The COVID middle-income trap
THE CORONAVIRUS pandemic has had a devastating impact on middle-income countries, MICs. With the exception of the United States, the 10 countries with the highest number of COVID-19 cases to date are all
MICs. And the same is true for new daily cases and COVID-19 deaths per million population.
The economic projections for MICs are equally dismal. Household incomes will fall across the board in 2020, including for most of the 100 million additional people globally who will fall into extreme poverty in a downside scenario.
Latin America’s experience is illustrative: the region accounts for just 8.4 per cent of the global population, but 30 per cent of total COVID-19 fatalities to date. The International Monetary Fund, IMF, estimates that GDP in Latin America and the Caribbean will contract by 9.4 per cent this year, while the World Bank expects a 10 percentage point increase in poverty in the region.
These setbacks come at a time when waves of social unrest are spreading across MICs. With a few exceptions such as Peru or Ghana, the main drivers of discontent – especially in Latin America – have been lacklustre growth, lack of upward mobility, and demands for greater political representation and participation.
Even in better-performing economies, like Chile, many feel that their expectations and aspirations have not been met, and that those at the top of the income distribution have captured most of the gains.
To make matters worse, before the COVID-19 crisis, the end of the long commodity supercycle that had boosted MICs’ exports was threatening to reverse rising living standards. Young people feared they would end up where their parents had started a generation ago.
When the pandemic erupted, MIC governments responded with lockdowns and economic stimulus. But the effectiveness of these measures has been limited by high urban population densities, sizeable informal economies that make human contact hard to avoid, and financial constraints that are much more binding than in the rich world.
In Colombia, for example, GDP will shrink this year by approximately 7 per cent, the largest decline on record. The pandemic-induced loss of jobs and income has already increased the share of the population living below the poverty line from 27 per cent at the end of 2019 to an estimated 38 per cent in May, despite the government’s provision of emergency cash transfers. Moreover, inequality has widened, with the income of the poorest fifth of the population falling by more than 50 per cent, compared to a 33 per cent reduction for the top quintile.
NOT ENOUGH
The story is similar in other Latin American countries, suggesting that the economic reversal feared by those protesting in the streets last December is already happening. Social unrest, which had been hibernating, will likely return with a vengeance.
MIC governments cannot afford a whatever-it-takes response, and are instead doing whatever they can. But whatever they can do will not be enough, and the international community would be short-sighted to ignore their plight, for at least three reasons.
First, MICs account for 75 per cent of the world’s population, which means there can be no effective global health security infrastructure without their engagement and support. It is therefore essential that these countries have access to an effective COVID-19 vaccine as soon as it becomes available.
But as things stand, it seems that a vaccine or vaccines will go first to the advanced economies that are investing in their development. Furthermore, the World Health Organization, which is leading the COVID19 Vaccine Global Access, COVAX, initiative together with the Coalition for Epidemic Preparedness Innovations and Gavi, the Vaccine Alliance, is – understandably – mainly focusing on the poorest countries. There is currently no guarantee that COVAX will be able to provide the vaccine volumes that MICs need.
The ‘missing middle’ is unable to invest heavily in laboratories and clinical trials, lacks adequate disease and mortality surveillance, and