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### Introduction: scope, shock characterization, and objectives
- Scope: examines medium- to long-term macroeconomic and welfare implications of Covid-19-induced human capital scarring in low-income countries, emphasizing damage to health and education from diversion of healthcare resources, school closures, reduced vaccinations, malnutrition, stunting, and wasting.
- Motivating estimates cited:
  - "real GDP could permanently decrease 4 percent in less developed countries" (World Bank quote).
  - Years of life lost from indirect effects on HIV, tuberculosis, and malaria "could be as high as 60 percent of the equivalent losses from the direct impact of the pandemic" (Hogan et al. (2020)).
- Shock characterization:
  - Treated as an unanticipated, one-off shock occurring simultaneously around the world in 2020.
  - Multi-channel shock: supply-side illness and lockdowns; health and education diversion; demand-side falls in export earnings, commodity prices, remittances, travel/tourism; financial slowdown in private capital flows.
  - Modeling choice ignores second/global waves or vaccine roll-out variations; focuses on a single shock.
- Objectives: quantify output and welfare costs under passive adjustment and under alternative recovery scenarios where public investment in health and education is ramped up and financed by mixes of external concessional borrowing and domestic fiscal adjustment.

### Model structure and agents
- Model: dynamic general equilibrium (DIG-Labor-Covid-19 model) for a representative multi-sector small open low-income economy with important smallholder agriculture.
- Sectors: four production sectors producing two traded and two non-traded goods — traded: tourism (b) and export cash-crop agriculture (x); non-traded: informal goods and services (j) and formal good (n).
- Key production features:
  - Cobb-Douglas sectoral production functions with inputs: private capital k, high-skill labor S, low-skill labor L, government-supplied infrastructure z, sector-specific inputs H and A, and foreign-owned capital k_f in tourism.
  - e_b links healthcare and primary education to low-skill labor human capital; e_n captures formal-sector effort.
- Labor market:
  - Segmented market with formal-sector job rationing and efficiency wage (wage curve) generating open unemployment in formal sector; informal and agriculture have flexible wages.
  - Formal-sector wage curve: ln(w_n,t / P_t) = 1 − b_o − b_1 ln u_t + b_2 ln(w_j,t / P_t).
- Households:
  - Majority hand-to-mouth (non-savers); minority "capitalist" savers owning private capital and financial assets.
  - Savers maximize iso-elastic utility V = sum_{t=0}^{∞} β^t (c_t^{1−1/τ} / (1−1/τ)).
- Government:
  - Provides transfers, maintenance, and investment in infrastructure, education, and health; finances via user fees, VAT, taxes on wages/profits/remittances, domestic and external borrowing (some concessional).
  - Education and health capital accumulation lags: basic education i_b with 6-period lag; upper-level education i_u with 8-period lag; health i_g with 3-period lag.
  - Education and health effects on productivity specified via fixed coefficients φ_1, φ_2, φ_3 and Covid-19 shocks ES_t and HS_t.

### Calibration and core shock components
- Calibration follows Buffie et al. (2020); baseline targets average low-income country values (key parameters listed in Baseline Calibration).
- Baseline shock components:
  - Lockdown and supply chain: first-year direct hit reduces GDP 6.3 percent; sectoral TFP reductions (Formal: 8, 5, 2, 0; Informal: 4, 3, 1, 0; Agriculture: 2.7, 1.5, 1, 0).
  - Formal-sector wage setting: wage curve temporarily suspended, freezing formal wages ≈ 3 to 5 percent higher vs. active wage curve; maximum output effect ≈ 0.1 percent of GDP from reduced effort.
  - Commodity prices: declines in 2020; partial recovery in 2021.
  - Remittances: baseline shock path applies World Bank revised decreases of 7.2 percent in 2020 and 7.5 percent in 2021 to an average remittance share of 7.2 percent of GDP.
  - Tourism: initial share 0.04 (4 percent of GDP); tourism output reduced by 40 percent in year one; recovery not to pre-pandemic level until at least four years after onset.
  - Capital account: G20 DSSI suspends interest payments on non-concessional loans initially through end-2021; IMF $650 billion SDR allocation increases reserves by approximately 2 percent of pre-pandemic GDP for a median low-income SSA country, drawn down over two years starting t = 2.
  - Private capital flows: passive calibration assuming no change.
- Health and education shocks: remote teaching ineffective; learning losses calibrated via multiple studies (Psacharopoulos, Kaffenberger, Azevedo).
  - Example: Psacharopoulos approach yields e_b bottoms out at 0.53 percent; Kaffenberger/Andriabi suggest adult earnings may decline 15 percent from 3 months lost learning at grade three and cumulative losses larger.
  - Phases of low-skill productivity shock: Phase 1 increase to peak when youngest affected cohort enters workforce, Phase 2 peak persistence, Phase 3 decline as cohorts retire.

### Detailed calibration of learning and health shocks
- Learning-loss calibration examples:
  - Azevedo et al. (2020) reported average decreases in learning-adjusted years: 0.6 (entire sample), 0.8 (East Asia and the Pacific), 0.6 (Sub-Saharan Africa).
  - Combining with Kaffenberger yields decrease in e_b of 5.5 percent for low-skill labor productivity when affected cohort fully enters workforce.
  - Authors adopt a limiting case where skilled labor supply is unaffected (optimistic bias acknowledged).
- Health shocks:
  - Adult health: assuming Covid-19 reduces effective work time by five days produces decreases in e_b of 0.7 - 1.5 percent; authors assume e_b declines by 1 percent in first five years then recovers slowly over next forty years.
  - Child health: early childhood malnutrition reduces adult earnings 10 - 20 percent; authors increase projected wasting to 25 percent and calibrate aggregate productivity decrease to average 0.23 percent when cohort enters workforce.
- Tabulated health and education shock paths (Table 4 highlights):
  - Education eb by year: Year 1: 0.2; Year 2: 0.5; Year 3: 0.9; Year 4: 1.4; Year 5: 2.0; Year 6: 2.7; Year 7: 3.5; Year 8: 4.4; Year 9: 5.4; Year 10: 5.2; Year 11: 4.9; Year 12: 4.5; Year 13: 4.0; Year 14: 3.4; Year 15: 2.7; Year 16: 1.9; Year 17: 1.0.
  - Health — Current Adults Years 1–5: 1, 0.97, 0.94, 0.91, 0.88; later years decline slowly toward near-zero over decades.
  - Health — Children Years 1–9: 0, 0.034, 0.067, 0.1, 0.133, 0.166, 0.192, 0.211, 0.224; Year 10: 0.230; Years 11–17: 0.196, 0.163, 0.130, 0.097, 0.64, 0.038, 0.019 (as reported).

