Coping with COVID-19: The ‘fiscal stimulus gap’ between rich and poor nations

Many countries across the world have undertaken unprecedented fiscal action to cope with the economic consequences of COVID-19. ILO has bemoaned the fact that the fiscal stimulus packages that have been enacted across the world have been rather unevenly distributed. The ILO’s Director General notes that the  “fiscal stimulus gap” is … around US$982 billion in low-income and lower-middle-income countries.’

The highly uneven nature of fiscal policy responses can be seen in Figure 1 below, with many countries in poorer parts of the world not being able to muster sufficient resources to cope with the pandemic-induced recession.

Figure 1 Global map of budgetary support (as % of 2020 GDP) in response to COVID-19 driven recession, derived from IMF Fiscal Monitor, April 2021

A clearer picture of this fiscal gap emerges when one examines Figures 2 to 4 (derived from IMF Fiscal Monitor, April, 2021).

Two types of fiscal measures are highlighted – type 1 or ‘above-the-line’  measures that consist of additional spending or forgone revenue; type 2 or ‘below-the-line’ measures that consist of liquidity support to the private sector in various forms – equity, loans on preferential terms and credit guarantees. Three broad cohorts are highlighted: (1) Advanced Economies (AEs, e.g., Japan); (2) Emerging market and middle-income economies (EMMIEs, e.g., Thailand); and (3) low income developing countries (LIDCs, e.g., Bangladesh).

The differences are quite stark. Consider the case of AEs. For this group, the average size of the fiscal support relative to GDP in terms of ‘above-the-line’ measures are over 16 percent and around 11 percent for ‘below-the-line’ measures.  It is worth observing that, among AEs, the USA has set the pace with its latest announcement of the fiscal stimulus package amounting to a staggering 25.5 percent of GDP! If successfully implemented, this package is likely to play a key role in shaping the growth and employment recovery in the USA, while delivering significant spill over benefits to the global economy.

For EMMIEs, the pertinent fiscal indicators drop to four per cent and below. For LIDCs, the relevant metrics are even lower –  around 1.6 percent of GDP for ‘above-the-line’ measures and about 0.2 percent for ‘below-the-line’ measures.

Figure 2: Fiscal policy response (% of GDP) in advanced economies (AEs)
Figure 3: Fiscal policy response (% of GDP), Emerging Market and Middle Income Economies (EMMIEs)
Figure 4: Fiscal policy response (% of GDP), Low Income Developing Countries (LIDCs).

To a significant extent, the fiscal stimulus gap between rich and poor nations reflect multiple structural constraints faced by low and middle income economies (LIMCs) that lead to limited fiscal space. Admittedly, a greater commitment to domestic resource mobilization and cutting back inefficiencies, corruption and waste can enlarge the fiscal envelope in LMICs, but it would be naive to suggest that such home-grown efforts alone are adequate. Without global cooperation and generous external assistance, the typical LMIC is likely to flounder and suffer perhaps irreversible setback in attaining the Sustainable Development Goals (SDGs). After all, about USD 3 trillion (equivalent to 2.6% of global GDP) would be required to meet the SDGs.

Furthermore, prevailing over COVID-19, which is a precondition for resumption of normal economic growth in the medium-term, requires a great deal of global cooperation in ensuring equitable access to mass vacccination programs. Sadly, such cooperation is yet to materialize.As one evaluation from Duke University notes:  ‘High-income countries currently hold a confirmed 4.6 billion doses, upper middle-income countries hold 1.5 billion doses, and lower middle-income countries hold 721 million doses, and low-income countries hold 770 million… Many high-income countries have hedged their bets by advance purchasing enough doses to vaccinate their population several times over.’  This troubling nature of ‘vaccine inequality’ means that many LMICs will not be able to prevail over COVID-19 within a reasonable timeframe thus preventing their capacity to resume normal economic activity. Hence, an equitable global vaccination programme is urgently needed to secure sustainable employment recovery across the world.