Mr. Eliott Harris Assistant Secretary-General for Economic Development and Chief Economist

Remarks
at the Fifth Ministerial Meeting of Like-minded Group of Countries Supporters of
Middle-Income Countries
COVID-19: Its impact on MICs and its effect on their prospects for sustainable development

Your Excellencies,
Honorable Ministers,
Permanent Representatives
Dear Colleagues.

It is a pleasure for me to join you today at this important discussion.

COVID-19 has created unprecedented human suffering and economic hardship around the world. I need not dwell on describing its economic impact—suffice it to say that the pandemic and the crisis it has unleashed has created new uncertainties for the implementation of the SDGs.
Those countries that have made more progress in achieving the SDGs have also been better able to deal with the pandemic. But overall, COVID-19 has raised the stakes for countries to accelerate the progress during the new Decade of Action.
The pandemic and the related economic crisis has highlighted several structural weaknesses that plague middle-income countries as a broad group and deepened the challenges they will face in recovering over the medium – to longer term.
As you know, the United Nations Development System (UNDS) has developed a socio-economic response framework con¬sisting of five streams of work – an integrated package to support countries and communities as they deal with the impact of the crisis.
The five streams of work that constitute this package include: 1. ensuring that essential health services are still available and protecting health systems; 2. helping people cope with adversity, through social protection and basic services; 3. protecting jobs, supporting small and medium-sized enterprises, and informal sector workers through economic response and recovery programmes; 4. guiding the necessary surge in fiscal and financial stim¬ulus to make macroeconomic policies work for the most vulnerable and strengthening multilateral and regional responses; and 5. promoting social cohesion and investing in community-led resilience and response sys¬tems. These five streams are connected by a strong environmental sustainability and gen¬der equality imperative to build back better.
In the remainder of my remarks, I would like to focus on four main issues that are of particular importance to the Middle Income Countries (MICs) as they confront the crisis and gear up for the recovery. These are:

  • Addressing the heightened inequalities exposed and deepened by the impact of COVID-19;
  • Maintaining an accommodative and supportive fiscal stance in the face of high levels of debt and limited fiscal space;
  • Challenges of mobilizing resources and financing for sustainable development; and
  • Adapting to the changes taking place in global trade.

COVID-19 has exposed and worsened existing high inequalities and generated a deep jobs crisis that are damaging the economic and social fabric of middle-income countries. The middle-income countries have been particularly hard hit. The International Labour Organization estimates that lower-middle-income countries have lost 240 million jobs in 2020, (that is 50 per cent of the 495 million jobs lost worldwide), as the crisis hit already weak and fragile labour markets, with a high proportion of informal workers lacking access to social protection, rights and health at work.
In the short-run, countries must focus on protecting at least a minimum level of income and consumption of the majority of the population. It highlights the urgency of guaranteeing basic income security for everyone.
The COVID-19 recovery offers countries the opportunity to Build Back Better by strengthening healthcare and public health systems; building and extending comprehensive social protection systems; developing effective protection programmes for informal workers; and rectifying the gender inequalities that are being amplified by various aspects of the COVID-19 impact.
All these policies put societies back on the track to achieving the related SDGs, and create resilience that reduces the vulnerability of societies to future shocks. They are the focus of the first three tracks of the UNDS response framework – ensuring the availability of that essential health services and protecting health systems supporting the delivery of social protection and basic services; and protecting jobs, supporting small and medium-sized enterprises, and informal sector workers through economic response and recovery programmes.

Debt

The experience of the last global crisis has taught us that too quick a return to fiscal consolidation can slow the recovery and make permanent, some of the damage caused by the crisis. But many MICs face a particular challenge in this regard—many were already highly indebted before the outbreak of the present crisis, and lacked sufficient fiscal space. Their ability to maintain an accommodative policy stance for a protracted period is, therefore, deeply compromised, and efforts to do so will lead to further debt crises unless additional support is provided

Average public debt increased steeply in MICs, from 37 per cent in 2010 to 54 per cent of GDP in 2019. As a result, and despite low global interest rates, debt servicing costs consumed almost one quarter of public revenues in the median middle-income country even prior to the current crisis.

MICs also saw a build-up in private sector borrowing, mostly in foreign currency, further increasing their vulnerability to capital flow reversals and currency crises now unfolding.

Addressing this debt crisis, therefore, has to be a core element of the immediate response and the recovery from the crisis. Immediate and comprehensive debt relief, including from private sector creditors and extended also to middle-income countries; the use of flexible and innovative approaches and instruments, such as debt buybacks or debt swaps; and improved debt transparency and improved debt management are all critical aspects of the response.

