Economic recovery from the Corona crisis – where do developing countries stand?

We have written several times about the recovery of the global economy after the sharp economic downturn in the spring of 2020 due to the corona pandemic. Today, we want to have a look at the economic development in the less developed economies.

Development of real GDP

Let us first look at the development of real gross domestic product (GDP) in selected regions of the world. In its World Economic Outlook of April 2021, the International Monetary Fund (IMF) estimated that the global economy would grow faster in 2021 than it shrank in 2020. Only in Latin America and the Caribbean will growth in 2021 be insufficient to offset the economic slump in 2020.

Emerging and developing Asia is coming through the crisis the best. Economic growth there is expected to reach 8.6 percent in 2021. The decline in GDP in 2020 was only one percent. The result is an increase in growth of 7.6 percentage points.

In the seven largest industrialized nations (G7), this plus is only 0.4 percentage points (plus 5.4 percent in 2021 after a GDP decline of five percent in 2020). Apart from Latin America and the Caribbean, this is the lowest figure of the regions considered here.

Percent change of real GDP in selected regions of the world. Ordered according to the difference in rates of change between 2021 and 2020.

Source: International Monetary Fund, World Economic Outlook Database, April 2021.

So, at first glance, the emerging and developing countries are coming through the current economic crisis better than the developed industrialized nations. However, things look different if we look at the development of real GDP per capita.

Development of real GDP per capita

When it comes to people’s material prosperity, it is not a country’s total GDP that is relevant, but its average real GDP per capita. Here, a look at selected countries reveals a somewhat different picture.

In an international comparison, it makes sense to express the real GDP of all countries not only in U.S. dollars but in U.S. dollar purchasing power parity.

This figure takes into account that in countries with a high level of prosperity and a high price level (e.g., oil-exporting countries, for example, Qatar and Norway, but also Switzerland and the USA), people can buy only very few goods with one dollar.

In poor countries, on the other hand, one U.S. dollar can buy a relatively large quantity of goods. This is particularly true of African countries, where GDP per capita is sometimes less than US$1,000 (Burundi, Central African Republic, Malawi, South Sudan, to name just a few).

For better comparability, the GDP per capita of the countries under consideration is normalized. For this purpose, the value for 2019 – the year before the outbreak of the Corona pandemic – is set to 100. The resulting figures in the following chart can be interpreted as follows:

• In the United States, the value of normalized GDP per capita in 2026 is 108.5. This means that, according to IMF forecasts, real GDP per capita in the United States will be around 8.5 percent higher in 2026 than in 2019. For Germany, real GDP per capita is forecast to be seven percent above the level before the outbreak of the Corona pandemic.
• The remaining three countries considered here will not yet return to pre-crisis levels of real GDP per capita even in 2026. Algeria’s figure is still almost eight percent below its 2019 level. These countries are examples of over 40 countries where real GDP per capita will be lower in 2026 than in 2019, according to IMF forecasts. They range from Angola, Belize, and Burundi to Somalia, Sudan, Zambia, and Zimbabwe.

The resulting development of real GDP per capita in the different countries is similar to a K, i.e., globally, we see a k-shaped economic recovery.

Development of real GDP per capita at constant prices and U.S. dollar purchasing power parity in selected countries, expressed as an index value (values for 2019 = 100)

Source: International Monetary Fund, World Economic Outlook Database, April 2021, and own calculations.

Causes of the global k-shaped economic recovery

There are various reasons for a k-shaped economic recovery at the global level. In broadly simple terms, two types of economies can be identified:

1. On the one hand, we have highly developed economies. Here, many companies can use digital technologies to manufacture their products even during a pandemic. These products are either sold online or kept in stock and sold later. Government stimulus packages stabilize the economy and citizens’ disposable incomes. An extensive supply of vaccinations ensures that the pandemic is contained. These countries thus come through the economic crisis relatively well.
2. On the other hand, we have poor, less developed economies. Governments can offer little if any, government support. Investors from the industrialized nations withdraw their capital from these countries because they need it at home. There are few vaccinations. It is particularly problematic when the country depends on tourism. This has been largely absent during the Corona pandemic – a vacation trip requires tourists to be physically on-site. A service in the tourism industry cannot be consumed online, nor can it be stored.

Many less developed economies also have high population growth. This means that even if GDP in 2021 has a high growth rate, goods and services must be distributed among a larger population. This may imply that GDP per capita decreases even though the economy’s GDP has increased.

Economic policy outlook

A gap in real GDP per capita between developed, industrial economies, and developing countries as a result of the Corona crisis has led to a number of negative developments.

Less developed economies lack the resources to invest in modern production facilities, digital technologies, or even schools and hospitals. If less developed countries lack the means to strengthen their economies, there is a risk of continuing a k-shaped economic development permanently.

The gap in living conditions between countries is widening. This will increase the pressure to migrate, impacting more developed countries.

In addition, less developed countries are finding it difficult to achieve an ecological transformation of their economies. This makes it more difficult to combat climate change, which is a global phenomenon and therefore requires the cooperation of all countries.

Stabilizing the economic situation in the less developed economies is, therefore, in industrialized nations’ interest.