COVER STORY • 3

Impact of Covid-19 on
Emerging Market &Developing Economies

By M. Ayhan Kose, Franziska Ohnsorge & Dana Vorisek

The Covid-19 pandemic has dealt a heavy blow to emerging
market and developing economies (EMDEs). The pandemic, thewidespread restrictions put in place to stem it, and the spontaneous
reactions of many consumers and producers have already caused
the deepest global recession since World War II (Chart 1).
Commodity prices plunged, capital inflows to EMDEs reversed, andfinancial conditions tightened severely in March and April. Prompt
policy stimulus on an unprecedented scale in many economies
helped ease the severity of the recession. A partial and precarious
recovery has since taken hold in the global economy.
This article takes stock of the consequences of the pandemic for
EMDEs. Specifically, it addresses the following questions. First, how
has the pandemic evolved? Second, through which channels does
the pandemic affect EMDEs? Third, what are the likely long-term
growth implications of the pandemic?
The article reports several findings. First, while outbreaks in mostadvanced economies had abated for a few months before risingagain in the third quarter of 2020, the pandemic has rapidly spread
across EMDEs, including low-income countries (LICs), where
healthcare systems have very limited capacity.
Second, the pandemic’s short-term impact was severe. Along with
CHART 1

Global per capita GDP growth inglobal recessions
Percent
0
-5
-10
-15

2020

2009

1991

1982

1975

1938

1945-46

1930-32

1917-21

1914

1908

1893

1885

1876

-20

Note: Data for 2020 are forecasts.

Sources: “Global Recessions” by M. Ayhan Kose, Naotaka Sugawara, and Marco E. Terrones,
World Bank Policy Research Working Paper 9172, March 2020; Global Economic
Prospects by World Bank, June 2020

https://www.jef.or.jp/journal/

AuthorM. Ayhan Kose

AuthorFranziska Ohnsorge

AuthorDana Vorisek

the public health crisis and the impact of pandemic-related
restrictions, EMDEs initially faced tighter financing conditions,plunging oil and other commodity prices, sharp declines inremittances, and collapsing international trade. While the external
environment has improved for most EMDEs since the middle of2020, the recovery has been at best halting.
Third, the pandemic is likely to leave lasting damage in the longrun. Covid-19 and the resulting recessions that engulfed vast swathsof the developing world will leave lasting scars, eroding productivity
and potential output for many years to come. In the average EMDE,
over a five-year horizon, past deep recessions lowered potential
output by about 6%. The pandemic is expected to exacerbate theweakness in productivity growth and private investment that werefeatures of the past decade.
Fourth, the pandemic’s long-term impact will aggravate preexisting long-term challenges. Recessions associated with the
pandemic will likely have an even larger impact on long-term growthprospects because of pre-existing vulnerabilities, fading
demographic dividends and structural bottlenecks, and permanentchanges in behavior patterns, including consumption habits, andhuman capital formation. In most years during the past decade,
EMDE growth fell short of its long-term average. The pandemic is
expected to exacerbate the multi-decade trend slowdown in potential
output growth and productivity growth.
Fifth, while the immediate priorities of policymakers are to address
the health crisis and moderate the short-term economic losses, thelikely long-term consequences of the pandemic highlight the need toforcefully undertake comprehensive reform programs to improve thefundamental drivers of economic growth.
The next section discusses the spread of the pandemic and themeasures taken to stem it. The subsequent section reviews theJapan SPOTLIGHT • January / February 2021

