By Philippe Le Houérou
This article was originally published on Project Syndicate on August 13, 2020.
With investment plummeting across the developing world, governments urgently must extend assistance to the private sector to ensure a strong recovery when the time comes. Given that resources are strained, policymakers should approach the problem with three guiding principles in mind.
WASHINGTON, DC — For most countries, navigating the protracted economic slump brought on by COVID-19 is starting to look more like a marathon than a sprint. According to our estimates at the International Finance Corporation (IFC), domestic private investment and foreign direct investment in emerging economies will fall this year by almost $700 billion and $250 billion, respectively, and may not return to pre-crisis levels until 2023.
Worse, the crisis is exacting a massive toll on the world’s poor and most vulnerable, jeopardizing decades of hard-won development gains. The World Bank warns that we are about to witness the first increase in global poverty since 1998, with up to 100 million people being pushed into extreme poverty.
How governments and firms navigate this uncertain period between shock and recovery will determine whether there is a sound economic foundation upon which to revive employment, long-term growth, and global development efforts. The situation demands that we reorganize and fix markets. Many companies have had no choice but to reshape their business models, now that the pandemic is accelerating changes in how we work, consume, and communicate. These trends could reshape entire industries, creating opportunities for those with the innovative capacity.
But governments, too, must seek creative ways to adapt their economies and protect viable firms, while quickly unwinding those that should disappear because they are insolvent or obsolete. This will be a time of trial and error, requiring strategic vision and pragmatism on the part of business and political leaders.
Countries can do three things to speed up the recovery. The first task is to adapt the rules of the game to new realities. A prolonged crisis means that emerging economies will increasingly find themselves ill equipped to help thousands of companies renegotiate their debts. In many low-income countries, an insolvency proceeding averages more than three years, a half-year longer than the global norm. But with informal out-of-court mechanisms and simplified court proceedings, governments can give viable businesses an opportunity to weather the storm and avoid lengthy legal processes and costly and cumbersome negotiations. Developing countries can also increase the threshold for insolvency and adapt debt-restructuring rules to prevent unnecessary liquidation of firms that are struggling for no other reason than lockdowns.
Second, governments must adopt a “do-no-harm” principle when organizing their responses. Wherever possible, the public sector should limit or simply suspend its arrears to private contractors, especially in job-rich sectors and critical supply chains. That will mitigate the damage to balance sheets, prevent viable businesses from going bankrupt, and limit the kind of ripple effects that could delay the recovery.
In Sub-Saharan Africa, public-sector arrears represent 3.3% of GDP. Clearing them could create the equivalent of a large stimulus package. At the same time, decision-makers should resist the temptation to use much-needed public money to prop up “zombie” firms with unviable business models. Achieving a strong recovery will require a level playing field for private companies.
Finally, all countries need to think strategically about their spending. Some sectors and industries should be retooled, and others should be phased out. For example, as countries and markets shift toward lower-carbon forms of energy and production, it would be counterproductive to continue subsidizing energy-inefficient industries.
Now is the time to start creating and nurturing the businesses of tomorrow. There are many key areas to choose from, including “green” value chains, recyclable personal protective equipment, resilient tourism, and gender-balanced work environments. In countries with large gaps in access to digital financial services, embracing technologies such as mobile money and artificial intelligence could hasten the process of digitalization, setting the stage for robust growth.
But if these countries are to attract investors, they will need to create opportunities — starting now. That is why IFC has made it a high priority to help lay the foundations for boosting private investment and private-sector growth in the developing world. Accelerating private investment will require policy and regulatory reforms to create the right conditions for business, and to generate bankable projects. This was true before the pandemic, and the urgency of reform is even greater now.
Development practitioners, for their part, need to step up their efforts to foster investable opportunities. That means restructuring and recapitalizing firms, investing equity in support of growing businesses and start-ups, and promoting public-private partnerships to attract investors back to emerging and developing countries. To that end, rather than passively waiting for investors, development-finance institutions need to approach them directly with investment proposals, which would generate feasibility studies and get the ball rolling on various opportunities.
The economic downturn from COVID-19 will inevitably affect many sectors and jobs. But there is hope yet for a strong recovery, provided we learn from past crises. Policymakers need to muster all their creativity to keep the private sector afloat, and to prepare companies for the return to growth.
Philippe Le Houérou is CEO of the International Finance Corporation, a member of the World Bank Group and the largest global development institution focused on the private sector in developing countries.