Developing countries unlock key industries to safeguard earnings and jobs

From Africa to Asia and Latin America, emerging countries disproportionately bruised by the Covid-19 pandemic are allowing some key industries to start back up in a bid to soften the economic blow.

This tentative unlocking highlights the balancing act for developing nations as they seek to protect their people while averting an economic collapse some fear could do more damage than the disease itself.

While academic study of Covid-19 containment policies is in its infancy, one model by Yale economists argues social distancing measures deliver far fewer benefits, at much greater economic cost, in poorer countries.

“They’re battling competing tensions. It’s being framed as lives versus livelihoods,” said Ronak Gopaldas, director of Africa-focused consultancy Signal Risk.

Unlike wealthier economies, developing countries cannot afford to spend trillions of dollars protecting people and businesses from the economic fallout of the pandemic. That has prompted some to start reopening key sectors.

“What’s clear is that lockdowns can’t go on forever and they’re having to strike a balance between safety and productivity,” said Gopaldas.

South Africa announced on Thursday it will allow mines to operate at 50% capacity during its lockdown, allowing workers to be called back gradually.

Mining contributed 360.9 billion rand (US$19.74 billion), around 7% of GDP, to the economy in 2019. Amid mass unemployment, it provides more than 450,000 jobs.

Getting mines back to full production will take weeks, said Jacques Nel, of research firm NKC African Economics. But opening them early is essential.

“Some countries are going to recover quicker than others, so you have to position yourself as one of the more attractive ones when this blows over,” he said.

Shock absorbers

Other governments are making similar calculations, generally favouring large employers or generators of crucial foreign exchange. JPMorgan calculates that emerging market FX reserves fell by more than US$190 billion in March.

“They won’t be able to borrow anymore,” said Wayne Camard, an ex-IMF official in Africa and Latin America who now heads the Camard Group, a business intelligence consultancy. “Mining and agricultural commodities are the main foreign exchange earners for a lot of developing countries.”

Investors pulled a record US$83.3 billion from emerging market stocks and bonds in March. At the same time, borrowing costs have soared, making it effectively impossible for many countries to raise funds on international capital markets

Malaysia has allowed its palm oil industry — the world’s second-biggest — to operate during a six-week lockdown. Its electronics industry, which produces nearly 8% of the world’s semiconductors, is running on a third of its normal workforce.

Colombia, the world’s fifth-biggest coal exporter, allowed coal producer Drummond to partially restart on April 9.

Coal is Colombia’s second-largest source of foreign exchange, and royalties paid by coal firms are “fundamental” to coping with the health emergency and reviving the economy, the energy ministry told Reuters.

Governments that cannot afford to replace workers’ lost incomes are under pressure to reopen labour-intensive sectors.

Pakistan on Tuesday extended its lockdown by two weeks but said some industries, starting with construction, would reopen in phases.

“If the construction sector can be stimulated in these testing times, it can prove to be an important shock absorber,” said Sakib Sherani, chief executive of Islamabad-based economics research firm Macro Economic Insights.

Construction and related sectors account for about 8-10% of Pakistan’s GDP, he estimated, and 10-12% of jobs.

Ugandan President Yoweri Museveni is keeping open factories, which he called “the life-blood of the country”, provided employees live in on-site accommodation. Manufacturing employs 10% of
the formal workforce.

Targeted measures

Other countries have implemented targeted quarantines to isolate critical industries from the pandemic.

Nigeria, Africa’s top crude producer, is allowing staff to travel to oilfields only when essential in a bid to avoid infections that could force a broad shutdown.

In Chile, where mining constituted 50% of exports last quarter, the government’s preference for targeted, local action has helped keep large mines of Atacama and Antofagasta open.

The northern desert provinces account for most of Chile’s copper and lithium output but fewer than 2% of its Covid-19 cases as of April 12, health ministry figures showed.

But in an interconnected world, damage limitation policies can only go so far.

Mexico’s president last week said the auto sector, which contributes 3.8% of GDP, would only reopen when the U.S. industry ramps up again.

Developing countries also have large informal sectors which are harder to measure and lack financial safety nets.

In Jakarta, Indonesia’s capital, Covid-19 restrictions ban motorbike taxis from carrying passengers, threatening the livelihood of thousands who work for ride-hailing apps.

“We pleaded for the president’s help,” said Igun Wicaksono, who heads “Garda Nasional”, an association of 100,000 motorbike taxi drivers.

“Of course we’re worried and we’re scared. But if we stay at home, we won’t have food.”

(US$1 = 18.2778 rand)

Source: Reuters