COVID-19 lockdowns are imposing substantial economic costs
Low- and middle-income countries (LMICs) face rapid and substantial economic costs due to the spread of COVID-19 and associated closure measures. James Thurlow describes the first assessments of economic impacts in some African countries and their varied effects on different sectors and types of households. It also highlights the challenges facing governments in moving from responses to the crisis to medium and long-term economic recovery policies. These assessments are carried out by IFPRI research teams and country partners coordinated by James and Karl Pauw. John McDermott, co-editor of the series and director of the CGIAR research program on agriculture for nutrition and health (A4NH).
It is too early to assess the full economic impact that the
COVID-19 blockades will have on developing countries. But early research
indicates that many African economies are significantly affected and that the
poorest households are struggling.
IFPRI is conducting a series of country studies, in
collaboration with local and government partners, which use economic models to
estimate the impacts of blockages, assess the exposure of food systems and
identify vulnerable population groups.
This investigation is ongoing and the situation is changing rapidly, but three clear observations emerge:
Developing countries bear substantial economic costs
Food supply chains exposed, although largely free of
blockages
Non-poor urban households face the highest income losses,
but poverty increases dramatically
Developing countries bear substantial economic costs
We do not yet know how long the blockades will remain in
place, what their full impact will be in 2020 or how quickly African economies
will recover from these shocks.
But the results of studies in our countries show that the current crisis causes much larger and faster contractions in economic activity
than those observed in previous crises, notably the world food crisis of
2007-2008 and the recession of 2009 Unlike previous crises, it is domestic
policies, rather than global shocks such as trade disruptions and reduced
remittances, that impose most of the economic costs, at least for now.
Our results are alarming: in Nigeria, Africa's largest
economy, we estimate a 38% drop in GDP during the five-week close from the end
of March to the end of April. South Africa seems to be undergoing a similarly
sized shock. The impacts are even greater in Rwanda, where GDP almost halved
during the country's six-week blockade.
The enormous economic costs of the blockades prevent governments from continuing to support these policies. But any easing of restrictions must balance the economic importance of various sectors with the risks they pose to those who work there. IFPRI works with governments to understand these compensations and avoid disruptions to national food systems.
Food supply chains exposed, although largely free of
blockages
Most African governments view food supply chains as
"essential" and have exempted them from blockade policies. However,
although food may be exempt, food systems are not immune to the effects of the
pandemic.
In Nigeria, for example, we estimate an 18% drop in
agri-food GDP during its five-week blockade and a 27% drop in Rwanda during its
six-week blockade. While other sectors, such as manufacturing and construction,
experience even larger declines, the food supply chain is particularly
important for working people and poor consumers.
Some impacts on the food system are direct. The closure of
hotels, restaurants, and bars was an early and common goal for most closure
policies in Africa. That said, while meals prepared outside the home are
important to many urban consumers, they represent only a small part of the
overall food economy.
Most of the impacts on food systems are indirect and are mainly due to lower incomes. Even when farmers, food processors, and traders are exempt from blockages, they may still be unable to sell products if consumer incomes and demand for food decrease.
Food supply chains have so far fared better than other sectors of the economy in most countries. But that could change. In Nigeria, the government closed some food markets in Lagos and limited the hours of food trade in major cities to just four hours every other day. If this prevents consumers from accessing food, it could quickly overshadow other disruptions to the food system and become a major source of economic costs throughout the economy.
For now, it remains a crisis in access to food caused by the loss of income, rather than by the availability of food. But the food supply could be more worrying if the blockades are prolonged, if they apply to rural areas or if the movement of rural workers is restricted.
Non-poor urban households face the highest income losses, but poverty increases dramatically
It may seem contradictory that non-poor urban households in
Africa is the most affected. But manufacturing and business services face the
tightest blockades in most places, and these sectors are often concentrated in
cities and employ better-trained workers.
In Nigeria, for example, income in the top quintile is
expected to drop 41% at the close, while income in the bottom quintile is
expected to drop 23%. There are also unequal distributive impacts in Rwanda and
South Africa.
But higher-income households can better compensate for these
losses by using savings and other assets. Poor and rural households also suffer
substantial losses and, for them, even a small drop in income can have harmful
and lasting effects.
Even more worryingly, the number of poor is increasing. In Nigeria and Rwanda, for example, we estimate that national poverty rates will increase by 15 and 27 percentage points respectively, which means 30 million more Nigerians and 3 million more Rwandans living on less than 1.90 dollar a day.
As the situation evolves, it could lead to even greater
losses for the poor in Africa. Tighter restrictions on urban markets, for
example, could further increase the burden on poor consumers and small farmers.
Reassess priorities by focusing on the poor.
The economic losses caused by the current crisis are much deeper and happen faster than those caused by previous crises. Governments are under enormous pressure to provide short-term emergency assistance while planning and investing in economic recovery.
Funding for emergency and recovery programs will be hampered by declining tax revenues due to closure policies and limited borrowing capacity of countries due to uncertainty in world markets and large debts accumulated since the last crisis. Some shift in policies and priorities before COVID-19 is inevitable.
BY JAMES THURLOW
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