Loss-of-learning and the post-Covid recovery in low-income countries

Abstract

We analyze the medium-term macroeconomic impact of the Covid-19 pandemic and associated lock-down measures on low-income countries. We focus on the impact of the degradation of health and human capital caused by the pandemic and its aftermath, exploring the trade-offs between rebuilding human capital and the recovery of livelihoods and macroeconomic sustainability. A dynamic general equilibrium model is calibrated to reflect the structural characteristics of vulnerable low-income countries and to replicate key dimensions of the Covid-19 shock. We show that absent significant and sustained external financing, the persistence of loss-of-learning effects on labor productivity is likely to make the post-Covid recovery more attenuated and more expensive than many contemporary analysis suggests.

Keywords: Covid-19; Debt; Fiscal policy; Growth; Human capital; Labor markets; Public investment; Welfare.

Fig. 1

Baseline shock with external concessional financing. Notes: Dynamic response of baseline economy to Covid-19 shock with ‘passive’ domestic fiscal policy (no change in public spending or to domestic tax rates) and external concessional finance.

Fig. 2

Fighting back vs. passive baseline response. Notes: Public investment program, rises by 3 percent of initial GDP by $t=3$, providing an additional 12.95 percent of initial GDP over first eight years. Two thirds of expenditure is allocated to supporting basic education spending. External concessional finance adjusts to satisfy external and fiscal balance.

Fig. 3

Fighting back with domestic financing. Notes: Public investment program as per Fig. 2. Plot compares full external concessional finance with case where donors provide only an additional 10 percentage points of initial GDP in concessional funding, which covers approximately 50 percent of the additional public investment.

Fig. 4

Welfare: Covid-19 shock and fighting back strategies, varying the distributional weight $\zeta$. Notes: Welfare evaluated at the private discount rate under different distributional weights $\zeta$. The first two runs of the left hand panel correspond to those reported in Table 5. See notes to Table 5 for detailed description of each of these runs. The final two runs correspond to cases where the fiscal authorities are unwilling or unable to adjust the domestic consumption tax but instead reduce transfers to households or reduce recurrent spending on maintenance of public infrastructure. The third run on the right hand panel considers the case described in the text where the domestic fiscal adjustment consists of reduced spending on the maintenance of the public capital stock).

Fig. 5

Welfare: Covid-19 shock and fighting back strategies, varying the social discount factor ${\beta }_s$. Notes: Welfare evaluated at $\zeta =1$ under different social discount factors ${\beta }_s$. Runs correspond to those described in Fig. 4.