Recovery capacity: Readiness for a new economic landscape
COVID-19 is affecting all countries, indiscriminately. However, there are wide differences in countries’ pre-crisis economic and socio-political situations, the stringency and duration of containment measures, and their impact on economies, industries, and jobs. Given those differences, the way countries are affected by the crisis and the pace of their subsequent recovery is unlikely to be symmetric and certainly not simultaneous (Noy et al. 2020).
At the same time, it is increasingly clear that the post-pandemic economy will be different. COVID-19 is accelerating structural transformations, notably towards more digitalised and more automated economies. To drive sustainable recovery, government (and donor) programmes will need to support these transformations and prepare countries, sectors, and individuals for a new economic landscape.
CERI: Evaluating countries’ recovery prospects
To assess how countries compare in terms of their recovery capacity, we developed the COVID Economic Recovery Index (CERI) that measures the degree to which countries have the right policies, institutions, and factors in place to rapidly recover to pre-COVID-19 levels of socioeconomic performance.1 The index covers three elements:
Health Resilience measures the extent to which a country is exposed to the risk of major health effects due to COVID-19, including through health system capacity, pre-existing health risk factors, and pandemic preparedness.
Absorptive Capacity describes the degree to which a country’s economy will be affected by the COVID-19 crisis, e.g. due to reliance on vulnerable sectors, international connectivity, social resilience, or labour-market performance.
Economic Resilience reflects a country’s capacity to recover and rebuild to pre-COVID-19 levels (Halegatte 2014). It is influenced by factors such as labour market adaptability, governance, and social capital, but also financial system robustness.
More than money: What matters for recovery capacity
Unsurprisingly, even if affected by the pandemic to similar degrees, countries with higher GDP tend to perform better on the metrics measuring recovery capacity. Many of the characteristics that made them successful in the first place will also enable post-COVID-19 recovery. These include good governance, well-developed skills, and stable financial markets, among others.
Moreover, wealthier countries have more resources to weather the crisis; for example, to increase health-system capacity swiftly or to deploy digital infrastructure. Economic resilience is therefore positively correlated with GDP.
However, absorptive capacity is not correlated with income. It is based on factors that differ strongly even within income groups, such as dependence on vulnerable industries, food security measures, or social security nets. Health resilience also increases with countries’ income but, as the COVID Economic Recovery Index shows, even in the best-prepared countries (Finland, the Netherlands, and Switzerland) there is ample room for improvement in terms of pandemic preparedness and health-system capacity, in particular, in light of pre-existing health risk factors such as older populations or prevalence of non-communicable diseases.
Figure 1 shows that some countries perform above what would be expected based on their level of income, while others come in below. We can see that significant differences persist within each of the groups, but also within regions. For example, Northern and Eastern Europe outperform Southern European countries.
Figure 1 Confounding expectations: COVID Economic Recovery Index by region and level of development
Notes: Countries are colour-coded as follows: green countries perform better than expected for their level of development as proxied by their GDP per capita; yellow denotes countries performing in line with GDP per capita; countries in red perform less well than expected for their GDP per capita. Source: Authors’ calculation.
How COVID-19 will reshape the global economic landscape
Many possible shapes have been put forward for the recovery process (Sheimer and Yilla 2020). Figure 2 illustrates how countries are positioned to start that process given their ability to absorb the short-term shock (vertical axis) and their economic resilience (horizontal axis), which is more long term.
Figure 2 Post-COVID-19 recovery landscape
The upper right quadrant shows those ‘most likely to succeed’. This group includes the Nordic economies and several other European countries including Germany, Switzerland, and most of Eastern Europe. Though these economies are starkly different, the data shows that their common features are low unemployment pre-crisis and flexible labour markets with strong social security systems.
Going forward, these countries must focus on rapid workforce transformation, through upskilling and reskilling, to ensure that unemployment remains low as transformations accelerate.
