The sharp economic downturn caused by the COVID-19 pandemic has created “a crisis like no other.” Advanced economies now need to overcome national reflexes and help developing countries.

“A crisis like no other”

COVID-19 has been re-shaping politics, economics, and society around the world profoundly, with the most immediate effect on national economies and the global economic order. It has been dubbed “A Crisis Like No Other” by the International Monetary Fund (IMF) in its June 2020 World Economic Outlook.

A glance at some key macroeconomic figures for its short-term effects reveals why this assessment is as true as it is dire: In the second quarter, all the other G20 economies reported major GDP downturns compared to the previous quarter. According to OECD data, they ranged from 3.2 percent in Russia and Korea to 19.8 and 25.2 percent in the United Kingdom and India respectively, with most of the G20 economies loosing between 7 and 14 percent of GDP.

A recovery on shaky grounds

Over the second and third quarter, several major economic indicators have started to point to a clear improvement compared to previous months. Industrial production in the EU also started to recover rather quickly, moving up by 11.6 percent in May, 9.6 percent in June and another 4.9 percent in July. While the US unemployment rate is still way above pre-crisis levels, it has embarked on a continual decline since its peak in April. In October, it reached 6.9 percent.

The upward trajectory has increased confidence among important market participants. The recent lookdowns in advanced economies in both Europe and North America, however, beget the question whether this trend is sustainable. Advanced economies may be in for another round of economic downturn.

Developing countries need help

Given these uncertainties, it may be tempting for advanced economies to solely focus on their own welfare. The COVID-19 crisis has exacerbated the economic and fiscal problems of many developing countries via multiple channels: decreasing commodity prices, declining exports, higher external indebtedness, and a flight of foreign direct investment toward countries deemed less risky and more robust in handling shocks.

Developing countries face at least two more important problems that impede their ability to battle a national health emergency. First, their medical infrastructures are often so rudimentary that they cannot handle even moderate infection rates, let alone major outbreaks. Second, they do not have social security systems that allow people to reduce economic activity or adhere to social distancing while they try to sit out an infection wave.

COVAX, more aid and debt write-offs

The COVID‑19 Vaccines Global Access (COVAX) initiative could be imperative in mitigating developing countries health plights. It brings together more than 170 countries to discuss an equitable distribution of effective and licensed vaccines.

However, two important players, Russia and the US, have so far stayed at the sidelines. While the World Bank has increased its financial assistance to developing countries, this will hardly suffice. The G20 – which has failed to live up to expectations so far – should not only consider debt payment extensions and restructuring for developing countries but also grant write-offs and cancellations for the most severe cases. Without assistance from advanced economies, many developing countries, particularly in Africa, could face a humanitarian disaster that may well lead to another wave of northward migration.

Collateral damage from US-China rivalry

One reason for the muted response from the G20 and other international institutions so far is the underlying current of increasing great power rivalry between China and the United States. Given China’s swift economic ascent and its more authoritarian course under President Xi Jinping as well as the Trump administration’s openly zero-sum approach to the world economy, it is no surprise that trust between the two countries has eroded.

China’s opaque handling of the outbreak and the Trump administration’s aggressive buck-passing for its global spread have only intensified this trend. Both countries will be keenly watching which of them loses or wins (or rather: loses less) from the fallout of the pandemic – that is also true for a Biden administration. That is certainly not a boon to international collaboration.

Beware of more protectionism

One of the clearest manifestations of the intensifying Sino-American rivalry had been their on-and-off trade war in the months preceding the crisis. Both the resulting tariff and counter-tariff hikes – and even more so the uncertainty surrounding them – have caused losses to the world economy in the hundreds of billions of dollars. Protectionism is therefore on the rise again across the globe—another worrying trend the coronavirus crisis could easily reinforce.

The second wave of coronavirus infections might induce countries to introduce more restricting measures, as more countries race to keep their personal protective equipment (PPE) only for themselves or scramble to protect important but tattered industries from foreign competition – which again would hurt the poorest countries most.

Almost no respite from climate change

When it comes to climate change, there appears to be a silver lining to the coronavirus crisis. Global CO2 emissions have decreased noticeably since the start of the pandemic. During the first half of 2020, lower economic output resulted in 8.8 percent fewer emissions compared to the same period in 2019, with lower use of ground transportation during lockdowns being the most important contributing factor.

However, there were also strong rebound effects. Once countries began to open their economies again, emission levels quickly came close to their pre-crisis levels. So, while the pandemic may have slowed down the process of global warming a tiny bit, it has not altered its fundamental trajectory. It might even lead to a “economics first, climate second” approach where policymakers soften climate goals to speed up the recovery.

What could EU policymakers do?

Rather than acting as the final wake-up call to set aside national posturing in the face of multiple global economic and governance challenges, the pandemic has brought about more concerns, at least so far. But it does not have to be this way. Policymakers in Brussels could take talk of a “geopolitical EU” seriously and try to strive for a bigger role in international affairs, not least to help balance out the great power rivalry between the US and China.

Europeans could refrain from more protectionist measures, in particular for agricultural goods, to set a positive example for international commerce and show that globalization can be a solution rather than a problem. And certainly, the EU stimulus package could include higher public investment in technologies that boost European competitiveness and speed up the ecological transition to a zero-carbon economy.

Public health and economic recovery go hand in hand

Finally, for the next steps in fighting the pandemic, it is fundamentally important to avoid a discussion stuck in the trade-off between public health and economic recovery—because there is no such thing. Quite the opposite: both can and should go together.

Bringing down infection rates is a necessary precondition for sustainable economic growth and beating a pandemic, in turn, is only possible with an adequate supply of basic goods and services. This is not just a national but a global challenge —one in which advanced economies bear a responsibility to look beyond their narrow national interests and support developing countries.

An extended version of this post has appeared as an article in the IP Quarterly’s COVID19 special issue in December 2020.

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