13

CHART 2

Share of global GDP affected by
mitigation measures
Percent of global GDP

Spread of the Pandemic

100

An extraordinary number of countries have restricted economic
activity to stem the spread of the Covid-19 pandemic. Nevertheless,it continues to spread rapidly in EMDEs, in some cases despite
lockdowns and other measures.
As of Oct. 26, almost 43 million cases of Covid-19 have been
confirmed globally, alongside about 1.15 million deaths attributed tothe disease. Of these, 28 million cases have been confirmed and 0.7
million deaths have been attributed to Covid-19 in EMDEs. Although
the number of confirmed cases represents just 0.5% of the global
population, cases continue to rise rapidly in most countries,
including in EMDEs. Reported cases may be significantly lower than
the number actually infected, given the sparseness of testing in somecountries.
The Covid-19 pandemic is the latest in a long series of epidemics
and pandemics during the 20th and 21st centuries. These haveincluded Ebola in West Africa (2014-15), MERS in the Middle East
(2012), swine flu (2009-10), SARS in East Asia (2002-03), Hong
Kong flu (1968-69), Asian flu (1957-58) and Spanish flu (1918-19).
Preliminary estimates suggest that Covid-19 may be considerably
more infectious than many of these diseases, but not among themost deadly for those infected (Global Economic Prospects by World
Bank, June 2020).
One feature of Covid-19 is that its lethality has been highest
among the elderly (“Severe Outcomes among Patients withCoronavirus Disease 2019 (COVID-19) – United States, February
12-March 16, 2020” by Centers for Disease Control and Prevention,
Morbidity and Mortality Weekly Report Vol. 69, March 2020). Thishas helped lower the case fatality rate in EMDEs, including LICs,
which typically have younger populations. The proportion of the
population older than 60 years is 11% on average in EMDEs, andonly 5% in LICs (as well as in Sub-Saharan Africa more broadly),compared with 26% in advanced economies.
However, EMDEs generally are less prepared for epidemics andhave poorer public health and medical care systems than advanced
economies, making the likelihood of recovery from Covid-19 lower
should medical attention be needed. The median LIC, for instance,
has less than one hospital bed per 1,000 people – compared to morethan four in the median advanced economy. Finally, a higher
proportion of the population of EMDEs live in informal, crowded
housing conditions where access to clean water and sanitation
services is limited, making the hygiene and physical distancing
measures needed to contain the virus impractical or impossible.
Restrictions and voluntary actions taken to stem the pandemic,

60

14 Japan SPOTLIGHT • January / February 2021

Advanced economies

EMDEs

80
40

International
travelcancellation

Eventcancellation0Workclosures

20
Schoolclosureschannels through which the pandemic affects economic activity in
EMDEs. Section 4 describes the severe initial disruptions to theglobal economy caused by the pandemic. Sections 5 and 6 discussand quantify the likely lasting damage from the pandemic. The lastsection concludes with policy implications.

Note: Figure shows the share of GDP accounted for by economies with restrictions.
Restrictions are counted if required (i.e., not only recommended) and, for school andwork closures, if applied across all levels and sectors, respectively. Travel restrictions
are counted if they entail a ban on arrivals from all regions or a total border closure.
Data are for April 1, 2020. Sample includes 34 advanced economies and 125
EMDEs.

Sources: University of Oxford COVID-19 Government Response Tracker, World Bank

including social distancing, have helped to lower the infection rate
and thus to delay, and lower, the peak number of infections. A key
part of the policy response to Covid-19 has been the implementationof restrictions on people’s movements and economic activity of
unprecedented scope and scale, beginning in China and extending tomost countries (Chart 2). By mid-April, nearly 150 countries had
closed schools and mandated cancellation of events, and more than
80 had closed all workplaces. Travel restrictions were widespread.
Many, but by no means all, of these restrictions have since been
lifted and have made room for a tentative economic recovery.

The Economics of the Pandemic:
Shocks & Spillovers
Covid-19 has caused unprecedented disruptions to global trade,travel, and tourism; stress in global financial markets; and sharp
declines in commodity prices. While the measures taken by
governments, consumers, and firms to reduce social interaction
have been critical to slow the spread of the virus, they have entailed
significant disruptions to economic activity. Reduced consumption of
goods and services has been one of the main drivers of lost output
in a range of model-based estimates of the effects of pandemics.
Investment has also been curtailed, not only by difficulties inmaintaining production and construction but also by sharply weaker
growth prospects, rising financing costs, eroding confidence, andincreased uncertainty.
Air travel, schools and universities, restaurants, theaters, sports
venues, and other facilities servicing masses of people were largely