### Baseline scenario outcomes ("Riding out the pandemic")
- Short-run (year one) key quantifications under baseline passive domestic fiscal policy with external concessional finance:
  - GDP decreases 7.2 percent.
  - Real high-skill wage decreases 9.1 percent.
  - Real informal wage for low-skill labor decreases 6 percent.
  - Private investment and formal sector employment plunge by around 10 percent.
  - Domestic tax rate jumps by two percentage points when adjustment is tax financed.
  - Debt-to-GDP rises from around 53 to 58 percent of GDP when adjustment is externally financed (about half from additional borrowing).
- Medium/long-run dynamics:
  - Years 2-4: rebound as initial shock dissipates; debt ratio begins to decline.
  - By year ten, GDP is still 3.2 percent below pre-pandemic level.
  - Cumulative output loss relative to trend over first ten years: 34 percent.
  - Cumulative private consumption loss over first ten years: 21 percent.
  - Real aggregates continue to fall beyond year ten (some 3.5 - 4 percent lower than initial levels in extended run).
  - Tax rates remain around 1.5 percent higher than baseline for more than 40 periods.
  - Public debt peaks at 72 percent of GDP at t = 52 before slowly returning to initial value.
- Sensitivity to financing type:
  - If adjustment financed by unrequited grants rather than concessional loans, cumulative output loss over first ten years ≈ 32 percent (≈ two percentage points lower); cumulative consumption loss ≈ 1 percent lower.
  - If adjustment accommodated by reduction in recurrent transfers, cumulative output losses ≈ 1 percent higher and private consumption losses ≈ 3 percent higher.

### Public investment recovery program ("Fighting back") and financing scenarios
- Program design:
  - Total front-loaded public investment: 12.95 percent of initial GDP to health and education over first eight years.
  - Distribution: two-thirds to education, one-third to healthcare.
  - Public investment rate rises from 10.7 to 13.7 percent of initial GDP in the third year after the crisis.
- Scenario A — Fully financed by external concessional debt:
  - Concessional interest rate rd = 1.3 percent (versus 6 percent real rate on non-concessional finance).
  - If supply unconstrained, authors note case for even more aggressive program.
- Scenario B — Concessional finance constrained:
  - Official concessional lending capped at an additional 10 percentage points of initial GDP disbursed over six years (≈ 50 percent of program cost).
  - Residual deficit financed by consumption tax and domestic public borrowing.
  - Maximal consumption tax increase capped at 2.0 percentage points above baseline rate of 20 percent and cannot be introduced until four years after crisis onset.
  - Alternative VAT collection improvements: raise collection from 30 to 50 percent in informal sector and from 10 to 20 percent in agriculture over five years, raising revenue by 1.2 percent of GDP.

### Macroeconomic outcomes under financing scenarios
- Common short-run observation: catastrophic short-run hit remains largely baked in; private investment and human capital initially hit and recovery is attenuated.
- Recovery timing:
  - Even with full external financing of the 12.95 percent program, it takes more than a decade for per capita incomes, formal employment, and real wages of the poor to reconnect with pre-pandemic trend levels; economy returns to trend only after about twelve years.
- Quantified outcomes — Fully externally financed program (Panel [B] Table 6):
  - Aggregate Output: Year 1: -7.1%, Year 2: -5.1%, Year 5: -1.5%, Year 10: -1.4%, Year 20: -0.1%, Year 50: -0.1%.
  - Aggregate Consumption: Year 1: -4.6%, Year 2: -3.6%, Year 5: -1.5%, Year 10: -1.1%, Year 20: -0.1%, Year 50: 0.2%.
  - Skilled Wage: Year 1: -8.7%, Year 2: -5.8%, Year 5: -0.5%, Year 10: -1.2%, Year 20: -0.2%, Year 50: -0.1%.
  - Income of ex ante poor: Year 1: -5.7%, Year 2: -3.8%, Year 5: -1.3%, Year 10: -1.3%, Year 20: -0.1%, Year 50: 0.0%.
  - Domestic Debt/GDP (initial = 15%): Year 1: 15.1%, Year 2: 15.1%, Year 5: 15.1%, Year 10: 15.1%, Year 20: 14.9%, Year 50: 14.7%.
  - Total External Debt/GDP (initial = 38%): Year 1: 56.9%, Year 2: 57.1%, Year 5: 46.1%, Year 10: 58.5%, Year 20: 58.7%, Year 50: 53.5%.
- Cumulative output loss under fully externally financed program over first decade: around a third lower than baseline but still ≈ 20.3 percent (statement: cumulative loss in potential output reaches over 20 percent of GDP).
- Debt dynamics — fully externally financed:
  - Total public debt rises by 15 percent of GDP to 68 percent of GDP within first decade.
  - Debt peaks at 74 percent of GDP at t = 50; after year ten debt rises more slowly (1.4 percent per decade).
  - Because concessional loan rate rd − g < 0 beyond initial impact, debt dynamics described as “inverted”; higher tax revenue path pays for entire increase in public investment.
- Constrained concessional finance outcomes:
  - Concessional borrowing capped at 10 percentage points of initial GDP: external concessional borrowing peaks at 24 percent of GDP at t = 9 (initial 18 percent of GDP).
  - Debt-to-GDP peaks at t = 10 then falls sharply.
  - Domestic borrowing remains above 20 percent of GDP for extended period, keeping domestic real interest rates higher, damping private investment and delaying recovery.
- Maintenance-cut experiment:
  - Cutting maintenance from ≈ 1.6 to 0.8 percent of GDP releases resources short-run and reduces interest-rate pressure.
  - Effective depreciation rises from 5 to 6.2 percent, reducing effective public capital stock and lowering returns to private investment, slowing recovery.

### Welfare analysis and distributional implications
- Social welfare function: SW = sum_{t=0}^{∞} β_s^t (c_t + ζ c^p_t)^{1−1/τ} / (1−1/τ), with ζ = 0, ζ = 1, ζ = 2 and β_s = β = 0.965 and β_s = 0.990 explored.
- Four key welfare messages:
  1. Welfare cost of the shock is very large and so are welfare costs of not responding.
  2. Poor are disproportionately hurt; recovery scenarios tend to favor the non-poor; increasing ζ amplifies welfare costs for the poor.
  3. Greater external financing reduces welfare costs—especially when domestic constraints would otherwise force cuts in high-return infrastructure spending.
  4. From a social welfare perspective (especially β_s = 0.990), far-sighted investment in health and education justifies accumulation of external debt.

