The paper studies the effects of the coronavirus disease 2019 (COVID‐19) pandemic on African economies and household welfare using a top‐down sequential macro‐micro simulation approach. The pandemic is modeled as a supply shock that disrupts economic activities of African countries and then affects households’ consumption behavior, the level of their welfare, and businesses’ investment decisions. The macroeconomic dynamic general equilibrium model is calibrated to account for informality, a key feature of African economies. We find that COVID‐19 could diminish employment in the formal and informal sectors and contract consumption of non‐savers and, especially, savers. These contractions would lead to an economic recession in Africa and widen both fiscal and current account deficits. Extreme poverty is expected to increase further in Africa, in particular if the welfare of the poorest households grows at lower rates. We also use the macroeconomic model to analyze the effects of different fiscal policy responses to the COVID‐19 pandemic.
The article examines the impact of the COVID‐19 pandemic on economies in Africa through the application of a novel Debt, Investment and Growth model with a segmented Labor market (DIG‐Labor). The pandemic is modeled via supply shock that disrupts economic activities in countries in Africa, followed by effects on household consumption behavior and welfare, and business investment decisions. The DIG‐Labor model is calibrated to account for informality, which is a key characteristic of economies in Africa. We find that, in the absence of appropriate remedial measures, the COVID‐19 pandemic reduces employment in the formal and informal sectors and scales back consumption for savers and non‐savers, with the reduction in consumption being more pronounced for savers. These contractions lead to an economic recession in Africa and widen the fiscal and current account deficits, among others. The effects of fiscal stimulus packages in response to the COVID‐19 pandemic and various financing mechanisms are also examined. A key finding is that various policy responses to the emerging COVID‐19 induced macroeconomic imbalances have diverse implications, which should be carefully examined to mitigate the negative consequences while maximizing the opportunities for a swift, stronger and more inclusive economic recovery.
We introduce a new suite of macroeconomic models that extend and complement the Debt, Investment, and Growth (DIG) model widely used at the IMF since 2012. The new DIG-Labor models feature segmented labor markets, efficiency wages and open unemployment, and an informal non-agricultural sector. These features allow for a deeper examination of macroeconomic and fiscal policy programs and their impact on labor market outcomes, inequality, and poverty. The paper illustrates the model's properties by analyzing the growth, debt, and distributional consequences of big-push public investment programs with different mixes of investment in human capital and infrastructure. We show that investment in human capital is much more effective than investment in infrastructure in promoting long-run economic development when investments earn their average estimated returns. The decision about how much to invest in human capital versus infrastructure involves, however, an acute intertemporal trade-off. Because investment in education affects labor productivity with a long lag, it takes 15+ years before net national income, the private capital stock, real wages for the poor, and formal sector employment surpass their counterparts in a program that invests mainly in infrastructure. The ranking of alternative investment programs depends on the policymakers' social discount rate and on the weight of distributional objectives in the social welfare function.
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