# **1. Introduction**

The COVID-19 pandemic has led to severe economic disruptions in the operations of businesses around the world. A prior work of the World Bank documents the impact of COVID-19 on firms in developing countries using the first wave of the Business Pulse Surveys (BPS) data collected during May-August 2020 in 51 countries covering more than 100,000 firms (Apedo-Amah et al., 2020). The analysis of this data found that the COVID-19 pandemic generated an average 49% drop in sales relative to 2019. This decline in sales was not only large but also persistent, as the drop in sales continued to be more than 40% even 4 months after the peak of the crisis (defined as the sharpest drop in mobility). During the May-August 2020 period, firms had been mostly holding on to workers, with only about a fifth of businesses resorting to lay-offs. However, most businesses (64%) made some adjustments to their payroll primarily by reducing hours, wages, or granting leave to workers. Financial risks driven by defaults and bankruptcies were large, with more than 55% of micro, small, and medium enterprises falling into arrears or expecting to be in arrears within the next 6 months from the time of the first wave of BPS. With the physical distancing norms in place, firms were found to be increasing the use of digital technology. About 34% of businesses started to use or increased the use of digital platforms and 16.5% increased their investment in digital solutions (Apedo-Amah et al., 2020).

The public health measures (e.g., physical distancing, strict lockdown of non-essential businesses) that dampened business operations in the first wave were largely retracted by October 2020 - March 2021, allowing activity to recover. Although business is not as usual yet and we are still in the midst of the crisis with more transmissible and virulent strains of the virus spreading (World Bank, 2021), this paper attempts to uncover the possible patterns of recovery by building on two waves of BPS data from 38 countries, covering 65,000 observations comprising 25,000 panel firms. Economists have long argued on the possible shapes of the recovery from the past crisis and including the current one. For instance, Sheiner and Yilla (2020) describe the possible shapes of the recovery from the current pandemic: ’Z’, ’V’, ’U’,’W’, ’L’ -shaped, and the Nike Swoosh.<sup>1</sup> While it is too early to confirm the shape of the overall economic recovery, our analysis suggests that the business recovery between May-August 2020 and October 2020 - March 2021 may take the form of either a ’U’-shaped or a Nike swoosh. Once more rounds of BPS data become available, we could possibly see a ’W’-shaped recovery.

Beyond the shape of the recovery, our analysis provides the most comprehensive assessment of several aspects of the recovery trajectory for firms in developing countries. Our cross-country analysis suggests a positive recovery with some catch up across countries in the second wave of BPS data (see Appendix Figure B1). Despite this positive recovery, heterogeneity across countries is still very large; with enormous differences between some countries in Europe and Latin America, and some countries in Africa and South Asia (See Figure 1, panel a). Sales in wave 2 range between

> 1On March 23, 2020 Angel Gurria, the OECD’s secretary-general, warned advanced economies that “... Right now we know it’s not going to be a ‘V’. It’s going to be more in the best of cases like a ‘U’ with a long trench in the bottom before it gets to the recovery period...”

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