### Policy implications, recommendations, and caveats
- Main policy points:
  1. Covid-19 direct and indirect short-run economic effects have been brutal and concentrated on low-income countries.
  2. Under plausible returns to education and loss-of-learning, medium/long-term effects on growth and welfare are severe if human-capital losses persist; increased public investment in education and health can repair damage but recovery is slow (12 percent of initial GDP injection still requires up to twelve years to return to trend; cumulative output loss > 20 percent).
  3. If recovery cannot be externally financed, domestic fiscal adjustment will delay recovery; faster concessional disbursement reduces need for domestic adjustment but raises external debt.
  4. Low-income countries’ limited fiscal adjustment capacity implies sustaining public investment will likely require rapid run-up in external and total public debt in short–medium term; shifting adjustment onto domestic balance sheets risks curtailing public investment, raising taxes, or expensive domestic borrowing.
- Policy emphasis:
  - High welfare returns to concessional lending for limiting divergence and restoring fiscal resilience.
  - Official creditors should consider re-evaluating tolerance for otherwise high external debt burdens over extended periods to enable recovery.
  - Scope for structural reforms to increase revenue mobilization (improve tax capacity and tax effort).
- Caveats and robustness:
  - Optimism biases: single-event outbreak assumption; neutral position on private capital flows; assumption that scaling up public investment avoids cost overruns or efficiency losses.
  - Calibration uncertainties: remittances, returns to education, magnitude/duration of learning losses.
  - Sensitivity exercises:
    - Tourism-dependent economy (tourism = 25% value-added) experiences much larger collapse: GDP, skilled wage, formal employment fall 16–20 percent; unemployment rises 6% → 7.8%; aggregate capital falls 10% in three years; public debt ≈ 72% of GDP; recovery harder, requiring larger investment and reforms.
    - Remittance-dependent economy: remittance shock > 5× baseline in experiment but aggregate trajectories only a little worse because remittances and concessional finance act as close substitutes; if external finance cannot substitute dollar-for-dollar, losses are traumatic.
    - If productivity hit concentrated on informal sector, five-year cumulative output loss ≈ 19.1 percent versus 19.85 percent baseline; distributional impacts worsen for informal/low-skilled workers.
    - If loss-of-learning also affects upper-level education similarly, aggregate output effect modest (annual output ≈ 0.2 percent lower at t = 10) but distributional effects worsen for unskilled labor.

*Source: wpiea2022025-print-pdf*

### 1. Introduction ........................................................................................................

### wpiea2022025-print-pdf - 1. Introduction ........................................................................................................

### Scope and motivation
- The paper examines medium- to long-term macroeconomic and welfare implications of Covid-19-induced human capital scarring in low-income countries.
- Emphasis on damage to health and education from diversion of healthcare resources, school closures, reduced vaccinations, malnutrition, stunting, and wasting.
- Cites a World Bank estimate that "real GDP could permanently decrease 4 percent in less developed countries if 'the human capital destruction and disruption of public infrastructure caused by Covid-19 are not quickly reversed.'"
- Notes an estimate (Hogan et al. (2020)) that years of life lost from indirect effects on HIV, tuberculosis, and malaria "could be as high as 60 percent of the equivalent losses from the direct impact of the pandemic."

### Characterization of the Covid-19 shock
- Treated as an unanticipated, one-off shock occurring simultaneously around the world in 2020.
- Multi-channel shock elements:
  - Supply-side: illness and domestic lock-downs disrupting domestic and international trade, reducing domestic productivity.
  - Health and education diversion: resources shifted to Covid-related healthcare; curtailment of education primarily at basic and secondary levels.
  - Demand-side: falls in export earnings, commodity prices, remittance flows; collapse in international travel and tourism affecting labor-intensive services.
  - Financial: slowdown in private capital flows due to reduced aggregate saving in developed economies and increased perceived credit risk of low-income countries.
- Acknowledges that the analysis ignores the possibility of second or subsequent global waves or vaccine roll-out variations; modeling choice focuses on a single shock.

### Model structure and key features
- Uses a dynamic general equilibrium macroeconomic model (version of the model developed by the authors under IMF auspices).
- Economy modeled: representative multi-sector small open low-income economy where smallholder agriculture plays an important role in output and employment.
- Non-agricultural economy: informal sector and a formal sector, including a labor-intensive services sector (e.g., tourism).
- Households:
  - Majority are hand-to-mouth households unable to access asset markets.
  - Minority "capitalist" households own private capital and can access financial assets.
- Labor market: efficiency wage effects yield open unemployment in the formal economy; informal and smallholder agricultural sectors feature flexible wages.
- Public provision and fiscal framework:
  - Investment in education is publicly provided and alters the skills mix, driving labor productivity and income differentials.
  - Government finances transfers and public investment in physical infrastructure and education via tax revenues and borrowing from private and official external creditors and from domestic households.
- Model tracks: growth, inequality, unemployment and underemployment, real wages, fiscal balance, and public debt across short, medium, and long runs.
- Detailed model specification available in the Appendix (DIG-Labor-Covid-19 model).

### Policy responses, financing considerations, and scenarios analyzed
- Focus on recovery strategies aimed at repairing damage to health and human capital.
- Key policy and financing trade-off: extent to which external concessional financing from IMF, World Bank, Regional Development Banks, and bilateral donors can fund recovery versus need for domestic fiscal adjustment.
- Recognizes official creditors' capacity or willingness to fully fund investment programs is partial due to limited resources and/or debt sustainability concerns.
- Allows financing burden to be shared between external concessional borrowing and domestic fiscal adjustment, where domestic measures may include tax increases, expenditure reallocation, and domestic public borrowing.
- Model used to generate:
  - Baseline measure of output and welfare costs of the Covid-19 shock under passive adjustment.
  - Alternative scenarios where countries "fight back" via public investment programs and various financing mixes.

### Organization of the paper (as presented)
- Section 2: Model description and calibration of the composite Covid-19 shock.
- Section 3: Core simulation results and implications.
- Section 5: Welfare analysis.
- Section 6: Conclusions and policy implications.
- Appendix: The DIG-Labor-Covid-19 Model and sensitivity analysis.

*Source: wpiea2022025-print-pdf - 1. Introduction ........................................................................................................*

### 2.1    Model Structure

### 2.1    Model Structure

### Production
- Economy: four production sectors producing two traded and two non-traded goods. Non-traded output: informal goods and services (subscript j) and a formal good, n, which is a substitute in consumption with an imported good. Traded output: tourism (b), an export enclave within the formal sector selling only to foreign customers, and the other traded good, x (cash-crop agriculture).
- Sectoral production functions (Cobb-Douglas with constant returns to private factors):
  - q_x,t = a_x z ψ_x t−1 k_αx x,t−1 S_θx x,t H_χ (e_b,t L_x,t)^{1−α_x−θ_x−χ}
  - q_n,t = a_n z ψ_n t−1 k_αn n,t−1 S_θn n,t (e_n,t e_b,t L_n,t)^{(1−α_n−θ_n)}
  - q_b,t = a_b z ψ_b t−1 (k_b,t−1 + k_f,t−1)^{α_b} S_θb b b,t A_θa t (e_n,t e_b,t L_n,t)^{(1−α_b−θ_b−θ_a)}
  - q_j,t = a_j z ψ_j t−1 k_αj j,t−1 S_θj j,t (e_b,t L_j,t)^{(1−α_j−θ_j)}
- Inputs: private capital k, low-skill labor L, high-skill labor S, government-supplied infrastructure z (public good). k_f is foreign-owned capital in tourism. H and A are sector-specific inputs in sectors x and b (land, natural resource, beaches, lions, etc.).
- e_b links healthcare and the quantity and quality of primary education to human capital of low-skill labor. In formal sectors productivity of low-skill labor also depends on work effort e_n.

