Shaping the post-pandemic economy, a global perspective

21 Jan 2021

Apart from aggravating the problem of inequalities among nations the pandemic is creating joblessness within countries and since global policies cannot be tailored to suit the requirements of all individual countries, there cannot be any guarantee that the IMF, or any international institution for that matter, would be able to help bring about a job-lead economic recovery

As the New Year dawns and the year 2020 comes to a close, the world is still struggling to get on its feet from the debilitating blow inflicted by the pandemic caused by the new coronavirus that started showing up first in China’s Wuhan province towards the close of 2019.

The virus has claimed over a million lives and inflicted irreparable damage to economies across the world. It is not just an year wasted, it is a full year of unaccountable losses for mankind.

But despair can give way to hope if we seize the opportunity to both address the current crisis and the problems that brought it about. What is needed is a global effort to jump-start growth, to put the global economy not just on a higher growth rate but also on a more sustainable growth trajectory, as the chief economist of the International Monetary Fund (IMF) Gita Gopinath put

The IMF has called on leaders of the Group of 20 (G 20) major economies to lead a shift in economic thinking that includes new policy priorities for shaping the global economy as the effects of the coronavirus pandemic starts subsiding.

A sustainable recovery of the global economy calls for green initiatives, new statistical methodologies and challenges, innovation in sovereign debt restructuring, fighting corruption, and preventing economic scarring, the IMF stated in a December issue of its Weekend Read.

Ahead of the virtual summit of G20 leaders, IMF Managing Director Kristalina Georgieva had urged governments to continue with strong policy action to combat the ongoing uncertainty caused by the pandemic.

Writing in a blog, she called for swift and concerted efforts for ending the health crisis, reinforcing the economic bridge to recovery, and building the foundations of a better economy.

For strengthening the bridge to recovery, she suggested that donor countries avoid premature withdrawal of policy support and instead prepare for a synchronised infrastructure investment push once the pandemic gets under control.

A study prepared by IMF staff showed large potential gains when G20 nations made coordinated investments. According to the study, a coordinated increase in infrastructure spending by major economies – those having the fiscal strength - by 0.5 per cent of GDP in 2021 and 1 per cent of GDP in the following years - and if fiscally constrained economies invest a third of that amount in subsequent years they could lift global GDP by close to 2 per cent by 2025.

An unsynchronised investment, on the other hand, could lift economies by less than 1.2 per cent, says the study.

IMF is assuming the role of a thought leader, trying to herald new thinking on finance, economy and environment, where policy coordination is the key.

As IMF Chief Economist Gita Gopinath said in an interview with the Financial Times, there is a need for a multi-pronged economic strategy that addresses climate change, the future of globalisation, and the effect of the pandemic on widening inequality.

According to her, the pandemic is bringing about a revolution of sorts on how economies function and interact – the narrowing scope of multilateralism in general.

While finding an effective vaccine for the coronavirus pandemic is one area that brings countries together, the probability of the quest for the vaccine creating `also rans’ could further aggravate the level of inequalities, she says.

Also, the pandemic has already stalled progress in terms of access to opportunities - in education and healthcare, she pointed out in the interview with the FT's European economics commentator Martin Sandbu.

Apart from aggravating the problem of inequalities among nations the pandemic is creating joblessness within countries by hastening the process of automation. This complicates the process of coordinated action to lift the global economy out of its present gloom.

Since global policies cannot be tailored to suit the requirements of all individual countries, there cannot be any guarantee that the IMF, or any international institution for that matter, would be able to help bring about a job-lead economic recovery.

For those who lost their jobs in the pandemic, there is no hope of getting them back.

Environment-friendly growth

The new coronavirus has given the world a chance to end the conquest of nature and ease the pain of climate change. The pandemic has taken more than a million lives, thrown hundreds of millions out of work, and is projected to wipe out $28 trillion in global output over the next five years.

A sound solution to the crisis is a strong, coordinated, green investment push that addresses both environment and livelihood.

