We're Live Bangla Monday, August 02, 2021

Economic vulnerability to coronavirus

The coronavirus outbreak is already having significant economic impacts globally even on economies that do not yet have confirmed cases. Forecasting the costs of the crisis is impossible. History bears ample testimony to the fact that global health pandemics can significantly alter growth trajectories irrespective of the state of development of the economy. The World Health Organization tracked 1,483 epidemic events in 172 countries between 2011 and 2018. The most expensive in recent history include $50 billion in lost output due to SARS in 2003 and up to $55 billion during a 2009 H1N1 swine flu pandemic, both of which involved China. Outbreak of Ebola in West Africa from 2014 to 2016 cost $53 billion.

Given that China's share in global GDP has risen to 17 percent in 2019, compared with 4.3 percent in 2003, with already confirmed cases more than double the total of SARS and a faster spread, it seems plausible to expect a larger economic impact than the 0.1 percent reduction in global growth caused by SARS in 2003. For the most part, the damage is due more to efforts to prevent the virus from spreading, not the virus itself. Fear of the virus makes many people choose to avoid activities they think might expose them to the risk of infection. The impact is amplified as it coincides with an already slowing Chinese economy as American and other countries' companies were shifting supply lines from China to elsewhere due to trade tensions.

There will also be effects in the poorest countries in Asia and Africa. However, economists caution that the full economic fallout depends on how well China can ultimately contain the outbreak. It is increasingly evident that the disruption to the Chinese economy will spill over to the rest of the world. The knock-on effects are surfacing daily, from disrupted air travel to rattled supply chains and sliding commodity prices that are dampening growth prospects from Asia to America and beyond. China is the largest exporter of intermediate manufactured goods that can be resold between industries or used to produce other things. Consequently, its problems quickly reverberate through global supply chains. Indeed, global reliance on those products doubled to 20 percent from 2005 to 2015.

Hundreds of major manufacturers have had their links to the global supply chain severed. The Asian supply chain—which imports about 40 percent of its intermediate goods from China—has the largest exposure, according to a Bloomberg Economics analysis. Finding alternative supplies for products in which China is a dominant supplier globally will be particularly hard, say Bloomberg economists.

An assessment by the London based Overseas Development Institute (ODI, February 2020) identifies individual countries that are most vulnerable to the economic impacts of the coronavirus and a slowdown in the Chinese economy. The assessment covers 97 countries, of which 18 are low-income, 37 are lower-middle-income and 42 are upper middle-income countries. ODI has developed an Index to quantify which low- and middle-income countries are most vulnerable based on three main impact channels:

Health and connectivity

The immediate impact on the health of the population and connectivity are most visible through confirmed coronavirus cases, as well as through direct flight cancellations and travel bans. These include a range of mainly Asian and African countries which recorded infected cases and have imposed visa issuance restrictions. Bangladesh is not in this list yet.  Knock in the woods!

Economic links with China and global integration: Countries with close links to China either through trade, investment, or the movement of people are likely to feel the most economic impact. Mongolia, Cambodia and Laos are the most exposed Asian countries, followed by Myanmar, the Philippines, and Viet Nam. The most exposed African countries include Angola, Congo, Sierra Leone, Lesotho, and Zambia. The majority of these countries export more than one-sixth of their total exports to China. More than one-fifth of total tourist arrivals in Myanmar, Thailand, Mongolia, Cambodia and Viet Nam comprise of Chinese visitors.  Even though China is Bangladesh's largest source of imports (21.5 percent), Bangladesh does not figure prominently in this list because its direct reliance on China for exports, tourism arrivals, and FDIs is very small as is its general economic openness relative to the other countries included in the ODI assessment.  Thus, it will be a mistake to underestimate the impact of disrupted imports of intermediate inputs and capital machinery on production, trade and investment in Bangladesh from this part of the ODI assessment.

Resilience

Economic resilience is the ability of a country to do something about a shock, either directly by protecting its population from the virus or in economic terms, such as the ability to use fiscal or monetary response. Countries with constrained fiscal resources and weak health systems are less resilient. These include Ethiopia, Laos, Pakistan, Ghana and Sudan. Bangladesh appears in this list as the 35th least resilient country primarily because of low expenditures (public plus private) on health and below the 50th percentile ranking on healthcare access and quality index.

Overall vulnerability

The overall vulnerability index is calculated based on the aggregation of the three sub-indices with scores ranging from 0 to 3. It uses 20 indicators for the direct economic impact of the Coronavirus outbreak, the direct and indirect exposure to China and the economic resilience. Economic vulnerability at country level is defined as the combination of direct impacts and economic exposure (divided into exposure directly to China and indirectly through openness to the world) minus the ability to act on the shock based on economic and health governance indicators.

Vietnam, Sri Lanka and Philippines, followed by Kazakhstan, Cambodia, Kenya, Malaysia and Nepal, are the most vulnerable because they are most exposed to China and least well placed to address the impacts.  Bangladesh's rank is 51 out of the 97 countries with a vulnerability score of 0.9 with the highest score of 2 (Vietnam and Sri Lanka) and the lowest scores of 0.1 (Macedonia) and 0.3 (Azerbaijan).  Bangladesh's relatively modest ranking on overall vulnerability owes to a significant extent to no confirmed cases of coronavirus; no reported reduction, cancellation, and suspension of flights of key air carriers to/from Bangladesh; and no government-imposed travel ban and/or entry or visa restrictions (they seem to have missed the Bangladesh government's restriction on visa-on-arrival on Chinese travelers).  Taking these into consideration, an overall score of 0.9 where the worst is 2 cannot be considered low.

What can be done to face the crisis? Protection of public health is the top most priority. A zero-tolerance on the risk of exposure to the virus is the safest option. This requires implementing vigorously health-related policies and information campaigns to prevent the spread of the virus. On the economic impact, we need to stay tuned to the changing potential fall-out. Although Bangladesh is not as vulnerable as Vietnam and Sri Lanka, it is much more exposed than when SARS struck in 2003. There may be some gains in the unlikely case of taking the place of Chinese production and as net importers of commodities such as oil and metals whose prices could drop. But the likely losses far outweigh the gains.

The situation is still unfolding. A protracted and wider outbreak will eventually affect global value chains, financial markets, flow of capital, and price levels. A key reminder from a crisis such as this is the importance of lowering economic exposure to a limited number of countries, designing and implementing policies to diversify production and trade and increasing resilience. Heavy exposure to just one country or economic activity (garments) nourishes economic vulnerability. While China is a major trading partner and creditor, the coronavirus outbreak reminds us of the importance of diversifying trading partners and funding sources. Efforts to build up fiscal buffers can hardly be overemphasized when the pre-existing buffers are eroding, and the government is expected to respond promptly when the likely economic fallout begin to be visible.