### Labor market
- Market features:
  - Segmented market with formal-sector job rationing → equilibrium open unemployment in formal sector.
  - Efficiency wage (wage curve) for formal sector real wages (w_n,t / P_t):
    - ln(w_n,t / P_t) = 1 − b_o − b_1 ln u_t + b_2 ln(w_j,t / P_t)
  - Formal sector wages decrease in unemployment rate u_t and increase in informal sector wage (w_j,t / P_t).
  - Informal sector and agriculture form an integrated labor market with flexible wages; tenuous property rights in agriculture imply labor receives marginal product plus a share of land rents. Arbitrage ensures informal sector wage (net of tax) equals net-of-tax shadow wage in agriculture plus its rental share.
- Overall raw labor supply is fixed; skill composition determined by public investment in upper-level education (converts low-skill to high-skill) and by new formal-sector job openings.

### Households
- Two agent types: non-savers and savers.
  - Preferences over food (agricultural good), informal goods and services, and formal goods (composite of domestic and imported varieties). No domestic consumption of tourism.
  - Unemployed and low-skill workers in agriculture and informal sector consume all income each period (hand-to-mouth). Income = net-of-tax labor income + pro-rated shares of remittances, land rents in agriculture, and government transfers.
  - Saving class: capitalists, skilled labor, and low-skill labor in formal sector. They maximize iso-elastic utility:
    - V = sum_{t=0}^{∞} β^t (c_t^{1−1/τ} / (1−1/τ))
    - Parameters: β discount factor; τ inter-temporal elasticity of substitution; c aggregate consumption of savers.
  - Saving household invests in physical capital and foreign bonds (subject to adjustment costs), and in domestic government bonds. Consumption path depends on real interest rate r_t adjusted for trend growth g and changes in the VAT rate h_t. Consumption-smoothing captured by standard Euler equation.

### Government
- Government expenditures: household transfers, debt service, maintenance, and investment in infrastructure, education, and health.
- Revenues: user fees for infrastructure services, consumption VAT, taxes on wages, profits, and remittances.
- Deficits financed through domestic and external borrowing; some borrowing may be concessional.
- Public infrastructure productivity can be compromised by inefficient public investment and/or deficient maintenance → accelerated capital depreciation.
- Education and health investment lags and depreciation:
  - Basic education stock S_b,t = i_b,t−6 + (1−δ_b) S_b,t−1
  - Upper-level education stock S_u,t = i_u,t−8 + (1−δ_u) S_u,t−1
  - Health capital G_t = i_g,t−3 + (1−δ_g) G_t−1
- Fixed input-output coefficients φ_1, φ_2, φ_3 link education and health capital to labor supply/productivity:
  - S_t = S_o + φ_1 (S_u,t−1 − S_uo)
  - e_b,t = [1 − ES_t + φ_2 (S_b,t−1 − S_bo)][1 − HS_t + φ_3 (G_t−1 − G_o)]
  - Subscript o denotes initial steady-state stock values. ES_t and HS_t are Covid-19 induced shocks to health and education.
- Assumed internal rates of return (IRR): basic education 12 percent, upper-level education 10 percent. Baseline sets IRR_g = 0.12 for healthcare.

### Fiscal adjustment and market-clearing
- Fiscal adjustment via simple rules: conditional on external financial flows, taxation and transfers eventually adjust to satisfy fiscal balance; short/medium-run gap can be financed by borrowing. External concessional finance may suffice without domestic fiscal adjustment.
- Market clearing: flexible wages and prices equate demand and supply for skilled labor, low-skill labor, and the two non-traded goods. Efficiency wage mechanism determines formal sector wages and equilibrium unemployment.
- Fiscal balance satisfied through tax and debt adjustments per fiscal rule. External balance satisfied when sustainable growth in net foreign debt equals current account deficit.

### Calibration and the Covid-19 shock — Core model and economic shock (summary of calibration features)
- Calibration follows procedure in Buffie et al. (2020); key calibration parameters referenced in Table 1 (not reproduced here).
- Baseline calibrates to average values for low-income countries.

Economic shock components and calibration choices:
- Lockdown and global supply chain shocks:
  - Represented as temporary productivity shocks, asymmetric across sectors (most severe in formal sector, then informal, then smallholder agriculture).
  - Direct hit reduces GDP 6.3 percent in the first year.
  - Shocks wear off and disappear altogether by year four.
- Formal sector wage setting during pandemic:
  - Efficiency wage mechanism temporarily suspended; wage curve flattens up to horizontal → freezes formal sector wages at pre-pandemic level.
  - Result: formal sector wages 3 to 5 percent higher compared to case where wage curve operates, holding other shocks constant.
  - Reduced effort lowers output slightly; maximum output effect ≈ 0.1 percent of GDP.
- Commodity price shock:
  - Recession depressed demand for developing-country exports; oil and base metals prices dropped in 2020; oil recovering in 2021.
- Remittances shock:
  - Initial World Bank estimate (June 2020) suggested a 20 percent decrease in 2020; later revised to decreases of 7.2 percent in 2020 and 7.5 percent in 2021 (World Bank, October 2020).
  - Baseline shock path applies this contraction to the average value of remittances in low-income countries: 7.2 percent of GDP (World Development Indicators).
- Tourism shock:
  - Initial share of tourism set at 4 percent of GDP (average in low- and lower-middle income countries).
  - Tourism sector output reduced in year one by 40 percent (consistent with 2020 global tourism revenue decrease).
  - Recovery expected slower than other sectors; revenues do not regain pre-pandemic level until at least four years after onset.
- Capital account shocks:
  - G20 DSSI suspended interest payments on non-concessional loans initially through end-2021. For average low-income country, IDA eligibility implies modest concession value.
  - US650billion SDR issue (IMF, June 2021) provides additional resource flow; allocation enhances reserves for a median low-income SSA country by a one-off amount of approximately 2 percent of pre-pandemic GDP. SDR inflow assumed drawn down over two years starting in year t = 2.
  - Private capital flows: passive calibration assuming no change in net private capital flows.
  - Concessional financing treated as element of financing program and becomes partially endogenous, adjusting to satisfy residual external and fiscal balance.

### Shocks to health and human capital
- Remote teaching/learning largely ineffective in low-income countries; duration of school closures approximates years of lost learning.
- Example calculation (Psacharopoulos et al. (2020) approach):
  - Assumed return to schooling 8 percent per year and three months lost learning → implied decrease in aggregate effectiveness of human capital e_b = 2.67 percent × weight of affected cohort (~20 percent) → e_b bottoms out at 0.53 percent.
- Authors argue this is likely too small due to cumulative self-productivity of human capital: short-term learning losses compound in subsequent grades (Kaffenberger (2021); Andriabi et al. (2020) evidence from Pakistan).
- Education losses can be large and persistent; detailed dynamics discussed in subsequent sections.