World leaders have a great opportunity for making coordinated decisions to catalyse green investments to both kick-start the recovery and reduce the chances of climate catastrophe, according to the IMF.

The G20 leaders have already committed over $12 trillion in fiscal spending for coronavirus recovery, and many also make new investments. But, what is more important is coordinated investments and fiscal spending, which would reduce the fiscal burden on individual countries

As the IMF pointed out, there are immense ways of investing in climate-friendly growth like plantations, forests and mangroves, soil conservation, climate friendly and energy efficient buildings, renewable energy and smart electricity grids, climate-resilient infrastructure and expanding green public transportation.

Investing in off-grid renewables would help connect billions living in the hinterlands while generating growth that is more horizontal.

The cost of green growth should not deter green projects – both in the developed countries and the developing world.

Need for policy shift

The economic and fiscal policies followed by countries across the world, especially the advanced countries, have only helped to bring about lopsided growth within individual economies and globally. This, in turn, has helped trigger political upheavals in country after country.

There is an urgent need for economic policy rethinking, including on the old orthodoxies about public spending, central banking, and government intervention in the economy.

For what was normal till yesterday for an economy is no more desirable after the coronavirus struck. The pandemic has brought about an upheaval – both social and economic – ever seen in the peacetime world.

While some orthodoxies gave way to radical thinking and out-of-box solutions to problems, the enormity of the problem is deterring more radical changes. Also, the state has to take more risks now as the private sector is both unwilling and incapable of rising to the occasion.

Fiscal policies and tax rules should encourage equity finance rather than debt funding, in order to make both investors and employees more risk-alert, which would be more conducive to productivity growth.

So far during the pandemic, most countries have been taking ad hoc measures rather than new policy measures to keep the economy ticking. Although the pandemic is still not over, it is now time to shape the long-term path – to find permanent solutions.

Perhaps the lone exception could be the Middle East where the oil-fed economies are trying to find new moorings once the days of fossil fuel get over, and some have, in fact, come a long way along the path.

This, however, is not in any way connected with the current pandemic, though.

While inequalities existed at all times, the pandemic and the worldwide lockdowns have helped to show the depths of the society’s fault lines by widening the gaps – social and economic.

While in advanced economies where conventional forms of employment and contracting are established practices and there are social safety nets for the unemployed, the informal labour market continues to be a burden on developing and poorer countries.

Securing jobs

The pandemic has created a vacuum in the career path of the young professionals and students who were in the process of building skills and gaining formal employment. It also stopped the skilling process for specialised trades in its track. Billions of students across the world have been denied formal school and college education.

The crisis is hampering access to opportunity for many and this cannot be seen as a temporary hit, for its effects will linger on. Governments would have to strengthen labour market regulations and improve protection of workers through stronger social safety nets.

The new service sector jobs, offered by mostly app-based businesses, have found takers in the absence or scarcity of formal jobs. But they were left in the lurch in the lockdowns as neither state nor employers offered any support to these groups.

They, along with some other marginalised employee groups, remained largely unidentified by the state and uncared for by employers, worsening the inequalities that were already prevalent.

It is these groups of service sector workers without any social security buffer who were hit disproportionately hard by the pandemic.

The disproportionate damage to these groups left the worse-off the worst hit and no amount of government support has reached them.

These unskilled workers already face lower wages, less job security, and little capacity to save for a rainy day. With the pandemic, most of them were thrown out of jobs – and there is no way to work remotely.

For the new world workers the only hope is retraining and re-skilling, especially in jobs connected with reforestation and conservation and making buildings more energy efficient.

In order to make jobs secure and well paid, the workplace should become more productive, involving more inputs by labour and the entrepreneur.

Alternatively, technology upgrades and improved labour productivity can make enterprises more productive and sustainable.

While countries speak of financial inclusion, about 1.7 billion adults are still unbanked, and roughly twice as many are not online.

