-four-suggestions-to-overcome-disparite-economic-responses-to-covid-19\/","date":"13. August 2020","date_unix":1597300992,"date_modified_unix":1597665070,"date_iso":"2020-08-13T06:43:12+00:00","content":"

Developing nations spend far less of their GDP than developed countries to address the economic consequences of COVID-19 – that could have far-reaching consequences.<\/p>\n

COVID-19 will have devastating consequences for developing countries as they are unable to set up robust stimulus packages comparable to advanced economies. Here are some explanations as well as suggestions on how the international community can do better. <\/em><\/p>\n

Making sense of the multitude of available economic indicators is sometimes hard. While developed countries<\/strong> are estimated to grow the least in 2020<\/strong> (Figure 1) because of the economic crisis induced by<\/strong> COVID-19<\/strong>, that does not mean that developing countries are per se better off. One aspect which crucially emphasizes this point is the size of the stimulus that countries can set<\/strong>.<\/p>\n

\"chart<\/p>\n

Global North and Global South – an outdated dichotomy?<\/strong><\/h2>\n

Emerging from the 1955 Bandung Conference<\/strong>, the term „Global South“ was used to decsribe a new international order grounded in horizontal forms of cooperation<\/a> linking between developing and industrialized countries instead of vertical linking<\/strong>.<\/p>\n

But the Global South<\/strong> per se does not exist anymore. There are countries in the \u201cGlobal South\u201d such as China that can recover strongly from the crisis while others that will suffer far more and will eventually need assistance from the global community. As inequality between countries decreased in the last years while inequality within countries increased<\/a>, it is questionable if that binary concept<\/strong> still holds true.<\/p>\n

In times of shared challenges like climate change, free trade, global health, and digital transformation, we probably need a more multi-layered concept<\/strong>. However, the current worldwide economic crisis shows that there is still a difference between the Global North and the Global South<\/strong>: the economic capability of the state to counteract the hardships of an enormous external macroeconomic shock<\/strong>. This is why the world needs to come and act together to help the most vulnerable.<\/p>\n

Developed countries can spend far more money than developing countries<\/strong><\/h2>\n

While \u00a0Europe and North American have experienced a health crisis preceding or accompanying a major economic shock wave<\/strong>, developing countries, for the most part, \u00a0have been hit first by the economic repercussions of the COVID-19 pandemic<\/strong> before suffering from rising infection rates and death tolls.<\/p>\n

The problem with the current pandemic is that if it is anywhere, it has consequences everywhere. Especially the decrease in commodity prices and the drop in tourism<\/a> hits some countries harder than others. While high-income countries have set up large rescue packages<\/strong>, low-income countries are often unable to do so. Germany and Italy, for example, have so far used amounts that are more than 25% of GDP<\/strong> on economic stabilization while Malawi, Kenya, and DRC<\/a> used less than 1%. Even China is currently still reluctant to deploy a bigger economic stimulus<\/a> to a large extent.<\/p>\n

The IMF has set up a policy response tracker<\/a> to capture all the fiscal and monetary actions<\/strong> taken by the majority of countries around the world. When trying to cluster all the numbers that can be found in the policy response tracker, it is possible to draw a general picture of stimuli<\/strong>\u00a0 by high-, middle- and low-income countries as a percentage of GDP (Figure 2). The result: advanced economies reacted with strong fiscal and monetary policy measures<\/a>.<\/p>\n

\"chart<\/p>\n

Another crucial aspect is that middle- and low-income countries are often only able to use fiscal measures<\/strong> to a slight extent. India, for example, has announced an overall economic package worth only 10% of India’s GDP<\/a>. However, only about 1% of that is in fiscal measures. In high-income countries, the ratio is much higher towards the fiscal side.<\/p>\n

Why do developing countries have problems setting up rescue packages?<\/strong><\/h2>\n

Developing countries cannot set up extensive rescue packages because they simply have limited financial options and face dangerous debt levels. This is why they still rely more strongly on family bonds, clan structures, or religious communities<\/strong> as a mechanism to help and support.<\/p>\n

But in the case of such an enormous economic crisis as the one currently induced by COVID-19, the lack of capability<\/strong> by the state becomes deeply apparent as families cannot absorb all the hardships. Even though the debt levels of developing nations are\u00a0 often smaller than that of developed countries, developing countries often face difficulties setting up significant stimuli<\/strong> because they need to service high-interest payments on their government debt \u2013 sometimes up to 20% of their tax revenue while developed countries are only at about 5%. There are three main reasons for this:<\/p>\n