*Source: wpiea2022025-print-pdf - 2.1    Model Structure*

### 1.5 school years at all grade levels. Extending this idea and calibrating to a small data set

### 1.5 school years at all grade levels. Extending this idea and calibrating to a small data set

### Calibration of learning losses and implied earnings effects
- Pedagogical production function (Kaffenberger and Pritchett (2020)) gives the same number at grade ten from three months of lost learning at grade three (Kaffenberger (2021)).
- Assuming a 10 percent return per year of schooling, Kaffenberger (2021) and Andriabi et al. (2020) conjecture that adult earnings of the affected cohort may decline 15 percent.
- Azevedo et al. (2020) collected data on school closures in 157 countries and report average decreases in learning-adjusted years of:
  - 0.6 years in the entire sample,
  - 0.8 years in East Asia and the Pacific,
  - 0.6 years in Sub-Saharan Africa.
- Combining Azevedo et al. (2020) with Kaffenberger’s estimate of cumulative learning loss yields a decrease ine_b of 5.5 percent for low-skill labor productivity when the affected cohort has fully entered the workforce.
- Calibration choices adopt a limiting case that the supply of skilled labor is unaffected by Covid-19 (as in equation (7)), acknowledging this likely biases the calibration toward optimism.

### Phases of the low-skill labor productivity shock
- The learning shock to low-skill labor productivity is characterized as playing out over three distinct phases:
  - Phase 1: Shock increases (in absolute value) at an increasing rate, reaching peak when the youngest member of the affected cohort joins the workforce.
  - Phase 2: Interregnum where the shock remains at peak level until the oldest cohort member reaches retirement age.
  - Phase 3: Shock decreases at an increasing rate (mirroring Phase 1), returning to zero when the last cohort member retires.
- The shock increases at an increasing rate in Phase 1 because the youngest children, with more years of schooling left, suffer the greatest cumulative learning loss.

### Health shock calibration for adults and children
- Adult health shock:
  - Using Schultz and Tansel (1997) estimates of how disability days affect earnings in Cote d’Ivoire and Ghana, and assuming Covid-19 reduces effective work time by five days, yields decreases ine_b of 0.7 - 1.5 percent.
  - The authors assume ine_b declines by 1 percent in the first five years while the pandemic runs its course, then recovers slowly over the next forty years as the affected adult cohort exits the workforce.
  - Current expert opinion cited: only half of the low-income country population will have been vaccinated by the start of 2024.
- Child health shock:
  - Estimates of how early childhood malnutrition affects adult earnings suggest adult earnings decrease 10 - 20 percent.
  - Early projections had moderate and severe wasting among children increasing 15 percent in low- and middle-income countries (Heady et al. (2020)); the authors increase this to 25 percent to reflect greater increases in low-income countries and a longer pandemic.
  - If the affected cohort comprises children ages 0-5 between 2020 and 2024, the decrease in aggregate labor productivity when the full cohort has entered the workforce is 0.16 - 0.31 percent.
  - The calibration selects the average, 0.23 percent, to calibrate the shock path in Table 4.

### Results — broad contours and robustness
- Simulations are intended to assess broad contours and duration of macroeconomic adjustment requirements for low-income countries and distribution between domestic fiscal adjustments and external finance; results are tentative and not forecasts for individual countries.
- Authors conducted sensitivity analysis and state main analytical messages are reasonably robust to plausible parameter variations.
- High-level results summarized in Table 6; Figures 1–4 illustrate dynamics (not reproduced here).

### Baseline scenario: Riding out the pandemic
- Baseline: government maintains domestic public policy stance while domestic tax base shrinks; adjustment can be domestic (tax/expenditure) or external (concessional borrowing, private capital, grants).
- Two limit financing cases in Figure 1:
  - Donors supply concessional loans as needed to forestall cuts in public investment while holding domestic taxes, transfers and borrowing constant (policy passive).
  - Donors maintain external financing at pre-crisis level and government finances spending program and debt service by adjustments to domestic consumption taxes.
- Key short-run quantifications (year one):
  - GDP decreases 7.2 percent.
  - Real high-skill wage decreases 9.1 percent.
  - Real informal wage for low-skill labor decreases 6 percent.
  - Private investment and formal sector employment plunge by around 10 percent.
  - Debt-to-GDP ratio jumps from around 53 to 58 percent of GDP when adjustment is externally financed (about half from additional borrowing).
  - Domestic tax rate jumps by two percentage points when adjustment is tax financed.
- Medium and long term dynamics:
  - Years 2-4: rebound as initial shock dissipates; debt ratio begins to decline.
  - By year ten, GDP is still 3.2 percent below its pre-pandemic level.
  - Cumulative output loss relative to trend since onset of pandemic over first ten years: 34 percent.
  - Cumulative private consumption loss over first ten years: 21 percent.
  - Output, wages and consumption continue to fall beyond year ten in simulations (real aggregates some 3.5 - 4 percent lower than initial levels and still slowly decreasing in extended run).
  - Tax rates remain around 1.5 percent higher than baseline for more than 40 periods.
  - Public debt peaks at 72 percent of GDP at t = 52 before slowly returning to initial value.
- Financing sensitivity notes:
  - If adjustment is financed by unrequited grants rather than concessional loans, cumulative output loss over first ten years is approximately two percentage points lower at 32 percent and cumulative consumption loss around 1 percent lower.
  - If adjustment is accommodated by a reduction in recurrent government spending on transfers, cumulative output losses are around 1 percent higher and private consumption losses 3 percent higher, reflecting crowding out of private investment.

### Fighting back with public investment (preview)
- Government can seek to repair human capital damage by ramping up investment in health and basic education (primary and lower-secondary).
- Aggregate public investment rate, measured in terms of initial GDP, rises from 10.7 to 13.7 percent in the third year after the crisis hits (provides an additional fiscal effort — see Table 5 for full details).

*Source: wpiea2022025-print-pdf*

### 12.95 percent of initial GDP to health and education in total over the first eight years.

### 12.95 percent of initial GDP to health and education in total over the first eight years.

### Public investment program design and financing scenarios
- Total front-loaded public investment: 12.95 percent of initial GDP to health and education in total over the first eight years.
- Distribution of new spending: Two-thirds of the new spending goes to education and the balance to healthcare.
- Scenario A — Fully financed by external concessional debt:
  - Assumed concessional interest rate: 1.3 percent (versus a real rate on non-concessional finance of 6 percent per annum).
  - If supply of concessional finance is unconstrained, authors note the case for an even more aggressive reconstruction program.
- Scenario B — Concessional finance constrained:
  - Official concessional lending capped at an additional 10 percentage points of initial GDP and disbursed over six years (covers approximately 50 percent of the cost of the public investment surge).
  - Residual fiscal deficit financed by adjustments to the consumption tax and domestic public borrowing.
  - Maximal increase in consumption tax: capped at 2.0 percentage points above the baseline rate of 20 percent and cannot be introduced until four years after the crisis emerges.
  - Alternative tax-adjustment via VAT collection improvements: raise collection from 30 to 50 percent in the informal sector and from 10 to 20 percent in agriculture over five years, raising tax revenue an extra 1.2 percent of GDP.

