COVID-19 and the Standard of Living in Developing Countries

Mac Hiller and Emily Larson

The negative effects of the COVID-19 pandemic have been experienced by communities worldwide. One of the concerns of the pandemic is how it has impacted living standards in different countries. In the long run, the standard of living can be measured by real gross domestic product (GDP) per person. We can use this measure to gauge the well-being or happiness of people across countries. To compare various countries and their respective level of standard of living, differences in prices of goods, currencies, and consumption patterns must be accounted for when determining differences in purchasing power of similar goods. Adjusted real GDP, therefore, measures the differences in purchasing power across countries, often called purchasing power parity (PPP) numbers. The purchasing power parity method accounts for similar prices of the same currency across different countries and their respective consumption bundles. For explanation purposes, suppose two countries, A and B, consume two distinguished goods of different markets called Food and Transportation that make up their entire per capita consumption. Country A can buy (adjusted to US dollars) Food at $1 per unit and Transportation at $2 per unit while Country B can buy (also adjusted to US dollars) Food at $0.90 per unit and Transportation at $2.50 per unit. At these prices, Country A consumes 1,000 units of Food and 2,000 units of Transportation while Country B consumes 1,000 units of Food and 1,800 units of Transportation. To find the purchasing power parity per person of Country A in terms of Country B’s price level we consider:

PPP(Country A's bundle w/Country B's prices)=$5,900=($0.90 *1,000) + ($2.50 *2,000)

Compared to the unadjusted per capita Country A consumption bundle with its own prices; 

Country A GDP (PPP own price) = $5,000=($1*1,000)+($2*2,000).

In this example, Country A’s purchasing power parity is less than Country B’s ($900 less) according to their relative prices and consumption bundle of Food and Transportation. These differences in purchasing power among countries are important when considering if money can buy, or promote, happiness. In rich countries, like the US, the large growth of real per capita GDP since the 1950s has largely been the result of advancements in technology. In economics, technology is anything that helps produce things faster, better, or cheaper, thus improving our quality of life by allocating time and resources towards other more important things. Over time, per person income will increase in correlation to the increasing “average life satisfaction” from more technology being implemented. This strong correlation of higher income and life satisfaction (or happiness) has been shown to occur in both high- and low-income countries. However, the correlation between increasing per-person income and average life satisfaction is stronger in poorer countries due to disparities in relative income levels.

         COVID-19 has created a shock to these income levels in lower-income countries. A recent study looked at measurements of unemployment, income, and even food access to see how COVID-19 has impacted the living standards of countries classified as low and middle income. The study, which surveyed over 30,000 households across 9 countries in April 2020, found significant drops in income, employment, and access to food (Egger et al, 2021). For example, during the crisis period, the median drop in income was around 70% and the median drop in food access was 45%. A news article published briefly before the journal elucidated many of these concerns. It stated that there are long-term impacts to developing countries due to economic shocks. This is because low-income households are more likely to adopt coping strategies such as reducing food consumption, and this nutritional deprivation in the long term leads to a lower accumulation of human capital (Hill and Narayan, 2021).

Evolution of key indicators over time.

Food Insecurity in Bangladesh and Nepal.

            A stark difference between developing and developed countries is their ability to respond to the negative shock. In developed countries, output losses can be mitigated by government programs, employer adjustments to hours or work, or household savings. The issue in low- and middle-income countries is they may not have these protections (Egger et al., 2021). We have seen this play out during the pandemic. In the US, we have observed several rounds of stimulus checks to Americans. Conversely, in developed countries, the journal article comments that in the 9 countries surveyed, the proportion of respondents who reported benefiting from government or non-profit help was a median proportion of 11% (Egger et al., 2021).

This evidence indicates the stark difference in the support that consumers of developed countries experienced versus developed countries in response to the pandemic. In discussions about changes in the standard of living, economists often talk about the force of compounding, which refers to how output per person can compound over time (Blanchard, 2017). The level of investment in sectors like education and technology affects the rate of growth countries experience over time. In richer countries, the level of investment in education and innovative technology is often higher compared to poorer countries. The long-term concern about COVID-19 is its impact on the long-run economic growth of countries. The negative economic shock to these countries can result in years of loss of growth (Blanchard, 2017). These shocks were perhaps exacerbated by the fact that many of these countries did not have the same government assistance in comparison to developed countries.

References

Blanchard, O. (2017). Macroeconomics (7th ed.). Pearson. 

Egger, D., Miguel, E., Warren, S. S., Shenoy, A., Collins, E., Karlan, D., … Vernot, C. (2021). Falling living standards during the COVID-19 crisis: Quantitative evidence from nine developing countries. Science Advances, 7(6). https://doi.org/10.1126/sciadv.abe0997. 

Hill and Narayan. (2021). What COVID-19 can mean for long-term inequality in developing countries. World Bank Blogs. https://blogs.worldbank.org/voices/what-covid-19-can-mean-long-term-inequality-developing-countries.