The COVID-19 pandemic may be pushing many emerging market nations into two separate crises that could spiral out of control鈥攐ne involving public health, the other involving individual country鈥檚 national debt.
That鈥檚 according to , a professor of economics at the 暗网吃瓜, who analyzed how emerging markets are struggling to balance policies designed to keep their populations safe while financing high debt obligations.
鈥淚f a country has a lot of debt鈥攐r if it has difficulty rolling over its debt鈥攖he government will have limited capacity to help its people,鈥� she says.
Bai and fellow economists Cristina Arellano of the University of Minneapolis and Gabriel Mihalache of Stony Brook University detail the financial and health risks in a new paper, 鈥�.鈥�
They began by studying the effectiveness of lockdowns that began about two months after the initial outbreak and lasted for eight months. Such stay-at-home health orders are effective in reducing the toll of the coronavirus, they note. When half of the workforce stays at home, followed by a gradual relaxation of restrictions, the authors found that the death toll was reduced by half.
But lockdowns come at a price, especially for countries with limited financial resources. People still need to pay for food, shelter, and basic supplies during a pandemic, but if a country is facing a debt crisis, that nation鈥檚 policy makers have fewer resources to help citizens make purchases. That means less revenue goes to vendors and landlords, which puts a further drag on the economy, forcing more people to lose their jobs.
鈥淎 lockdown means people don鈥檛 have access to work, which makes it more difficult for them and their families to survive,鈥� says Bai. 鈥淭hat鈥檚 why in Chile, as well as other countries, people have been protesting the lockdown, which, in turn, makes it difficult for the government to sustain its lockdown policies.鈥�
When that happens, countries often soften their restrictions, leading to a worsening of the health crisis. And, as Bai points out, that leads to a further degrading of the economy.
At the onset of the COVID-19 pandemic, the International Monetary Fund (IMF) announced that short-term debt loans and funding initiatives would be available for emerging market nations. The authors argue that those programs need to continue.
鈥淒ebt relief programs by the IMF and other international organizations not only help in terms of providing consumption, they also help to save lives,鈥� says Bai. 鈥淔rom that perspective, we find that the return on investment is quite high for the debt relief programs.鈥�
Several countries鈥攊ncluding Argentina, Ecuador, and Lebanon鈥攈ave already gone into default while still dealing with the COVID-19 pandemic. Bai cautions that there could be long-term consequences, as it has historically taken some countries 10 years to come back from economic default.
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