### Macroeconomic outcomes under the financing scenarios
- Common short-run outcome: catastrophic short-run hit to the economy remains effectively baked-in; private investment and human capital initially hit and recovery is attenuated.
- Recovery timing:
  - It still takes more than a decade for per capita incomes, formal sector employment, and real wages of the poor to reconnect with pre-pandemic trend levels when investment is fully externally financed.
  - Even a large front-loaded program that injects 12 percent of initial GDP over the short/medium run does not return the economy to its pre-pandemic trend line until twelve years have passed.
- Cumulative output loss:
  - Under the fully externally financed program the cumulative output loss over the first decade is around a third lower than in the baseline but remains appallingly high at 20.3 percent.
  - Statement elsewhere: cumulative loss in potential output reaches over 20 percent of GDP.
- Public debt dynamics — fully externally financed case:
  - Total public debt rises rapidly in the short–medium run, increasing by 15 percent of GDP to 68 percent of GDP within the first decade.
  - Debt peaks at 74 percent of GDP at t = 50.
  - After year ten, the debt continues to rise but the pace slows to 1.4 percent per decade.
  - Because loans are highly concessional and rd − g < 0 beyond the initial impact, conventional debt dynamics are described as “inverted” (rolling over the debt creates more fiscal space) and the higher path for tax revenue pays for the entire increase in public investment.
- Public debt and domestic financing pressures — constrained concessional finance:
  - With concessional borrowing capped at 10 percentage points of initial GDP, external concessional borrowing peaks at 24 percent of GDP at t = 9 (against an initial level of 18 percent of GDP).
  - The debt-to-GDP ratio peaks at t = 10 and then falls away sharply.
  - Given the ceiling on domestic taxation (hit at t = 11), domestic borrowing remains above 20 percent of GDP for an extended period.
  - Higher sustained domestic borrowing keeps domestic real interest rates higher for longer, damping private investment and slowing recovery in output, aggregate consumption, skilled wages, unemployment, and incomes of low-skilled workers.
- Maintenance-cut experiment:
  - Cutting maintenance from around 1.6 to 0.8 percent of GDP releases resources for investment, reduces pressure on tax and borrowing, and helps dampen the rise in interest rates in the short run.
  - But effective depreciation rate rises from 5 to 6.2 percent, reducing the effective public capital stock and complementarity with private inputs, which lowers returns to private investment and further slows recovery.

### Welfare analysis and distributional implications
- Social welfare function used: SW = sum_{t=0}^{∞} β_s^t (c_t + ζ c^p_t)^{1−1/τ} / (1−1/τ), where c_t is aggregate consumption, c^p_t is consumption of the ex ante poor, ζ is the weight on the ex ante poor, and β_s is the social discount factor.
- Calibration choices reported: ζ = 0, ζ = 1, ζ = 2; β_s = β = 0.965 and β_s = 0.990.
- Four key welfare messages:
  1. The welfare cost of the shock itself is very large and so are the welfare costs of not responding.
  2. The poor are disproportionately hurt by the shock; recovery scenarios tend to be relatively favorable to the non-poor. Increasing ζ (placing more weight on inequality) makes welfare costs on the poor more severe.
  3. The more that adjustment can be financed externally, the less severe the welfare cost—particularly if domestic fiscal constraints would otherwise force cuts in high-return infrastructure spending.
  4. From a social welfare perspective, a sufficiently far-sighted investment in health and education justifies accumulation of external debt (noted via the β_s = 0.990 bars for recovery scenarios).

### Policy implications and conclusions
- Four main policy points highlighted:
  1. The direct and indirect short-run economic effects of Covid-19 have been brutal and highly concentrated on low-income countries, disproportionate to direct health costs.
  2. Under plausible assumptions about returns to education and loss-of-learning, medium- and long-term effects on growth and welfare are likely to be severe if human-capital losses are allowed to persist; increased public investment in education and health can repair damage but recovery is slow (injecting 12 percent of initial GDP still requires up to twelve years to return to trend and cumulative output loss exceeds 20 percent).
  3. If public investment recovery cannot be financed externally via grants or concessional lending, an attenuated fiscal adjustment will fall on domestic finances and further delay recovery; more rapid disbursement of concessional finance reduces the need for domestic fiscal adjustment but raises external debt profiles.
  4. Limits on fiscal adjustment capacity in low-income countries mean that sustaining public investment will likely require a rapid run-up in external and total public debt in the short–medium term; shifting too much adjustment onto debtors’ balance sheets risks forcing governments to scale back regular public investment, raise domestic tax rates, or sharply increase domestic borrowing (which becomes significantly more expensive than external concessional financing).
- Policy recommendation emphasis:
  - The (welfare) returns to concessional lending are high for limiting divergence between advanced and developing countries and restoring fiscal resilience to address other challenges (including climate change).
  - “Doing whatever it takes” implies official creditors re-evaluating tolerance of otherwise uncomfortably high external debt burdens over an extended period.
  - There may be scope for structural reforms during the crisis to increase revenue mobilization through improved tax capacity and tax effort.

### Robustness, caveats, and extensions
- Important caveats that may impart optimism bias:
  - Treating the 2020 outbreak as a single event; no modeling of resurgent waves, subsequent lockdowns, or slower vaccine distribution.
  - Neutral position on private capital account developments and assumption that fast scaling up of public investment can be achieved without substantial cost overruns or efficiency losses.
  - Calibration uncertainties: role of remittances, returns to education, and magnitude/duration of additional learning losses.
- Sensitivity analyses summarized:
  - Tourism-dependent economies (tourism value-added recalibrated to 25 percent): much larger initial collapse (GDP, high-skill real wage, and formal employment fall 16–20 percent; unemployment rises from 6 to 7.8 percent; aggregate capital stock falls 10 percent in three years); public debt skyrockets to 72 percent of GDP; recovery harder and requires bigger front-loaded investment and aggressive fiscal reforms.
  - Remittance-dependent economies: remittance shock more than five times larger than base case in the experiment, but aggregate trajectories are only a little worse because remittances and concessional finance act as close substitutes in the capital account in these simulations; nonetheless, if external finance cannot substitute dollar-for-dollar, losses are traumatic and destabilizing.
  - Alternative shock specifications:
    - If productivity hit is concentrated on the informal sector, aggregate output loss is slightly moderated (five-year cumulative output loss ≈ 19.1 percent versus 19.85 percent baseline) but distributional impacts worsen for informal/low-skilled workers.
    - If loss-of-learning also affects upper-level education with similar quantitative impact as basic education (adjusted for shorter gestation), the effect on aggregate output is modest (annual output around 0.2 percent lower at t = 10) but distributional effects worsen for unskilled labor.

