The COVID-19 Pandemic Reveals the Inefficiency of Economic Institutions

The unexpectedness of the COVID-19 pandemic has exacerbated the inequality between the global north and the global south. International economic institutions that have long existed for the purpose of financially aiding the development of countries considered to be a part of the global south, such the International Monetary Fund and the World Bank, has rolled out COVID-19 relief packages to low-income countries with the aim of relieving the economic burden placed upon these countries. However, the programs have been overall ineffective in offsetting the economic losses low-income countries are currently facing. Therefore, the increase in global economic inequality and the inefficiency of economic institutions reveals the depth to which reforms required within these institutions were created during a time with a very different international political economy.

In recent years, international aid organizations have made significant progress in combating issues of poverty, wealth inequality, and access to basic necessities, but the unexpected arrival of the pandemic has derailed and in some cases worsened the situations in certain countries. Although news of vaccine roll-out is supposed to spark optimism worldwide, the unequal distribution and the unwillingness of wealthy nations and international organizations to help the global south reveals the flaws in the system of economic institutions. Though the International Monetary Fund and the World Bank have both vowed to help struggling nations during this time, their practices have exhibited that this promise remains unfulfilled. For instance, the I.M.F.’s policy of loans and debt bailouts have proved to not be of aid to the global south. A July 2020 report by the Jubilee Debt Campaign reports that the I.M.F. has lent out money to already highly indebted countries without debt restructurings taking place, a practice which has shown to be less successful than if the I.M.F. lends money to highly indebted countries with debt restructuring in place. The absence of debt restructuring also helps bail out private lenders, something which the I.M.F. has criticized in the past. Thus, the inconsistency and the ineffectiveness of this bailout program may not be of much help to the global south’s economy.

However, there may be some hope with the new United States government. Previously, the Trump administration opposed an expansion of the I.M.F.’s special drawing rights–an international reserve asset created to supplement countries’ official reserves–denying a large liquidity injection into struggling countries. The reasons for the opposition was cited as not wanting Iran and China to be able to access funds without any conditions, for which the Chinese foreign ministry replied by saying “International financial institutions are important platforms for international cooperation, not political tools for a minority of countries to manipulate.” However, the new U.S. Treasury Secretary, Janet Yellen, stated that she would support the allocation of SDRs, but with established parameters and transparency of how the currency will be used and exchanged. Despite the welcoming news of this policy reversal, this blatantly reveals the dependency of the global south’s on the goodwill of the global north’s government.

The World Bank’s relief program of increasing lending volumes has also shown to be ineffective. Although the World Bank states that it’s “its emergency operations to fight COVID-19 have reached 100 developing countries”, a study done by the Center for Global Development reveals the extent to which loans have been disbursed. Although loan commitments by the World Bank did increase by 118 percent in the first seven months of 2020, actual loan disbursements only amounted up to 31 percent.

Additionally, world leaders participating in the Group 20 summit in 2020 agreed to halt debt payments of poor countries, owed to the I.M.F. or the World Bank, to mid-2021, but participation by private creditors was made voluntary. The program intended to free up countries’ funds and support their economy during this global crisis. However, the program’s exclusion of certain countries–including Lebanon, Ecuador, and middle-income countries–and the lack of participation by the private sector has caused the program to be less successful than intended.

Some experts express the sentiment that international economic institutions’ response to the COVID-19 crisis is not only ineffective, but may also worsen the situation. Lidy Nacpil– the Manila-based Asian Peoples’ Movement on Debt and Development Coordinator–expressed her views that, “International financial institutions are going to leave countries in much worse shape than they were before the pandemic,” because “their interest is not primarily about these countries getting back on their feet, but to get these countries back into the business of borrowing.”

The vulnerability and inconsistent policies of the World Bank and the International Monetary Fund exhibits the need for proper reform in these almost century old institutions. The COVID-19 pandemic has revealed the ineffective aid programs these institutions have to offer and the variable practices within the institutions. Thus, the global north needs to do better in allocating resources to ensure the global south equal access to economic relief from this ravaging pandemic.