The World Development Report is an annual flagship report of the World Bank, and the 2022 version is focused on the theme “Finance for an Equitable Recovery.” The report emphasizes that the COVID-19 pandemic was a truly global economic shock, in the sense that a greater share of countries around the world were affected than in previous economic cataclysms. The authors write (footnotes omitted):

Economic activity contracted in 2020 in about 90 percent of countries, exceeding the number of countries seeing such declines during two world wars, the Great Depression of the 1930s, the emerging economy debt crises of the 1980s, and the 2007–09 global financial crisis (figure O.1). In 2020, the first year of the COVID-19 pandemic, the global economy shrank by approximately 3 percent, and global poverty increased for the first time in a generation.

The challenge for policymakers around the world was to provide sufficient assistance to help households and firms over the worst of the pandemic, but at the same time not to pile up so much debt as to create dramatic future problems.

As the COVID-19 crisis unfolded in 2020, it became clear that many households and firms were ill-prepared to withstand an income shock of the length and scale of the pandemic. In 2020, more than 50 percent of households globally were not able to sustain basic consumption for more than three months in the event of income losses, while the cash reserves of the average business would cover fewer than 51 days of expenses. Within countries, the crisis disproportionately affected disadvantaged groups. In 2020, in 70 percent of countries the incidence of temporary unemployment was higher for workers who had completed only primary education. Income losses were similarly larger among youth, women, the self-employed, and casual workers with lower levels of education. Women, in particular, were affected by income and employment losses because they were more likely to be employed in sectors most affected by lockdown and social distancing measures, and they bore the brunt of the rising family care needs associated, for example, with the closures of childcare centers and schools. According to high-frequency phone survey data collected by the World Bank, in the initial phase of the pandemic, up to July 2020, 42 percent of women lost their jobs, compared with 31 percent of men, further underscoring the unequal impacts of the crisis by gender.

The common pattern around the world was that governments of high-income countries were able to borrow more easily and thus do spend as a share of GDP during the pandemic.

The World Bank of course focuses on issues of lower- and middle-income countries. Although the governments of these countries on average mostly did not take on large amounts of extra debt, many of them pushed the limits of what they were able to borrow. In addition, their financial systems nonetheless face the substantial challenge of firms and households that are unable to repay their loans or pay their bills.

Thus, these countries face a challenge of how to manage a situation where so many firms and households are in loan distress, in a legal context where provisions for bankruptcy law are underdeveloped, and indeed where it may be better for the economy to offer some additional loans rather than see widespread bankruptcies that eliminate a substantial share of existing firms. Of course, in giving additional loans, the challenge is to avoid subsidizing money-losing “zombie” firms that really should go out of business and stop sucking up credit that could be put to better use elsewhere in the economy. The report notes:

Past crises have revealed that without a swift, comprehensive policy response, loan quality issues are likely to persist and worsen over time, as epitomized by the typical increase in loans to “zombie firms”— that is, loans to weak businesses that have little or no prospect of returning to health and fully paying off their debts. Continued extension and rolling over of loans to such firms (also known as evergreening) stifles economic growth by absorbing capital that would be better directed to loans for businesses with high productivity and growth potential.

It’s a fragile situation. Not making extra loans has risks. Making extra loans has risks. Figuring out when to make extra loans and when not to do so is inherently difficult. It’s one reason why the report states: “The COVID-19 pandemic is possibly the largest shock to the global economy in over a century.”