*Italic: Source — content unit “wpiea2022025-print-pdf - 12.95 percent of initial GDP to health and education in total over the first eight years.”*

### References

### References

### References overview
- Bibliographic list of studies on Covid-19 economic impacts, education and health human-capital effects, remittances, public investment, infrastructure, and related macroeconomic modeling. Authors and outlets include Adam, Alderman, Alon, Andriabi, Ansah, Arellano, Asian Development Bank, Azevedo, Badiane, Behsudi, Benedek, Berg, Besart, Bloom, Bossavie, Brinceno-Garmendia, Buffie, Cakmakl, Carnap, Centre for Global Development, Dantine, Dercon, Glewwe, Goldberg, Guild, Haddad, Hannan, Heady, Hogan, Howes, Hulten, ILO, IMF, Jaume, Jurzyk, Kaffenberger, Kara, Kpodar, Lopez-Calva, OECD, Pritchett, Psacharopoulos, Rawal, Ray, Sayeh, Schultz, Shapiro, Thomas, UNCTAD, UNDP, Velasco, Vofl, World Bank, York, among others.
- The references support the Working Paper No. WP/22/25 titled "Loss-of-Learning and the Post-Covid Recovery in Low-Income Countries."

### Baseline Calibration (Table 1)
- Consumption shares of the imported, formal and informal goods (γm, γn, γj, γx): 0.1, 0.4, 0.2, 0.3
- Intertemporal elasticity of substitution (τ): 0.4
- Elasticity of substitution between good x and goods n, j, and m (ε1): 0.5
- Elasticity of substitution between formal and informal traded goods (ε2): 0.5
- Elasticity of substitution between imported good and the formal good (ε3): 1/5
- Wages in the formal and informal sectors (ws, wn, wj): 3, 1, 0.6
- Factor shares in the formal sector (αn, θn): 0.5, 0.3
- Factor shares in the informal sector (αj, θj): 0.2, 0.2
- Factor shares in agriculture (χ, αx, θx): 0.3, 0.2, 0.05
- Factor shares in the tourism sector (αb, θb, θa): 0.4, 0.3, 0.15
- Depreciation rates (δ, δz, δb, δu): 0.05
- Real interest rates on concessional and semi-concessional loans (rd): 0.013
- Real interest rates on external commercial debt (rdc): 0.045
- Trend growth rate (g): 0.023
- Ratio of user fees to recurrent costs (f): 0.5
- Consumption VAT rates (h, gj, gx): 0.2, 0.3, 0.1
- Taxes on profits (fn, fj, fx, fb): 0.15, 0.03, 0.02, 0.15
- Taxes on wages and land rents (fw, fwj, fwx, fh): 0.12, 0.01, 0.01, 0.01
- Tax rate on remittances (fR): 0.1
- Efficiency of public investment (s): 1
- Absorptive capacity constraint (φ): 0
- Return on infrastructure (Rz): 0.2
- Real interest rate on domestic bonds (r): 0.06
- Real interest rate on foreign loans held by the private sector (rf): 0.06
- Interest elasticity of private capital flows (Γ): 1
- Ratio of maintenance spending to GDP (Pzm/GDP): 0.01644
- Ratio of infrastructure investment to GDP (Pziz/GDP): 0.06
- Ratios of education investment to GDP (Psi b/GDP, Psi u/GDP): 0.028, 0.012
- Ratio of public investment in health to GDP (Pgi g/GDP): 0.019
- Ratio of remittances to GDP (base case): 0.072
- q-elasticity of investment spending (Ω): 2.5
- Share of VAT adjustment in long-run fiscal adjustment (λ): 1
- Ratio of domestic public debt to initial GDP (b/GDP): 0.15
- Ratio of private foreign debt to initial GDP (bf/GDP): 0
- Ratio of concessional public external debt to initial GDP (d/GDP): 0.18
- Ratio of non-concessional public external debt to initial GDP (dc/GDP): 0.2
- Long-run targets for public domestic and concessional debt (btarget, dtarget): 0.15, 0.18
- Share of new skilled workers drawn from unskilled workers pool in sector x-j (∆xj): 0.8
- Fraction of newly created/vacant formal sector jobs filled by workers from sector x-j (ξ): 0.5
- Unemployment rate (u): 0.06
- Elasticity of the real wage in formal sector w.r.t. the real wage in informal sector (g2): 0.1
- Elasticity of the real wage in formal sector w.r.t. the unemployment rate (g3): 0.5
- Non-traded cost shares in private capital goods (αkj, αkn): 0.35, 0.15
- Non-traded cost shares in infrastructure (αzj, αzn): 0.35, 0.15
- Non-traded cost shares in education capital (αsj, αsn): 0.2, 0.6
- Non-traded cost shares in health capital (αgj, αgn): 0.35, 0.15
- Gross return to infrastructure (Rz): 0.27
- Gross returns to education (Ru, Rb): 2/0.3, 0.3
- Gross return to health (Rg): 0.2
- Relative return on maintenance to new infrastructure investment (Rmz): 1
- Ratio of elasticities of sectoral output w.r.t. infrastructure (ψn/ψx, ψj/ψx): 1, 1
- Share of tourism sector in GDP: 0.04
- Share of domestic capital in total capital stock in the tourism sector: 1

Notes:
- "This elasticity implies the formal and imported consumption goods are close substitutes."
- "For the assumed time lags, the internal rate of return is 12 percent for basic education and 10 percent for upper-level education."

### Baseline Economic Shocks (Table 2)
- Lockdown and Global Supply Chain (% decrease in TFP)
  - Formal Sector: 8, 5, 2, 0
  - Informal Sector: 4, 3, 1, 0
  - Agriculture: 2.7, 1.5, 1, 0
- Commodity Price (% decrease): 3, 2, 1, 0
- Remittances (% decrease): 0.5, 0.5, 0.3, 0.1
- Tourism Sector (% decrease in TFP): 40, 30, 20, 10
Notes:
- For year 5 and beyond, all shocks are zero.

### External Financing and Other Responses (Table 3)
- Debt service on external non-concessional borrowing: interest payments on external commercial debt suspended for the first three years post-pandemic under the G20 DSSI.
- Reserve augmentation: Countries’ share of the IMF’s 2021 $650 billion SDR allocation generates 2 percent of initial GDP in ‘excess of reserves’, drawn as grant financing in t = 2 and t = 3.
- Wage curve: Temporarily suspended (z = 1) during t = 1, 2 of the pandemic; partially returns (z = 0.5) in t = 3; recovers fully (z = 0) in t = 4.
Notes:
- See the specification of the wage curve in the online Appendix.

### Health and Education Shocks (Table 4)
- Education (Percentage Decrease in Effective Labor eb) by year:
  - Year 1: 0.2
  - Year 2: 0.5
  - Year 3: 0.9
  - Year 4: 1.4
  - Year 5: 2.0
  - Year 6: 2.7
  - Year 7: 3.5
  - Year 8: 4.4
  - Year 9: 5.4
  - Year 10: 5.2
  - Year 11: 4.9
  - Year 12: 4.5
  - Year 13: 4.0
  - Year 14: 3.4
  - Year 15: 2.7
  - Year 16: 1.9
  - Year 17: 1.0
- Health: Current Adults (shock across years 1–61 summarized)
  - Year 1–5: 1, 0.97, 0.94, 0.91, 0.88
  - Year 6: 0.85; Year 7: 0.82; Year 8: 0.79; Year 9: 0.76; Year 10: 0.73; Year 11: 0.70; Year 12: 0.68; Year 13: 0.66 ... 0.02 (up to year 61)
- Health: Children (shock across years)
  - Year 1–9: 0, 0.034, 0.067, 0.1, 0.133, 0.166, 0.192, 0.211, 0.224
  - Year 10: 0.230; Year 11: 0.196; Year 12: 0.163; Year 13: 0.130; Year 14: 0.097; Year 15: 0.64; Year 16: 0.038; Year 17: 0.019
- Health: Combined Adult Shock examples: 0.88, 0.89, 0.88, 0.87 ... 0.25
Notes:
- For years not shown, all shocks are assumed to be zero.