CHART 3

Lowest weekly net portfolio inflows
to EMDEs
US$, billions
0

-5
-10
-15
-20
-25
-30
Aug.-07Aug.-11

July-15-35
Feb.-18

The pandemic initially caused major disruptions in global activity
and trade, a sharp tightening of financial conditions, and a severe
decline in commodity prices. As unprecedented policy stimulus was
implemented and lockdowns eased, economic activity began torecover in mid-2020.
Along with the implied sharp drop in output, global tradecontracted significantly. April’s 11-point fall in the new export orderpurchasing manager’s index from March was the steepest on recordand considerably steeper than at the onset of the global financial
crisis, during the Euro Area crisis (2010-13), or during the recent
period of trade tensions (2018-19). Since April, global goods trade
has recovered but remains below its pre-pandemic level in January.
With international travel restricted and internal travel discouraged inmost countries, global tourism and travel have been severely
curtailed.
Global equity markets initially fell sharply as the pandemic spread
across the world. Flight to safety resulted in a sharp tightening of
EMDE financing conditions. Net portfolio outflows from EMDEs
during each of the last three weeks of March were the three largest
on record (Chart 3). Since May, global risk sentiment has improved
amid large-scale liquidity injections by major central banks and a
gradual relaxation of lockdown measures in some countries. Capitaloutflows from EMDEs have subsided and equity market valuations
have retraced some of their earlier losses. Nonetheless, financial
conditions remain fragile for many EMDEs. Foreign aid flows may
also shrink in 2020 as donors focus on supporting their own
economies.
As a result of the sharp decline of global commodity demand, theJune-13

Initial Global Economic Impact

prices of most commodities initially fell steeply, particularly of thosecommodities used in the transport industry. The restrictions
implemented to control the outbreak resulted in particularly sharp
declines in travel and transport – which account for two-thirds of oil
consumption – and in other energy-using economic activities. As aresult, benchmark oil prices have been most affected, with theEuropean Brent spot price plunging by 85% between late January –when the first human-to-human transmissions of the virus wereannounced – and its trough in late April and the WTI price briefly
trading at negative levels, before a gradual recovery in May. The
decline in oil prices in March was the largest one-month price plunge
on record. Notwithstanding a recovery as economic activity pickedup and OPEC and its partners agreed to historic production cuts, oilprices remain less than two-thirds of their pre-pandemic levels in
January.
Industrial metals prices initially declined steeply, by 24% between
late January and late April, but since then have rebounded to prepandemic levels on strong demand from China. Most agriculturalcommodity prices have experienced only minor swings since
January, reflecting their less direct relationship with economic
activity (Commodity Markets Outlook: Implications of COVID-19 forCommodities by World Bank, April 2020).
EMDEs therefore faced a perfect storm of both domestic shocks(health crises, restrictions to promote social distancing) and external
shocks (plunging trade, collapsing tourism, capital outflows, fallingcommodity prices) in 2020. Most immediately, the domestic shocks
were often more disruptive to economic activity than the external
shocks. For the first time in 60 years, EMDE output contracted in2020. Nevertheless, to support their economies through the

March-20

closed down for several weeks. Workers able to work at home havein many countries been encouraged or instructed to do so, but fewer
jobs can be undertaken remotely in EMDEs than in advanced
economies, partly because of more limited Internet connectivity. In
some advanced economies, such restrictions as quarantine
requirements on the entry of temporary foreign workers temporarily
threatened agricultural production. Delays in input deliveries andlimited access to financing, in the context of global value chains, attimes caused operational challenges for firms.
These adverse shocks resulted in cross-border spillovers to
EMDEs through multiple channels – real channels, including
disruptions in global trade, supply chains, travel, and tourism; andfinancial channels, including sharp declines in remittance flows in Q2
2020 and large capital outflows amid a flight to safety in March.
Commodity prices, especially oil prices, collapsed in March and April
amid a sharp decline in demand that outpaced historic production
cuts. These cross-border spillovers were amplified by plunging
confidence and rising uncertainty. Since the trough of the global
recession in April, conditions have improved and a recovery has
gained momentum. However, it remains fragile and partial.

Note: One-week sum of net daily purchases of EMDE stocks and bonds by non-residents(published by the Institute of International Finance) for 20 EMDEs. Data available
from 2005. Chart only considers dates that are at least six weeks apart. Consecutive
weeks not shown.

Sources: Institute of International Finance; World BankJapan SPOTLIGHT • January / February 2021

15

shutdowns, policymakers have implemented relief programs of an
unprecedented scale. The immediate fiscal policy response has
included support for healthcare systems, expanded social benefit
programs, and measures to help firms and households. EMDE
monetary authorities across the world have eased monetaryconditions to support activity and provided emergency liquidity
support to stabilize financial markets.