In developing countries like India, financial inclusion also requires government action to improve financial literacy, remove legal barriers to property ownership, and provide proof of identity — so that people can open bank accounts and access digital financial services.

Capital flows

International capital flows provide significant benefits for economic development but it creates volatility, for which no insulation mechanism is available. This is true in case of economies where the market has no depth and also in economies that are too dependent on external funds.

This is one reason for the volatility of the Indian rupee. The Indian rupee is down 3 per cent after foreign investors poured in over $50 billion into Indian stocks, start-ups and in direct investments.

For investments to fructify, there is a need to generate strong demand, which is backed by ample purchasing power. State can help improve demand by policies that encourage productive sectors. Monetary and fiscal policies should be so calibrated to build up demand pressure, so that the supply side just fits in to cope with demand, of course keeping inflationary pressures under check.

And, for investments to be competitive, there should be infrastructural incentives in the form of better transport and IT connectivity, local infrastructure and amenities to make places attractive to live in, and policies to make financing available for new ventures.

There is no return to the pre-pandemic days and there cannot be as the virus has fundamentally changed the way people work, think and live, the way they interact. People may hope for a return to the old world, but it seems nearly impossible unless a miracle cure emerges for the pandemic.

In order to prevent the loss of a whole generation, especially in the developing world, governments must think of massive shifts to alternative investments that provide sustainable growth and generate gainful employment.

And, to put the world back on its feet, the IMF and the World Bank along with other global financial institutions should invent another Marshall Plan.

Governments across the world have provided about $12 trillion in fiscal lifelines to households and firms. But not much of that has gone to help healthcare workers, delivery drivers, sanitary workers and all other people who have made a difference during the pandemic.

According to IMF’s Regional Economic Outlook for Europe, Fall 2020, the coronavirus pandemic hit Europe particularly hard, leading to the worst economic contraction in 2020, especially among the world's largest economies.

Countries across Europe responded swiftly to protect incomes and productive capacities and governments deployed large fiscal packages to support households and firms, with job retention programmes preserving at least 54 million jobs. But the outlook for 2020 remains bleak and the recovery will be partial and uneven. IMF projects economic activity in Europe this year to decline by 7 per cent and rebound by 4.7 per cent in 2021. The recovery path is exceptionally uncertain, the report noted.

Growth in Latin America and the Caribbean (LAC) has slowed from 1.0 per cent in 2018 to 0.2 per cent in 2019, but a tentative pick-up to 1.8 per cent is expected in 2020, says the IMF report.

There are no universal policy fits that can be applied across economies worldwide without causing disparities in growth and economic wellbeing. The optimal policy for any economy would depend on the nature of the problems and country characteristics.

Universal policies will generally suit countries with flexible exchange rates, deep markets, and infinite market access. But won’t suit countries that are characterised by poorly developed markets and uncertain inflationary pressures.

But, then, the optimal policy mix for any country also depends on the actions of other countries and global institutions. Such policies are intended to avoid any negative effects on macroeconomic and financial stability, and possible negative impact on trade.

Such policies may be seen as supporting under/overvalued exchange rates, substitute for warranted macroeconomic adjustment, or impede price discovery and competition.

Trade flows ebb

Trade has been the worst hit as global supply chains dried up and demand got fractured as economies contracted. Imports and exports fell sharply.

Falling imports along with rising capital flows helped boost current account surplus of many a country but this was at the cost of a sharp decline in local demand.

But, the spike in current account surplus acted as a forced saving in times of the coronavirus crisis, which helped most countries avert a build-up of pressure on domestic currencies.

While traditional mode of trade took a beating, it was the e-commerce platforms that kept both domestic and international trade alive.

Global trade has grown remarkably over the last two decades and according to available data, about a fourth of total global production is exported. But trade has generated both gains and losses, causing distortions in economies that are less competitive.

Supporters of globalisation argue that trade stems from comparative advantages based on efficiency in production. But efficiencies can be added through extraneous sources like fiscal and trade policies like incentivising production and exports.