Developing Economies Spending Less In Economic Bailouts Due To Debt Obligations


As developed countries spend trillions, developing countries must bail out their economies and meet debt obligations.

Western countries have pushed forward expensive economic relief packages as the economy stalls due to social distancing measures. The U.S. passed a $2 trillion relief package that includes a corporate bailout fund, government-backed loans to small businesses and $1,200 checks to most taxpayers, according to CNN. The largest economic relief package in Europe is less than half that value with Germany spending $825 billion in an effort to balance the budget and avoid a deficit. The package increases lending to businesses and even provides financial support to artists.

Debt obligations position developing countries to be harder hit by the coronavirus pandemic. Paying off debt would use up cash that could be allocated towards economic relief packages in developing countries. The world’s 69 poorest countries are obligated to pay back $25.5 billion in debt this year, according to the BBC. As developing countries pay off debt they will need to take on more debt to fund any type of economic relief package that is implemented. Higher amounts of debt will also be a major barrier to an economic rebound after the pandemic. Nonprofits, such as Oxfam and Action Aid International are calling for debt relief.

"This is the fastest way to keep money in countries to use in responding to Covid-19, and to ensure public money is not wasted bailing out the profits of rich private speculators," said Sarah-Jayne Clifton, director of the Jubilee Debt Campaign.

After the announcement of a 21-day lockdown, India announced a $23 billion financial relief package, according to Quartz India. Portions of the relief package will be used to keep essential services operational and will also continue funding migrant workers’ welfare. Additionally, the package expands different cash transfer schemes but does not include all individuals who need it most. The informal sector accounts for employing 83% of India’s workforce and as a result are not typically covered by the cash transfer schemes laid out in the relief package. There have also been questions over how the Indian government will pay for this package.

Malaysia has responded with a robust financial relief package that rivals packages put forward by developed countries. The package being implemented by the Malaysian government is expensive and will be worth 16% of the country’s GDP, according to the Economist. For comparison, India’s relief package is 0.8% of the GDP. Malaysia’s stimulus package includes wage subsidies, government-backed loans and free internet. Although the U.S. lacks a strong coordinated response to providing support during the pandemic, some cities are providing free internet to students who have transitioned to remote learning.

China is departing from financial strategies pursued in prior crises and is spending less. During the 2008 financial recession, the Chinese government spent $500 billion on relief, according to the New York Times. The lack of spending can be a result of the large amounts of debt is has taken on during the past decade. China has rolled out policy that will increase the amount of loans available to businesses. Recently, the Chinese bank announced it will make $200 billion available to businesses while local governments use $150 billion in bonds to fund construction projects. However, the latter effort is being scrutinized as an ineffective way to support the economy.

“Negative impacts of the coronavirus disease are mainly borne by people working specific industries, such as restaurants, hotels, transportation companies, movie theaters and tourism,” said Zhi George Yu, an economist at Renmin University of China. “Infrastructure investment will not directly absorb many workers who worked in the industries mostly impacted by the disease.”


Economics, Finance and Investing