Two Proposals for Ambitious 2021 Reforms
Coping with Compound Shocks
Developing countries and small economies are facing the prospect of more frequent and devastating compound shocks, defined as multiple disruptive events—including natural disasters, economic and financial crises, and pandemics—striking simultaneously or in rapid sequence. In 2020, Bangladesh, Fiji, Honduras, India, the Philippines, Mexico, Nicaragua, and 11 countries in the Sahel faced combinations of the COVID-19 pandemic; economic shocks associated with the pandemic and measures to contain it; and extreme weather events, including drought, floods, and/or hurricanes, that were exacerbated by climate change.
Compound shocks are more devastating than isolated shocks, for several reasons. First, they stretch health care delivery, social safety nets, and disaster response systems too thin, making effective relief and response difficult or impossible. Second, they can leave reserve funds and public budgets dangerously depleted, leaving countries more vulnerable to future shocks. Third, they can result in “cascading failures”—situations in which the collapse of one system, such as power generation or transportation networks, can lead to failures of other systems, such as food supply chains and water and sanitation systems.