The pandemic has affected us all, but it has not affected us all equally. I won’t go into any type of detail on how the Middle-Income Countries have been affected—we have been discussing this issue in different fora for more than a year. Suffice it to say that the pandemic and the economic crisis it has unleashed have derailed progress toward the SDGs in all countries.
The crisis of COVID has not only set back progress toward the SDGs, but it has also deepened many of the pre-existing vulnerabilities that plagued the Middle-income Countries. Poverty and hunger have worsened in many countries, as income-earning opportunities have been lost. Inequalities have widened, between the advanced economies and the middle-income countries, and within the middle-income countries themselves. Many countries may face persistently higher unemployment rates and a regression of female labor market participation, even as the labor markets themselves come under increasing pressure from technological change.
The pandemic has of course, also complicated the implementation of the recommendations put forward in the last report on the Middle-Income Countries from last 2018. The economic disruptions caused by the pandemic have significantly tightened the already constrained fiscal situation in most developing countries, including the middle-income ones, and led to a worsening of their debt situation. This has not only prevented many countries from being able to respond rapidly and effectively to the crisis—it hinders their ability to fund ambitious recovery plans.
The disruption of global trade and changes in global value chains were a risk identified in last report which has unfortunately materialized during this crisis. The upheavals this has caused to the exports and the production capacities of many middle-income countries have underscored the vulnerabilities associated with a growth model heavily dependent on international trade—both in commodities and in manufactured goods feeding into global supply chains. Many MICs will find it difficult to undertake the investments in productive capacity and human capital needed to diversify domestic economies and strengthen resilience to future trade shocks. Moreover, given the difficulties experienced in the global trading system before and since the COVID-19 crisis, there are rising concerns that trade may no longer play the same role as an engine of development going forward—calling into question the prevailing development paradigm, and confronting Middle-income Countries with challenges they must address with urgency.
Challenges for Middle-income Countries post-COVID
I believe Middle-Income Countries, as diverse as they are, face several common challenges. I will refer to four of these.
Escaping the Middle-income Trap
Many middle-income countries have found it difficult to maintain their progress in increasing incomes and to sustain the dynamism of their economic development having attained middle income status. This middle-income trap is often associated with growing difficulties to sustain levels and types of investment that can generate continued improvements in their productivity and adequate employment growth. Such investment often does not contribute to diversifying the economic structure or enhancing its inclusiveness and sustainability.
Clearly, policy must focus on encouraging and mobilizing more of the right kind of investment. But the middle-income countries cannot limit their investment priorities to investing in physical assets alone. Investments in human capital are equally important to ensure that economic growth and productivity increases do not translate in a decline share of wages in national income, as has happened elsewhere; and that technological innovation can indeed generate broad-based benefits, rather than labor market polarization and deepening inequalities. Investments must also be directly at strengthening the natural capital base, which together with the human and physical capital stocks is the basis of future growth and prosperity.
Digitalization
The world is digitalizing at an increasingly rapid rate: in the production of goods and the rapid expansion of the importance of services; in the increasing shift to the online provision of public services; in the generation and dissemination of information. The pandemic has accelerated this process and opened now possibilities for a more efficient organization of work, the delivery of education and healthcare services.
But digitalization poses significant challenges, including for the middle-income countries. Reflecting the persistent inequalities in many societies, a significant digital divide exists, and it is widening, within and between countries. The pandemic has both made this divide painfully evident and greatly worsened it.
The situation is complicated – many countries lack an evenly distributed digital infrastructure; many groups within countries lack equitable access to the digital infrastructure and services. Vulnerable and marginalized groups lack the digital skills to take advantage of many technological innovations that are changing the nature of work, and as a result, they are being left even further behind.
This has to be a priority in the development strategies of all Middle-Income Countries, indeed of all countries, going forward.
Social Protection
Like the global economic and financial crisis in 2008-2010, this crisis has underscored the importance of robust systems of social protection. Most countries have either introduced or reinforced social protection measures in their response to COVID-19, and there is broad agreement that strengthened social protection should be a central element of the COVID recovery strategies.
Robust social protection systems are not only the foundation of social resilience. There are also a very effective economic shock absorber, and this aspect should be kept in mind as countries consider how to fund such systems, particularly in the current constrained fiscal circumstances.
Equally important, social protection is essential to ensuring that the transformational changes ahead of us on the path to sustainable development respect the principles of economic and social justice. That will increase the support of societies for the changes that must be made—to our production and consumption patterns; to the priorities of our expenditures; and to our efforts to reduce and overcome inequality, climate change, the loss of biodiversity, all the major challenges of our time.
The Multidimensional Vulnerability Index
There is general agreement that GDP, for all its strengths, cannot adequately measure progress towards the SDGs. The pandemic made it necessary to assess vulnerabilities in health care systems, and the differential access to social protection and key public services. It also forced us to confront the impact of the digital divide, as well as the multiple vulnerabilities caused by rising inequalities.
Middle-income countries have long argued that their per capita GDP is not an adequate indication of the vulnerabilities that they do still suffer from, and this explains in part their interest in a multidimensional vulnerability index. An MVI is a very useful diagnostic tool—it allows the middle-income countries to focus their attention and their policy interventions on the specific vulnerabilities that often are not addressed through the mere process of economic growth.
However, it is important to be realistic about what an MVI can and should do. It is often argued that an MVI should replace per capita GDP in determining access to concessional official financing. Even if that were the case, that alone would not lead to an increase in concessional funding for MICs—it would merely sharpen the competition for the existing available resources. The mere fact of vulnerability does not translate into more grants.
It might be more interesting to consider how the assessment of MIC vulnerabilities could inform the thinking about their debt burden. Many MICs are more deeply indebted than most LDCs; and their debt is more expensive. There is a strong case for a more systematic approach to handling this problem—and the analysis of vulnerabilities could be a part of that effort.
Clearly, these are not the only challenges, and I have not mentioned deep-seated problems like inequalities, or global challenges like climate change and biodiversity loss. The four I have mentioned are challenges that each MIC can start to address through its own efforts. The support of the global community will be necessary, of course, but I think how well the MICs address these challenges will determine the overall success of their efforts to build back better and achieve sustainable development in the years to come.