How COVID-19 is Affecting Emerging Economies?

The coronavirus crisis is the most significant economic event impacting the world after the World War-2. Many economic experts are of the opinion that the crisis will have a long-lasting impact on the economy of the entire world. This can be ascertained from the fact that COVID-19 has already wreaked havoc in more than 200 countries across the globe!

At the present moment, the coronavirus crisis is most severe in developed nations. Countries like the United States, Italy, and other European nations have borne the brunt of coronavirus until now. However, in the future, it is likely that the crisis may manifest more in emerging economies.

The reality is that the developed nations have the infrastructure to deal with such an issue. They have economic as well as social infrastructure ready to deal with a problem of this magnitude. However, the same cannot be said about emerging markets. Developing countries do not have the wherewithal to face this problem, and hence the consequences may be more severe.

This article explains the problems that emerging economies are likely to face during the coronavirus crisis.

  • Emerging economies will witness a sharp drop in consumer demand until the coronavirus crisis continues. Developed nations are also likely to face the same problem. However, this problem is likely to be more pronounced in emerging economies. This is because developed economies have social welfare schemes and provide unemployment benefits to their people.

    Countries like the United States, Germany and the United Kingdom have already announced trillion dollar bailout packages and more relief measures are likely to follow through. However, this is not the case with emerging nations. These nations are already struggling to make ends meet and many find it difficult to spend any additional money in order to fight this crisis.

    Hence, large swathes of the lower class populations in these nations are unlikely to have any cash to spend even on daily necessities. The essential goods, such as food products, may witness a slight increase in demand. However, this increase in demand is more than likely to be offset by a fall in discretionary spending on products such as apparel and entertainment.

    The bottom line is that governments in the emerging markets will be forced to enforce lockdowns, just like the developed nations do. However, they do not have the economic wherewithal to provide the same economic benefits to the people that may be locked down.

  • A significant amount of manufacturing happens in countries such as the Philippines, Bangladesh, Thailand, Mexico, etc. If the coronavirus spreads in these countries, it could have a major impact on the manufacturing industry. This is because, firstly, the supply chain is already negatively affected.

    Hence, there is a likelihood of a shortage of raw materials. Also, if lockdowns have to be imposed in the country, the labor force might also be in short supply.

    Even after the lockdown opens, there is a likelihood that companies may lay off several employees. This is because the demand for products and services is likely to remain low for a while due to the recession caused by the coronavirus crisis.

    In an ideal world, companies could continue production and build up excess inventory, which can be cleared off later. However, that is unlikely to happen. This is because a lot of production units in emerging economies are set up in such a way that employees sit quite close to each other. Hence, they could become the hotbeds of coronavirus infection. It is for this reason that companies may not be allowed to run these workshops at least for some time in the near future.

  • Service sector industries are also likely to be severely impacted. This is because industries like travel and tourism, retail and aviation are facing a slowdown. A lot of emerging economies such as Thailand, the Maldives, etc. are totally dependent upon tourism. A significant downfall in these sectors could have a catastrophic effect on the emerging economy in general.

  • Another problem with emerging markets is that they have much more population as compared to the developed world. This generally means that the density of population is very high. Therefore, if coronavirus does start to spread, it could cause many cases within no time. The curve is likely to be much steeper in these economies. The bigger problem is that the government does not have the health infrastructure to take care of people if they actually fall sick.

    The number of hospital beds, as well as intensive care equipment, are woefully less in developing nations. This is why the pandemic has the highest chance of causing indefinite lockdowns and, therefore, significant economic loss to the country.

    Fearing massive economic loss as well as social catastrophe, the governments of these countries are likely to adopt stricter measures. This could lead to massive economic losses.

  • A lot of the governments in emerging nations are already facing a lot of debt. This year, the volume of production will be much lower than usual. This also means that the tax collection will be lower than usual. In order to counter this, governments may have to raise more debt. Additional debt could mean more interest payments in the future years. In order to arrange for the additional cash, the government may have to raise taxes which would further impact the local economy in these emerging nations.

The bottom line is that the crisis is likely to be more pronounced in the emerging economies even though at the present moment developed nations seem to be worse off.

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