Author: Yan

The latest (January 2021) IMF estimates reveal that world GDP for 2020 is expected to fall by 3.5 percent, with the advanced economies registering a projected decline of 4.9 percent. Emerging and developing economies are estimated to endure a fall in real GDP of 2.4 percent (Figure 1). This is unlike the last global recession of 2008 when the emerging and developing economies registered modest positive growth juxtaposed with a significant decline of more than 3 percent for the advanced economies. The net impact was that, at the global level, output contracted by a modest 0.1 percent.

Figure 1

Source: Derived from IMF, World Economic Outlook, January 2021

A ‘V’ shaped recovery is expected in 2021 across the world and the projections suggest that between 2020 and 2025 both the advanced and emerging and developing economies will continue to grow at a steady pace in line with recent historical trends (IMF data mapper, October 2020). Such a salutary outcome, however, rests on the  critical assumption that appropriate policy responses across the world will be enacted and implemented and that the timely availability of vaccines will offer durable protection against the current pandemic. In the absence of appropriate policy interventions, much more pessimistic interpretations of the nature of the global economic recovery are very likely. This point is elucidated below.

A number of analysts have highlighted the notion that aggregate growth statistics hide the fact that a ‘K-shaped’ or uneven recovery is in progress.[1] This can be gauged from both sectoral growth and employment patterns and the nature of job losses across cohorts of workers stratified by income and skill levels.

The ILO’s latest Global Monitor (January 2021) notes that specific sectors, most notably, ‘accommodation and food services, arts and culture, retail, and construction’, have experienced massive job losses, while positive job growth is evident in information and communication, and financial and insurance activities which tend to be populated by higher skilled workers. Others find that the semiconductor industry is booming, while contact-intensive, service-oriented industries are languishing.[2]

Evidence from the USA highlights a striking pattern: high wage workers experienced job gains (+2.9 percent) during the pandemic, middle wage workers experienced modest job losses (-3.4 percent), while low wage workers experienced massive job losses (-21 percent).[3] This implies that COVID-19 is likely to exacerbate existing inequalities unless countervailing policy measures are undertaken.

The thesis of uneven economic recovery also pertains to the fact that emerging and developing economies are likely to fare worse than advanced economies, despite GDP projections suggesting that the magnitude of the 2020 recession was less acute for low-and middle-income countries (Figure 1). This can be illustrated by computing GDP losses relative to the pre-COVID era (2019) across regions of the world (Figure 2). With the exception of China, in all cases, regions that form part of emerging and developing economies are expected to experience higher GDP losses relative to advanced economies.

Source: Derived from IMF, World Economic Outlook, January 2021

Notes: Em. Asia ex.CHN= Emerging Asia excluding China; LAC= Latin America and the Caribbean; MECA= Middle East and Central Asia (MECA); Em.Eur = Emerging Europe; AE= Advanced economies

Labour market indicators suggest that lower middle-income economies are expected to experience a greater degree of labour market distress relative to their counterparts in both rich and poor countries. The latest (January 2021) ILO estimates indicate that work-place closures have led to a loss of 8.8 percent of workhours globally relative to 2019 thresholds in 2020. This is distributed as follows: low-income countries – 6.7 percent; lower middle-income economies- 11.3 percent; upper middle-income countries: 7.3 percent; high income countries – 8.3 percent. Similarly, the share of labour income losses due to workhour losses are of greater magnitude in lower middle-income countries relative to their counterparts in low, upper middle-income and high-income countries.

If one adds the impact on extreme poverty of COVID-19, then the picture of the greater distress experienced by low- and middle-income economies becomes even more stark. Given the way that extreme poverty is currently measured (the ‘global’ poor earn less than USD 1.90 a day), it is almost exclusively prevalent in low- and middle-income economies. Until COVID-19, extreme poverty was on a sustained downward trend. Now, the latest estimates suggest that “… between 119 and 124 additional poor globally ” as a result of the pandemic (Lakner et al, 2021). What is worrying is the steady manner in which the pertinent projections have worsened. In April 2020, for example, the maximum expected increase in global poverty was 62 million. By January 2021, this has more than doubled.[4] Some of the most populous countries in South  Asia, such as India, are projected to experience the highest increase in poverty (Kharas, 2020). In contrast, in some advanced economies, such as the USA, a generous, but time-bound, increase in income support was associated with stability in short-run poverty during the early phase of the pandemic.

One area that has been badly hit is the education of children and young adults. In April, when the first wave of COVID-19 was at its peak, more than 90 percent of children were subjected to school closures globally. At the same time, various tertiary institutions, most notably technical and vocational institutions, were badly affected. While the situation has eased to some extent, the deleterious long-term consequences are increasingly becoming evident. World Bank estimates note that ‘learning poverty’ (inability to read a simple text by age 10) is projected to increase from 53 percent of the pertinent cohort to 63 percent in low and middle-income economies. This in turn translates into potential earning losses almost equal to 10 percent of the collective GDP of middle-income economies.

In sum, the challenges that low and middle-income economies will face in a post-COVID world are immense. It will require a combination of national determination and generous international cooperation to attenuate these challenges.