Long-Term Growth Effects
Prior to the pandemic, the global economy already faced
prospects of slower long-term growth, with long-term (10-yearahead) growth forecasts having been repeatedly revised down for all
country groups since the global recession of 2009. This, in part,reflected a recognition of slowing potential growth in EMDEs,
particularly China, over the past decade and reaching into the next
decade (“Subdued Potential Growth: Sources and Remedies” bySinem Kilic Celik, M. Ayhan Kose, and Franziska Ohnsorge, Growth
in a Time of Change: Global and Country Perspectives on a New
Agenda, February 2020; Global Economic Prospects: Broad-Based
Upturn, but for How Long? by World Bank, January 2018).
In addition to its devastating short-term health andmacroeconomic effects, the pandemic may have significant longterm effects. The substantial economic dislocations, deep output
contractions across large numbers of countries, and heightened andwide-ranging uncertainties that have arisen from the pandemic may
dampen human and physical capital accumulation. Supply chains
and working arrangements in many industries may go through costly
reconfigurations. There may also be long-lasting shifts in consumer
behavior, including in the composition of spending. Households may
also opt for increased precautionary saving in view of heightened
uncertainty about employment and income prospects. Bothconsumer spending and business investment may suffer fromsustained declines in confidence. Depressed capital spending would
be particularly damaging to long-term growth prospects in EMDEs,
coming on the heels of several years of weak investment (Global
Economic Prospects: Heightened Tensions, Subdued Investment byWorld Bank, June 2019).
There is little research on the medium- or long-term effects of
disease outbreaks on output (“The Economic Impact of COVID-19”
by Warwick McKibbin and Roshen Fernando, Economics in the Timeof COVID-19, 2020). However, it is well-known that other major
adverse economic shocks, such as financial or currency crises, havebeen associated with persistently negative effects on growth. Thissuggests that the current pandemic may also leave lasting scars on
the global economy by lowering potential output and productivity.
Severe recessions have been associated with highly persistentlosses in output in both advanced economies and EMDEs (“Inflation
and Activity – Two Explorations and Their Monetary Policy
Implications” by Olivier Blanchard, Eugenio Cerutti, and Lawrence
Summers, National Bureau of Economic Research Working Paper
16 Japan SPOTLIGHT • January / February 2021

21726, November 2015). Low levels of capacity utilization
discourage investment and lead to a legacy of obsolete capacity;
expectations of weak growth also discourage investment andbecome self-fulfilling; protracted unemployment causes losses ofhuman capital and reduces job-search activity (“Hysteresis in
Unemployment: Old and New Evidence” by Laurence M. Ball,
National Bureau of Economic Research Working Paper 14818, March2009). All these forces will tend to lower long-run as well as shortrun labor productivity.

Quantifying the Impact of Recessions
on Potential Output
A local projection model is used to assess and quantify the effects
of recessions on potential and actual growth and output levels(Global Economic Prospects by World Bank, June 2020). Threeshocks are considered: recessions, financial crises, and a
combination of recessions and financial crises. Potential growth isbased on a production function approach (“Subdued Potential
Growth: Sources and Remedies” by Sinem Kilic Celik, M. Ayhan
Kose, and Franziska Ohnsorge, Growth in a Time of Change: Global
and Country Perspectives on a New Agenda, February 2020). Annual
data is available for up to 95 EMDEs for 1982-2018. Recessions aredefined as years of negative output growth. Depending on data
availability for potential growth estimates, this definition yields up to
65 recession events in 32 advanced economies and up to 203
recession events in 75 EMDEs during 1982-2018. Hence, outright
output contractions are rare, at about 6% of the country-year pairs inthe sample. Financial crises are defined as systematic banking crises,
currency crises, or sovereign debt crises (“Systemic Banking Crises
Revisited” by Luc Laeven and Fabian Valencia, International
Monetary Fund Working Paper 18/206, September 2018). During
1982-2018, there have been 42 financial crises in 26 advanced
economies and 274 financial crises in 87 EMDEs in the regression
sample – almost 7% of country-year pairs in the sample.
In line with earlier findings, recessions left a legacy of lower
potential output for four to five years after their onset. Five years
after the average recession, potential output was about 6% below
baseline in EMDEs (Chart 4). Financial crises – including those whichwere not associated with outright recessions – also tended to be
associated with lower potential output over the medium term. Fiveyears after a financial crisis, potential output in EMDEs was about
4% below the baseline. Recessions that were accompanied byfinancial crises caused larger long-term potential output losses in
EMDEs than recessions without financial crises. Five years after arecession-cum-crisis, potential output in EMDEs remained almost
8% below baseline – more than the 6% potential output loss
following the average recession.

