Low and middle-income countries (LMICs) are suffering rapid and substantial economic costs from the spread of COVID-19 and related lockdown measures. James Thurlow describes initial assessments of economy-wide impacts in some African countries and their varied effects on different sectors and types of households. He also highlights challenges for governments in moving from crisis responses to policies for medium- and longer-term economic recovery. These assessments are done by teams of IFPRI researchers and country partners coordinated by James and Karl Pauw.—John McDermott, series co-editor and Director, CGIAR Research Program on Agriculture for Nutrition and Health (A4NH).
It is too soon to assess the full economic impacts that COVID-19 lockdowns will have on developing countries. But early research indicates that many African economies are significantly impacted and that poorer households are struggling.
IFPRI is conducting a series of country studies, in collaboration with local and government partners, that use economy-wide models to estimate the impacts of lockdowns, assess the exposure of food systems, and identify vulnerable population groups.
This research is ongoing and the situation is evolving rapidly, but three clear findings are emerging:
- Developing countries are shouldering substantial economic costs
- Food supply chains are exposed, despite being largely exempted from lockdowns
- Non-poor urban households face the largest income losses, but poverty is rising sharply
Developing countries are shouldering substantial economic costs
We do not yet know how long lockdowns will remain in effect, what their full impact will be in 2020, or how quickly African economies will recover from these shocks.
But findings from our country studies show that the current crisis is leading to much larger and more rapid contractions of economic activity than seen in previous crises, including the global food crisis of 2007-2008 and the 2009 recession. In addition, unlike in previous crises, it is domestic policies, rather than global shocks, such as trade disruptions and reduced remittances, that are imposing most of the economic costs, at least for now.
Our findings are alarming: In Nigeria, Africa’s largest economy, we estimate a 38% drop in GDP during the five-week lockdown from late March to the end of April. South Africa appears to be experiencing a similar-sized shock.
The enormous economic costs of the lockdowns are making it difficult for governments to maintain support for these policies. But any easing of restrictions must balance the economic importance of various sectors with the risks posed to those who work in them. IFPRI is working with governments to understand these trade-offs and avoid disruptions to national food systems.
Food supply chains are exposed, despite being largely exempted from lockdowns
Most African governments consider food supply chains to be “essential” and have exempted them from lockdown policies. However, while food may be exempt, food systems are not immune to the effects of the pandemic.
In Nigeria, for example, we estimate an 18% decline in agri-food GDP during its five-week lockdown. While other sectors, such as manufacturing and construction, are suffering even larger declines, the food supply chain is particularly important for poor workers and consumers.
Some impacts on the food system are direct. The closure of hotels, restaurants and bars was an early and common target for most lockdown policies in Africa. That said, while eating meals prepared outside the home is important for many urban consumers, it comprises a small part of overall food economy.
Most impacts on food systems are indirect, and mainly caused by falling incomes. Even when farmers, food processors and traders are exempt from lockdowns, they may still be unable to sell products if consumer incomes and demand for food declines.
So far, food supply chains are faring better than other parts of the economy in most countries. But this could change. In Nigeria, the government has closed some food markets in Lagos and restricted food trading times in major cities to only four hours every other day. If this prevents consumers from getting access to food, it could quickly overshadow other disruptions to the food system and become a major source of economic costs across the entire economy.
For now, this remains a crisis of food access driven by income losses, rather than one of food availability. But food supplies could become more of a concern if lockdowns go on for longer, if they are applied to rural areas, or if the movement of rural workers is restricted.
Non-poor urban households face the largest income losses, but poverty is rising sharply
It may seem counterintuitive that Africa’s non-poor urban households are hardest hit. But manufacturing and business services are facing the strictest lockdowns in most places, and these sectors are often concentrated in cities and employ better-educated workers.
In Nigeria, for example, incomes in the top quintile are estimated to fall by 41% during the lockdown, while the bottom quintile’s incomes fall by 23%. There are similarly uneven distributional impacts in South Africa.
But higher-income households are better able to offset such losses by drawing on savings and other assets. Poor and rural households are also suffering substantial losses, and for them, even a small drop in income can have detrimental and lasting effects.
More concerning is that the number of poor people is rising. In Nigeria, for example, we estimate that national poverty rates will increase by 15 points—that means 30 million more Nigerians living on less than $1.90 per day.
As the situation evolves, it could bring even greater losses to Africa’s poor. Tighter restrictions on urban markets, for example, could shift more of the burden onto poor consumers and smallholder farmers.
Reassessing priorities, while maintaining a focus on the poor
The economic losses brought by the current crisis are much deeper and occurring more quickly than those brought on by earlier crises. Governments are under enormous pressure to provide short-term emergency relief while also planning and investing in economic recovery.
Financing emergency and recovery programs will be hampered by lower tax revenues caused by lockdown policies, and by countries’ limited ability to borrow due to uncertainty in global markets and large debts accumulated since the last crisis. Some displacement of pre-COVID-19 policies and priorities is inevitable.
As governments reassess their policy priorities, they should not lose focus on the longer-term growth and poverty reduction that have underpinned Africa’s past decade of strong economic development. Minimizing both the economic and health impacts of the COVID-19 pandemic will require coordinating both, and ensuring that they work for the poor. The outbreak COVID-19 has confirmed the importance of having well-functioning health and food systems—achieving this requires sustained investment, even during times of crisis.
James Thurlow is a Senior Research Fellow with IFPRI’s Development Strategy and Governance Division. The analysis and opinions expressed in this piece are solely those of the author. The work discussed in this blog post was supported by the CGIAR Research Program on Policies, Institutions, and Markets. This post has been updated from the original on May 27, 2020
