Why Developing Countries Will Suffer so Much Worse from the Coronavirus Recession?

The COVID-19 pandemic is a tragedy on a global scale. At this difficult time, we see how entire countries sacrifice their economies to keep the population safe. This is definitely the right and moral choice. However, the result of it is the worst recession since The Great Depression. It would be extremely hard in developing countries, in particular. That’s because they’ve lost streams of income that helped them to get through the previous recession of 2008. And recovering those will take a long while if they ever are recovered fully.

How Coronavirus Has Affected the Global Economy and Trade

Simply put, the coronavirus pandemic decimated global trade, which means the entire planet’s economy has all but collapsed. Of course, there are some industries that are faring quite well even in these trying times. The fintech industry, in particular, has seen a great boost in the times of lockdown.

However, those positive changes aren’t able to offset the destructive effects of the trade collapse. The most economically-devastating effects of the COVID-19 pandemic go somewhat like this:

  1. China went on lockdown, which means about 20% of the world’s intermediate products manufacturing stopped. Therefore, all enterprises that use those parts in their own manufacturing had to stop as well.
  2. Global border lockdowns made international trade virtually impossible. Even if there were goods to transport, closed borders made it impossible to deliver them.
  3. Lockdowns caused millions of businesses to close or at least go on hiatus with a record number of people losing their jobs. The rate of consumption went down in all countries. And consumption is the main fuel for the economy.

Because the destructive effects of these changes snowballed and multiplied, the global economy has entered a recession. Unfortunately, as the pandemic is still going strong, these negative circumstances persist. With every passing day the ability of the world economy to recover goes down by a large margin.

Why Developing Countries Are More Vulnerable to the Repercussions of the Pandemic

Developing countries struggle at the best of times. However, the global recession always hits them harder. This one might be the worst in history because it all but destroyed the main streams of income that those countries could rely on.

  • The rapid downturn of local trade made the revenues from export drop to almost nothing. The majority of developing economies rely on it for survival. Even if export routes recover swiftly after the pandemic’s end, countries affected by this crisis will need much more time to make up for the losses incurred during lockdowns.
  • The reduction in global trade makes big corporations cut down their manufacturing. Many developing countries heavily rely on business coming from such big companies. For example, multiple car manufacturers have already closed many of their plants. Even companies like Currencies Direct, with offices in Mumbai are closing those same offices. And there’s no guarantee that they will reopen fast after the lockdown is lifted. Currencies Direct is one of the leading money transfer services that allow millions of Indian migrant workers to send money home to their families. Within India, it mostly serves online sellers that need cheap currency exchanges for their business. However, with the pandemic, the slowdown of those same sellers means that even intermediary service providers like Currencies Direct have a hard time keeping their business in developing countries afloat.
  • The pandemic caused a major reduction in remittances. These payments are a big part of the GDP in many developing economies. In fact, some countries, like India, managed to recover after the 2008 recession largely due to the money coming from migrant workers. Remittances have been growing extremely fast in the last few years, fueling developing economies. However, now it’s unclear whether they will be able to pick up and get back to the pre-pandemic level.

When Will This New Recession End?

The worst thing about this recession is that it’s sure to be a long one. That’s because the pandemic itself has yet to end. Governments of multiple countries have no choice but to tighten lockdown measures. And every day spent with blocked trade and production means that recovery gets postponed by much longer than a day.

It’s only now that factories in China, where the pandemic began, are starting to get back on track. However, even they have yet to return to their “old” levels of production. And one shouldn’t forget that the pause in the production and global trade has created a void. It will take a lot of time to make up for everything lost during this period.

There is also sure to be a startup crisis during this recession. Lending has already all but stopped worldwide. Therefore, new businesses won’t be emerging to power up the economy. In the meantime, the number of small businesses has gone down already. More will close down in the future as they are unable to cope with the loss of business during lockdowns.

All in all, the situation looks grim. The world will not be the same after this pandemic and it’s impossible to predict the speed of recovery after the recession it caused.

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