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[1] See, for example, Jones (2020) and Bheemaiah et al (2020)

[2] Manabe and Hiroi, 2021

[3] Economic Tracker (tracktherecovery.org). The data is based on November 15, 2020

[4] Lakner et al, 2021

I wrote a paper for the Griffith Asia Institute on the theme of COVID-19 and the challenge of meeting the SDGs in developing Asia. The paper is available here .

Nobel Laureate Paul Romer had a brief, but tempestuous, tenure at the World Bank as its Chief Economist. He reportedly had a tense and adversarial relationship with Bank staff on multiple issues, but the proverbial straw that broke the camel’s back turned out to be Romer’s critique of the World Bank’s celebrated Doing Business reports (henceforth DBR). He made an abrupt exit in January 2018 after this critique became public. Even worse, media reports attributed to him the sensational claim that Bank staff fabricated the data to create an unfavourable impression of a particular country (Chile) because it was being ruled by a left-of-centre government and, therefore, presumed not to be business-friendly.

Romer subsequently recanted his position in his personal blog pointing out that he never intended to cast aspersions on the intellectual integrity of World Bank staff but stood by his methodological critique. It is ironic that, after his departure from the World Bank, Romer went on to win the Noble prize in economics, a singular honour that he shared with William Nordhaus. The World Bank was thus deprived of the opportunity to claim that it had a Nobel Laureate as its Chief Economist.

When Romer took aim at the DBR, he was taking on a ‘flagship publication’ of the World Bank. It grew out of a ‘project’ conceived in 2002. As the Bank states:

The Doing Business project provides objective measures of business regulations and their enforcement across 190 economies and selected cities at the subnational and regional level.

The Doing Business project, launched in 2002, looks at domestic small and medium-size companies and measures the regulations applying to them through their life cycle.

By gathering and analyzing comprehensive quantitative data to compare business regulation environments across economies and over time, Doing Business encourages economies to compete towards more efficient regulation; offers measurable benchmarks for reform; and serves as a resource for academics, journalists, private sector researchers and others interested in the business climate of each economy.

Countries are scored (100=best) and ranked (1=best) for ‘ease of doing business’. The progenitors of DBR did not anticipate that the ranking exercise would become so influential.  Timothy Besley calls it ‘…one of the most prominent knowledge products produced by the World Bank.’

Governments, especially in the developing world, eagerly consulted the annual publication of DBR to find out how well or how poorly they were ranked. When significant ‘improvements’ in the business environment took place, they led to the World Bank President (David Malpass) to join in the national celebrations, as in the case of Pakistan. He proclaimed: ‘Your country jumps to 108th place from 136th last year…I congratulate you all, prime minister, chief minister, your team for this achievement.’

Some, such as India, set a policy goal in terms of reaching a particular rank (‘top 50’). Others, such as Indonesia, took an identical approach, aiming to be ranked 53^rd in 2020 and 40^th in about four years.

In retrospect, this scramble to win the rankings game by many countries was a misguided endeavour that the World Bank made little or no attempt to rectify. Now, it seems, it has no choice. An official statement issued by the World Bank on August 27 acknowledges ‘data irregularities’ that were considered serious enough for the DBR to be ‘paused’. Here is an extensive extract from the August 27 statement.

A number of irregularities have been reported regarding changes to the data in the Doing Business 2018 and Doing Business 2020 reports, published in October 2017 and 2019…

The integrity and impartiality of our data and analysis is paramount and so we are immediately taking the following actions:

• We are conducting a systematic review and assessment of data changes that occurred subsequent to the institutional data review process for the last five Doing Business reports.
• We have asked the World Bank Group’s independent Internal Audit function to perform an audit of the processes for data collection and review for Doing Business and the controls to safeguard data integrity.

We will act based on the findings and will retrospectively correct the data of countries that were most affected by the irregularities.

The Board of Executive Directors of the World Bank has been briefed on the situation as have the authorities of the countries that were most affected by the data irregularities.

The publication of the Doing Business report will be paused as we conduct our assessment.

This embarrassing development was duly reported by leading representatives of the global media – see, for example, The Economist, Financial Times, Bloomberg Quint and Reuters, UK . All of them referred to Paul Romer’s concerns about DBR.

One wonders what Romer is thinking now. He also wanted to review past DBRs because he felt that changes in methods of measurement were too frequent and led to arbitrary changes in national rankings. He highlighted the case of Chile whose rank fell by more than twenty places in a short span of time.

Two analysts, Justin Sandefur and Divyanshi Wadhwa, from the Center for Global Development illustrated spurious improvements in the ranking for India due to changes in methodology and even changes in sample size. An external audit of DBR commissioned by the World Bank in June 2018 exonerated World Bank staff from data manipulation but noted the following: ‘… both the survey questionnaires and how the indicators are calculated have changed frequently… (F)requent methodology changes reduce the value of the indicators to researchers, policy makers and the media.’

It appears, however, that the worst fears of Romer have turned out to be true. It was not just a case of frequent changes in methodology, but ‘data irregularities’ that has caused the World Bank to temporarily cease the publication of DBR. Who committed these irregularities is unclear. The Bank faces the formidable challenge of salvaging the reputation of a flagship publication. Will it be able to persuade member states to take the DB rankings seriously following this debacle? Only time will tell.