While they may have been deeply affected initially, countries in the lower right quadrant, including Ireland, Israel, Luxemburg, Malta, Singapore, and the United Arab Emirates (UAE), display stronger economic resilience, which will favour recovery. These countries are mostly relatively small, open economies, highly dependent on international trade and/or flows of capital, and on sectors that are vulnerable to COVID-19 containment measures. Most of these countries are highly digitalised and have strong institutions and well-educated populations.
Countries in this group will need to focus short-term stimuli to help businesses weather the shock and to avoid longer-term scarring through bankruptcies and layoffs. Once the initial shock has passed, these countries have a strong capacity to recover and transform their economies.
In the upper left quadrant are countries that were less exposed and/or more able to absorb the initial shock, but are less resilient than other economies. For the most part, these countries may be less affected by the initial shock because they are less dependent on vulnerable industries and/or are less connected internationally than their peers. Examples include Bolivia, Egypt, Ethiopia, India, Pakistan, and Ukraine. Rigid labour markets and low levels of education and digitalisation are detrimental to these countries’ economic resilience. They risk being left further behind in terms of their economic growth as a result.
Though affected to a similar degree by the pandemic (absorptive capacity), many of these countries are low-income economies with a significantly lower capacity to rebound. Over the medium term, the economic fallout from COVID-19 risks exacerbating economic differences between developing and developed countries, thus undoing much of the convergence in terms of prosperity and standards of living achieved in recent years.
Finally, in the lower-left quadrant are countries with low absorption capacity and low resilience, which are likely to suffer the most and recover slowly. Most of these countries are low-income economies, but this group also includes several middle-income countries such as Brazil, Colombia, the Dominican Republic, Ecuador, and Mexico. These countries should be a priority for development assistance to strengthen economic resilience and the recovery going forward, as well as for humanitarian assistance to mitigate the economic crisis’s most important effects on the people.
Our analysis of the COVID Economic Recovery Index points to three over-arching themes for governments to guide their economies out of this crisis and to ready them for the coming transformation: the importance of restoring trade flows; managing the risks of slowing global economic convergence; and the need to actively prepare for accelerating economic transformation.
International trade and investment will play a key role in the recovery, and keeping borders open is crucial. The degree to which a country’s recovery is driven by trade will depend on the recovery capacity of target markets, the timing of recovery, and the main export sectors. The COVID-19 Economic Recovery Index sheds light on the degree to which a country’s recovery is driven by recovery capacity, which can vastly differ: over 60% of Japan’s exports go to markets that overperform in terms of recovery capacity as opposed to less than 30% for the UAE.
The COVID-19 pandemic is rapidly redrawing the global economic landscape. The COVID-19 Economic Recovery Index shows that while developing countries may have been less affected by the initial shock than advanced economies, their recovery will be more protracted. If this materialises, then the crisis could slow down the development convergence between developing countries and advanced economies. This finding is in line with the recently published World Economic Outlook (International Monetary Fund 2020).
While the jury is still out, data shows that some countries are better positioned for recovery than others. This will bring long-term advantages to these countries, as they will reduce hysteresis effects that durably scar economies. This is notably the case for China and the US, or Eastern Europe in comparison to Southern Europe.
Transformation speeds up
It is increasingly clear that the post-pandemic economy will be different because COVID-19 is accelerating structural transformations. When designing recovery programmes and stimulus packages, governments need to also think long term and use these programmes to pave the way for these transformations. Measures could include promoting digitisation, governance, and social capital as well as support for workforce adaptability. The workforce can only adapt through upskilling and reskilling, which are particularly pivotal to a successful recovery. When it comes to readying for recovery and transformation, all countries have room for improvement.
Halegatte, Stephane (2014), “Economic resilience: Definition and measurement”, World Bank Policy Research Working Paper 6852.
International Monetary Fund (2020), “World economic outlook, October 2020: A long and difficult ascent”, Washington DC: IMF.
Noy, Ilan, Nguyen Doan, Benno Ferrarini and Donghyun Park (2020), “The economic risk from COVID-19 is not where COVID-19 is”, VoxEU.org, 1 May.
Sheimer, Louise, and Kadija Yilla (2020), “The ABC of the post-COVID economic recovery”, The Brookings Institution, 4 May.