estimated that the informal economy accounts for about 34 percent of GDP in Latin America and SubSaharan Africa and 28 percent of GDP in South Asia.17 In India, more than 80 percent of the total labor force is employed in the informal sector.18 The survival of small and informal businesses therefore has a direct impact on the broader economy. The pandemic also exposed and worsened preexisting fragilities in the financial sector. Similar to that of households and governments, the resilience of banks and financial institutions at the onset of the pandemic varied widely across countries. Some countries that were heavily affected by the 2007–09 global financial crisis had initiated meaningful financial sector reforms in response and ensured that their banking systems were well capitalized.19 In some countries, such as Ghana, reforms also strengthened regulation and capitalization of the microfinance and nonbank sector. As a result, the financial sector in these countries was better able to weather the strains of the pandemic. Many emerging economies, however, had failed to address financial sector fragilities in the years prior to the crisis, which compounded the problems of chronically low levels of financial intermediation and credit in the private sector. As a result, the financial sectors of these countries were ill-prepared for a crisis of the magnitude of the COVID-19 recession, which further reduced their ability to finance consumption and productive investment through the recovery.
The economic policy response to the pandemic: Swift but with large variation across countries There were also marked inequalities in the crisis response across countries, which reflect differences in the resources and policy tools available to governments. As the pandemic intensified in 2020, the size and scope of government support programs varied widely. Many low-income countries struggled to mobilize the resources necessary to fight the immediate effects of the pandemic, or had to take on significant new debt to finance the crisis response. Half of the low-income countries eligible for the Group of Twenty (G20) Debt Service Suspension Initiative (DSSI), for example, were already in debt distress or close to debt distress prior to the pandemic.20 During the first year of the pandemic, the debt stock of these countries increased from 54 percent to 61 percent of GDP, further limiting their ability to respond to the possibility of a drawn-out recovery.21 While these debt levels are low by the standards of advanced economies, which have a much higher debt carrying capacity, they have been associated with the onset of debt crises in low-income countries.22 Figure O.4 shows the stark variation across countries in the scale of the fiscal response to the pandemic. The magnitude of the fiscal response as a share of GDP was almost uniformly large by any historic metric in high-income countries and uniformly small or nonexistent in low-income countries. In middle-income countries, the fiscal response varied significantly, reflecting marked differences in the ability and willingness of governments to mobilize fiscal resources and spend on support programs. In many cases, fiscal emergency measures were supported by large monetary policy interventions. Several emerging economy central banks, for example, used unconventional monetary policies such as asset purchase programs for the first time in history. These programs supported the fiscal response and provided liquidity at a time it was most urgently needed. However, the capacity of central banks to support the crisis response in this manner varied dramatically, so that these policy tools were both more widely used and more effective in higher-middle-income countries that had deeper capital markets and a more sophisticated financial sector. By contrast, in most low-income countries governments were constrained in their response to the crisis because monetary policy was not able to play a similarly supportive role. The initial impact of the pandemic translated into rising inequality across countries in large measure because of the constraints many governments faced in assisting households and businesses.23 Although
6 | WORLD DE VELOPMENT REPORT 2022