CHART 4

Potential output after recessions &financial crises
Percent deviation from baseline
0

-5

-10

Recession

Financial crisisand recession

Note: Cumulative potential output response in four years after the event, based on local
projections model. Bars show coefficient estimates, vertical lines show 90%
confidence bands. The dependent variable is cumulative slowdown in potential
output after the beginning of events. Sample includes 75 EMDEs.

Source: Global Economic Prospects by World Bank, June 2020

Unique Nature of the Pandemic-Induced Recession
The deep recessions associated with the current pandemic arelikely to leave more permanent economic scars than typicalrecessions because of lasting effects of the pandemic and related
mitigation policies on the behavior of households and firms – effects
that will be exacerbated in many countries by pre-existing
vulnerabilities.
Persistently weak confidence could result in a buildup of
precautionary savings by households and also more cautious
spending by firms, markedly reducing aggregate demand and supply(“Survey Data and Subjective Beliefs in Business Cycle Models” byAnmol Bhandari, Jaroslav Borovička, and Paul Ho, Federal Reserve
Bank of Richmond Working Paper 19-14, September 2019). There
could be long-lasting changes in consumption patterns motivated by
the aim of lowering infection risks. The learning disruptions
associated with widespread school and university closures, as wellas income losses, may cause lasting setbacks to human capital
accumulation (https://en.unesco.org/covid19/educationresponse).
For example, evidence from the Ebola epidemic in West Africa in2014 suggests that school closures were associated with higher
dropout rates and wider gender gaps in educational attainment(“Confronting the Gender Impact of Ebola Virus Disease in Guinea,
Liberia, and Sierra Leone” by United Nations Development
Programme, UNDP Africa Policy Note Vol. 2, January 2015). Largedeclines in household income are also associated with increased
school dropout rates in EMDEs.

Conclusion
The Covid-19 pandemic has taken an exceedingly heavy human
toll and ravaged the global economy. Both advanced economies and
EMDEs experienced an unprecedented combination of public healthcrises; sharp increases in borrowing costs, especially in EMDEs; acollapse in global trade, travel, and tourism; and a plunge incommodity prices. These shocks have already led to sharp
contractions in many economies.
Meanwhile, governments in many countries have taken fiscal andmonetary policy action on unprecedented scales in response to thepandemic to support demand and activity. Great care will need to betaken when withdrawing this support, as multiple objectives willneed to be served, including sustaining the recovery of output andemployment, ensuring the sustainability of public debt, maintaining
price stability, promoting long-term growth, and ensuring social
cohesion.
Beyond the short term, the pandemic is expected to have severe
adverse effects on long-term economic growth. The exceptional
severity of the pandemic and economic collapse raises concerns
about the risk of “super-hysteresis”: not only a permanent loss of
output levels but a permanent slowdown in potential output growth(“Long-Term Damage from the Great Recession in OECD Countries”
by Laurence Ball, European Journal of Economics and Economic
Policies: Intervention Vol. 11, September 2014). The pandemic could
alter the very structures upon which the growth of recent decades
was built, since it could cause prolonged damage to global supply
chains, global trade and financial flows, and global collaboration.
Note: This piece is based on the main findings of our analysis in
the Global Economic Prospects report by the World Bank publishedin June 2020. We would like to thank Kevin Clinton, Hali Edison,
Antonio Fatas, Ugo Panizza, and Christopher Towe, as well as
participants at seminars and institutions around the world, for many
useful suggestions and comments. We thank Hrisyana Doytchinova
for excellent research assistance. The findings, interpretations, andconclusions expressed in this paper are those of the authors. They
do not necessarily represent the views of the institutions they areaffiliated with.

M. Ayhan Kose is acting vice president of the Equitable Growth, Finance andInstitutions (EFI) Practice Group at the World Bank and director of the EFI
Prospects Group. Under his management, the Prospects Group produces thebank’s flagship report, Global Economic Prospects, in addition to other policy
and analytical publications.
Franziska Ohnsorge is manager of the World Bank’s Prospects Group that
prepares the Global Economic Prospects report. Previously she was at theInternational Monetary Fund and at the Office of the Chief Economist of theEuropean Bank for Reconstruction and Development.
Dana Vorisek is a senior economist in the World Bank’s Prospects Group,
where she is one of the lead authors of the Global Economic Prospects report.
She has covered Latin America and the Caribbean, and the Middle East andNorth Africa. Previously she worked for the Economist Intelligence Unit.

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