How to finance social protection in developing countries in the age of COVID-19

The world is now in the grip of an unprecedented crisis, with the spread of the Covid-19 pandemic and the very adverse economic impact of containment measures. The pandemic has highlighted something that had been almost forgotten by policy makers across the world in the past few decades; the importance of expenditure in public health and social protection systems.

These protect not just those who are traditionally seen as beneficiaries, but everyone in society. Pandemics expose the basic truth that as long as anyone anywhere has a contagious disease, everyone everywhere is at risk. Universal health coverage is not about compassion but the survival of all. Policies of reducing government expenditure on health services have been shown to be fundamentally flawed, generating major vulnerabilities in societies and economies.

COVID-19 has not been a great leveller. Rather, it has already sharply increased global inequality, both between and within countries. Containment measures like lockdowns and mobility restrictions also have unequal effects. Informal workers tend to be the worst affected because of a lack of legal and social protection. Since the enforced closures also affect supply, there are concerns about rising food prices and shocks to food security, even among those not considered “poor”.

The need for adequate social protection on various fronts has never been more evident and urgent. But these large demands on public fiscal resources are coming just as most developing countries are facing a terrible combination of rapid declines in export and tourism revenues, and capital outflows. While most developed countries are instituting large fiscal stimulus packages, this is much more difficult for developing countries.

For them, policy space is reduced by external constraints on the balance of payments and by fears of capital flight. Estimates of the financing needs of developing countries have been in the range of US$2.5 trillion (1) while the immediately-required increase in health spending has been projected at anywhere between US$160 billion (2) and US$500 billion (3). How is this to be achieved?

Most fiscal packages in advanced countries require a substantial amount of monetised deficit (borrowing by the state from the central bank). This is also possible in developing countries. Internally, there are possibilities to raise tax revenues through wealth taxes. In most countries even a low tax rate of 3 per cent applied to just the top 0.1 per cent of the population could yield significant revenues. Implementing the proposal for unitary taxation of multinational companies would also generate substantial revenues.

Developing countries have much less flexibility with regard to foreign exchange. The international community has to step in, through immediate changes that enable a swift increase in resources. Such new finance must be compensatory in nature and avoid policy conditionalities (which have had, at best, mixed success in the past and cannot be insisted upon at a time of global recession and health hazards).

Within the existing financial architecture, a measure that is immediately possible is a large new issue of Special Drawing Rights (SDRs) by the IMF. These are reserve assets created by the IMF (as a weighted basket of five major currencies) to supplement the official foreign exchange reserves of countries. They create additional liquidity at no extra cost and are not loans.

A second required measure is a standstill on all debt repayments (both principal and interest) for one year, or until debt restructuring packages are worked out, as countries cope with both the spread of the disease and the lockdown effects. This is essential because as much as $1.6 trillion of developing country external debt is due to be repaid in the current year, with a further $1.1 trillion due in 2021.

All this requires greater international solidarity than is currently evident. But if there is one message from the pandemic that we cannot ignore (and which is even more significant when it comes to dealing with climate change), it is that the absence of such solidarity will affect people across all nations badly. Unprecedented existential threats require unprecedented and globally co-ordinated responses.


Jayati Ghosh
Jayati Ghosh
Development Economist