The High-Level Event on Financing for Development co-convened by the Prime Ministers of Canada, Jamaica and the Secretary-General has launched an ongoing process where various options for innovative and decisive solutions to the debt situation, as well as to the issue of mobilizing finance for development, are being considered in an open and inclusive approach.

Illicit Financial Flows

Domestic resource mobilization prospects have declined, as the economic fall-out from COVID-19 has affected all major sources of tax revenue. The drop in commodity prices has compounded the dire revenue situation of commodity exporting countries.

Mobilizing resources for the 2030 Agenda was already deeply hampered throughout the developing world by illicit financial flows, including in MICs. Multinational enterprise tax base erosion and profit shifting, for instance, have a heavy impact on lower middle-income countries which tend, on average, to rely more on corporate income tax as a source of revenue.

Combatting illicit financial flows was one of the work streams included in the joint initiative on COVID-19 financial response convened by the United Nations Secretary-General, Canada and Jamaica. It is also a core topic of the High-Level Panel on Financial Accountability, Transparency and Integrity (the FACTI Panel), which has just published its findings on the review of international systems in its interim report. The Panel argues that the world needs systemic responses to overcome the shortcomings, gaps and vulnerabilities it identifies in international frameworks.

It will be very important for MICs to engage closely with the FACTI Panel to figure out the best systemic responses. The UNDS stands ready to support this important effort.

Mobilizing Financing for Development

Many MICs that have exceeded income per capita thresholds for access to concessional finance. There are calls for the international community to meet their ODA commitments and widen the categories of recipient countries eligible for ODA.

Global FDI flows are expected to decrease by up to 40 per cent in 2020 owing to the impact of COVID-19. Developing economies, including MICs, are likely to see the biggest fall in FDI because they rely more on investment in global value chain (GVC) and extractive industries, which have been severely hit.

Even countries with conducive business environments often fail to attract private finance to sustainable development priorities, for a variety of reasons—limited project profitability, high (real and perceived) risks, small scale and constrained access to finance. Strengthening the business environment to address these investment constraints is imperative for the recovery effort, but improvements will only be gradual.

The COVID-19 Financial Initiative co-sponsored by Canada, Jamaica and the United Nations is considering a range of financial instruments that can be used to overcome some of these impediments, and to mobilize private capital for sustainable development more effectively.

The international community should also further help MICs build the internal capacity necessary to deliver cost-efficient and resilient infrastructure solutions, including developing “investible projects” when feasible. The lack of investible projects remains an obstacle to private investment.

COVID-19 and the digital divide and adapting to the digital economy

Digital technologies have not only become central to almost every aspect of our lives, but also for the response to COVID-19, and this has accelerated the digitalization of our economies and our societies. Yet, the digital divide is now a matter of life and death for people in many developing countries unable to access essential healthcare information or to work from home. The digital divide is also threatening to become the new face of inequality.

Countries need to harness the infinite opportunities offered by digital technology to scale-up their efforts on healthcare, on the climate crisis, on eradicating poverty, and across all the SDGs. At the same time, countries need to address the threats posed by the ungoverned use of digital technologies from exclusion and inequality, to surveillance, human rights abuses and cybercrime. This will be essential for preserving productivity gains and avoiding the middle -income trap.

The last challenge I wish to mention is adapting to the ongoing changes in the global trading system. The disruption of global value chains by the impact of COVID-19 in individual countries has caused great damage to a multilateral trading system already under great pressure before the crisis erupted. Efforts to reduce the vulnerability to such shocks in the future by shortening the value chains, for example, will have a lasting effect on the development prospects of countries at all stages of income, but particularly the middle-income countries, which depend so heavily on international trade. The global community needs to come together to strengthen the system and reaffirm the commitment to the open, free, rules-based and non-discriminatory multilateral trading system.

In closing, Your Excellencies, it is clear that the COVID-19 pandemic and its economic and social impacts have accentuated the development challenges facing MICs. But it also is an opportunity to frame the recovery in ways that directly address the structural constraints that have plagued your countries and place yourselves back on a path of accelerated progress toward the SDGs.

The United Nations stands ready to assist you in this critical endeavor. We have prepared a range of policy briefs that assess the impact of the pandemic in its various dimensions on sustainable development and on the situation of countries in special circumstances, and vulnerable groups. We will continue to do this analysis providing input and guidance to member states on various aspects of the recovery effort. Our United Nations Country Teams and our reinvigorated resident coordinator systems give us the effective means to provide the needed support to the governments and communities that we serve on the ground.

But above all, achieving this recovery will require rekindling the spirit of multilateralism and stepping up global cooperation, including South-South cooperation. We all look to the leadership of the Like Minded Group in supporting this return to the collaboration and solidarity that we will all need to succeed.

Thank you.

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