The Great Divergence
Without additional efforts to give people a fair shot, cross-country gaps in living standards could widen significantly.
Unprecedented policy responses and rapid progress in vaccine development have helped pull the global economy from a deep recession, but the economic fallout from the pandemic could be with us for years to come—particularly for tourism-dependent economies, which suffered some of the biggest losses.
Recoveries from the pandemic are diverging dangerously across and within countries, with long-lasting scars likely for countries with preexisting vulnerabilities and fewer resources for fiscal stimulus, vaccine rollouts, and labor force retraining. Differences in vaccination rates and fiscal and monetary policy responses are driving the divergence. These divergent recovery paths are widening the gaps in living standards across countries, with nearly half of emerging market and developing economies and some middle-income countries now at risk of falling further behind.
Divergence within countries is also growing, with youth, women, low-skilled workers, and contact-intensive sectors disproportionately affected. Because the crisis has accelerated the transformative forces of digitalization and automation, some of the jobs lost are unlikely to return. Unequal setbacks to schooling could further amplify divergent recovery paths. Schoolchildren in emerging market and low-income developing countries missed more days of instruction in 2020 than children in high-income countries (see Figure 1.4). As a result, an estimated 6 million children are at risk of dropping out of school in 2021, with potentially lifelong adverse consequences.
Support for vulnerable countries
In the decade leading up to 2019, low-income countries were making significant progress toward income convergence with advanced economies. COVID-19 dealt low-income countries a major blow in this regard, however, pushing an estimated additional 95 million people into extreme poverty in 2020 relative to pre-COVID-19 projections. Ramping up the production and distribution of vaccines at affordable prices remains a key priority. But significant external support is needed too.
The IMF estimates that low-income countries will need about $200 billion between now and 2025 to respond to the pandemic and a further $250 billion to return to their precrisis convergence path with advanced economies. A downside scenario of a slower global recovery could add $100 billion to these financing needs. Meeting these additional needs requires a multifaceted approach. Implementing domestic reforms to raise revenues and improve governance, spending efficiency, and public financial management will be crucial to help resolve the structural lack of adequate access to public financing. These reforms should also help foster private sector financing, especially for infrastructure.
But this will cover only a portion of low-income countries’ immediate needs. Grants and concessional loans must bridge the gap. The IMF continues to do its part, with lending to low-income countries rising to about $12 billion in 2020 and 50 low-income countries receiving financial support, largely through emergency financing instruments. As countries make the transition to multiyear upper-credit-tranche arrangements, the IMF is reviewing its lending framework for low-income countries and exploring options for scaling up its capacity for concessional lending through its Poverty Reduction and Growth Trust (PRGT). Options for providing greater support to vulnerable middle-income countries are also being considered, with the aim of helping countries to be more resilient, green, and inclusive.