### Public Investment Program (Table 5)
- Public investment program (in Percent of Initial GDP)
  - Education (ib): 0.21, 2.2, 2.1, 1.5, 1.0, 0.5, 0.2
  - Health (ig): 0.21, 1.0, 0.75, 0.75, 0.5, 0.25, 0.1
  - Total (ib + ig): 0.42, 3.2, 2.75, 2.25, 1.5, 0.75, 0.3

### Summary Macroeconomic Effects (Table 6) — Selected outputs
- Panel [A] Shock, Lockdowns and Global Contraction (baseline passive domestic fiscal policy with external concessional finance)
  - Aggregate Output: Year 1: -7.2%, Year 2: -5.4%, Year 5: -1.8%, Year 10: -3.1%, Year 20: -3.3%, Year 50: -3.0%
  - Aggregate Consumption: Year 1: -5.0%, Year 2: -4.0%, Year 5: -1.9%, Year 10: -2.7%, Year 20: -2.9%, Year 50: -2.4%
  - Skilled Wage: Year 1: -9.1%, Year 2: -7.0%, Year 5: -1.8%, Year 10: -2.6%, Year 20: -2.8%, Year 50: -2.7%
  - Income of ex ante poor: Year 1: -5.7%, Year 2: -4.0%, Year 5: -1.6%, Year 10: -2.9%, Year 20: -3.1%, Year 50: -2.7%
  - Domestic Debt/GDP (initial = 15%): Year 1: 16.2%, Year 2: 15.9%, Year 5: 15.3%, Year 10: 15.5%, Year 20: 15.5%, Year 50: 15.5%
  - Total External Debt / GDP (initial = 38%): Year 1: 42.0%, Year 2: 40.6%, Year 5: 51.7%, Year 10: 41.5%, Year 20: 45.9%, Year 50: 56.2%
- Alternative domestic fiscal adjustments (examples under Panel [A]):
  - Domestic consumption taxation, recurrent transfers to households, and domestic tax plus reduced public infrastructure each have distinct year-by-year values for Aggregate Output, Aggregate Consumption, Skilled Wage, Income of ex ante poor, Domestic Debt/GDP, Total External Debt/GDP (all presented in Table 6).
- Panel [B] Fighting back: health and education investment
  - Pure external concessional financing:
    - Aggregate Output: Year 1: -7.1%, Year 2: -5.1%, Year 5: -1.5%, Year 10: -1.4%, Year 20: -0.1%, Year 50: -0.1%
    - Aggregate Consumption: Year 1: -4.6%, Year 2: -3.6%, Year 5: -1.5%, Year 10: -1.1%, Year 20: -0.1%, Year 50: 0.2%
    - Skilled Wage: Year 1: -8.7%, Year 2: -5.8%, Year 5: -0.5%, Year 10: -1.2%, Year 20: -0.2%, Year 50: -0.1%
    - Income of ex ante poor: Year 1: -5.7%, Year 2: -3.8%, Year 5: -1.3%, Year 10: -1.3%, Year 20: -0.1%, Year 50: 0.0%
    - Domestic Debt/GDP (initial = 15%): Year 1: 15.1%, Year 2: 15.1%, Year 5: 15.1%, Year 10: 15.1%, Year 20: 14.9%, Year 50: 14.7%
    - Total External Debt / GDP (initial = 38%): Year 1: 56.9%, Year 2: 57.1%, Year 5: 46.1%, Year 10: 58.5%, Year 20: 58.7%, Year 50: 53.5%
  - External finance plus domestic taxation; external finance plus domestic tax and reduced O&M are reported with their respective time-paths for macro indicators (see Table 6).
Notes on Table 6:
- 1/ See text for description of baseline shock ('Riding out the pandemic') and the health and education investment responses ('Fighting back').
- 2/ Domestic tax rates and recurrent and investment spending held at baseline levels with all fiscal adjustment financed from external concessional borrowing.
- 3/ Domestic recurrent and investment spending and real borrowing held at baseline levels; fiscal adjustment through changing domestic consumption tax.
- 4/ Domestic tax rates, investment spending and real borrowing held at baseline levels; fiscal adjustment through changing transfers to households.
- 5/ Domestic recurrent spending and real borrowing held at baseline levels; fiscal adjustment through reduced infrastructure spending plus small adjustments to tax rate.
- 6/ Concessional external finance capped at 50% of additional public investment increase with residual fiscal financing from consumption tax (subject to an initial 5-year freeze) and domestic borrowing.
- 7/ As previous run but with maintenance expenditure on public infrastructure capital reduced to 75% of optimal level for t = 1 to 5.

### Figures and Notes (Figures 1–8)
- Figure 1: Baseline Shock — dynamic response of baseline economy to Covid-19 shock with (i) ‘passive’ domestic fiscal policy and external concessional finance; and (ii) with domestic consumption tax adjustment.
- Figure 2: Fighting Back vs. Passive Baseline Response — 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 allocated to supporting basic education spending; external concessional finance adjusts to satisfy external and fiscal balance.
- Figure 3: Fighting Back with Domestic Financing — compares full external concessional finance with case where donors provide an additional 10 percentage points of initial GDP in concessional funding, covering approximately 50 percent of the additional public investment.
- Figure 4: Domestic Financing with Reduced Maintenance Spending — compares adjustment through taxation and domestic borrowing versus cases where maintenance expenditures are reduced to finance new public investment, with donors providing an additional 10 percentage points of initial GDP in concessional funding.
- Figure 5: Welfare: Covid-19 Shock and Fighting Back Strategies, Varying the Distributional Weight ζ — welfare evaluated at the private discount rate under different distributional weights ζ; runs correspond to Table 6.
- Figure 6: Welfare: Covid-19 Shock and Fighting Back Strategies, Varying the Social Discount Factor βs — welfare evaluated at ζ = 1 under different social discount factors βs; runs correspond to Table 6.
- Figure 7: The Tourism-Dependent Economy — dynamic response of tourism-dependent economy compared to baseline economy under passive domestic fiscal policy with external concessional finance adjusting.
- Figure 8: The Remittance-Dependent Economy — dynamic response of remittance-dependent economy compared to baseline economy under passive domestic fiscal policy with external concessional finance adjusting.

*Content extracted from the References and Tables/Figures section of the source PDF (wpiea2022025-print-pdf).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022025-print-pdf.pdf_