Gita Gopinath on a just recovery from 'the great lockdown'

When the Covid-19 outbreak struck last year it quickly became clear we were facing not just a global health crisis, but a potential economic catastrophe. Today, as many developed nations are celebrating the beginning of the end, it looks as if a crash has been avoided.

How was this possible? And, with infection rates still rising in many developing countries, how do we ensure a truly global recovery?

Gita Gopinath, Chief Economist at the International Monetary Fund (IMF) and Professor of Economics at Harvard University, joined Elias Papaioannou, Co-academic Director of the Wheeler Institute for Business and Development at London Business School to discuss the ramifications of the pandemic and the future of the world economy.

Here are her key takeaways:

2021 is not 2008 part two

2020 saw the biggest peacetime recession since the Great Depression. The world economy’s growth fell to – 3.3%, a loss many orders of magnitudes bigger than during the Global Financial Crash (GFC) of 2008, when growth slumped to – 0.1%. So why hasn’t there been another crash?

One answer is that this recession has a clear cause, which is external to global markets. But there’s also been a much faster, far more comprehensive outpouring of support for those affected. Governments have carried out unprecedented interventions and central banks have uniformly slashed interest rates and provided exceptional levels of liquidity. This time, rather than needing government support to stay afloat, banks have been able to play a role in distributing government support to the wider population.

But it’s not all positive. Whereas the GFC hit developed countries the hardest, the aftershocks of the Covid crisis will likely disproportionally impact emerging markets in developing countries.

The good news: debt is growing but stable

Italian Prime Minister Mario Draghi has suggested “now is not the time to talk about debt”, and he’s right. Debt has risen, yes, but it’s largely sustainable. Borrowing was necessary to save lives and livelihoods – without which future recovery would have been impossible. By offering extra support when it was so desperately needed, governments have been able to protect not just their citizens, but the very fabric of the global economy.

Moreover, places like the US and most of Europe, where medium-term fiscal frameworks were already strong, are able to borrow at very low rates of interest. Their debt might have increased but their debt servicing costs remain manageable, meaning repayment is possible. The stimulus packages might have been large, but there’s no reason they should lead to persistent inflation.  Of course, governments will need a post-pandemic plan, but broadly there’s no need to panic and now is certainly not the moment to withdraw support from recovering markets.

However, many developing countries will require some form of debt relief or restructuring. The IMF and the G20 are already providing this, and the IMF has also provided extra financing without conditions to eighty plus countries, but there are fears this disparity is only the tip of the iceberg.

The bad news: recovery will likely be asynchronous

China was already back to pre-pandemic levels of growth by the end of 2020 and the US is not far behind. But it’s important that we don’t let these success stories distract us from the reality: cases continue to rise and, for many developing countries, the crisis is still at its peak.

These contrasts will only become clearer as we recover. The IMF’s five-year projections for the annual hit to per capita income suggest a loss of 2% for developed countries, but up to 6% for developing countries and emerging markets. Essentially, the poorer you are, the poorer you’ll be.

The potential for human suffering is horrendous; in 2020 alone an additional 95 million people were classified as being in extreme poverty, relative to pre-pandemic projections. We must ensure that the last year and a half does not undo two decades worth of progress in curbing inequality.

Vaccine discovery is only half the battle

It’s true that we must recognise our success in developing effective vaccines. But, again, we must make sure the rollout of these vaccines doesn’t further entrench divisions. While places like Israel, the UAE, the US and the UK are enjoying swift, well-managed vaccination programs, vaccine access around the globe remains highly inequitable.

There could be as many as nine billion doses available by the end of the year, but most of these have already been pre-purchased by rich countries. If we’re not careful, we could also see a rise in ‘vaccine nationalism’, with individual countries looking to exert strict export control on vaccines.

To make any real progress, we need to take a global approach. It was clear by the middle of last year that a vaccine would be possible, but there should have been more conversations about enhancing production and democratising access. The World Health Organisation tried to do this with COVAX, but that had very limited success. Governments need to be proactive too – or else this creeping nationalism could continue to expand. 

There’s no room for complacency

Even once sufficient doses of the vaccines are secured, distribution is expensive and time-consuming. In the meantime, we must continue to social distance and wear masks, but also keep investing in contact tracing and genome sequencing.

It’s a long road, but the alternative is dire. We’re seeing this as cases skyrocket in India, causing unimaginable suffering. The economic aftershocks of the current situation there won’t be fully understood until the summer, but with India representing 7% of the global economy on a purchasing power parity basis, the impact of this new outbreak will likely be felt around the world. If this repeats across Africa, which is entirely possible, the consequences will be devastating.

A ‘green recovery’ must address job losses

US President Joe Biden’s 1.9 trillion-dollar recovery package makes some positive steps towards a greener economy but, until carbon pricing is addressed, we still have a long way to go. Looking to the future, we need a plan not just to reach net zero emissions, but to support those people currently working in the fossil fuels industry who will lose their jobs.

What next?

To move forward, we must prioritise grappling with rising inequality. In almost every part of the world, if you look at who is struggling, you’ll find it’s people with little education, people in low-income households, women and other minorities. None of these issues were caused by the pandemic, but if we’re not careful it will compound them.

In many ways it seems we’ve learnt the right lessons from the GFC. During times of crisis, the state must step in and invest in human capital, rather than cracking down on borrowing and making the situation worse. We’ve been talking for years about the need for universal healthcare, free broadband and policies that properly address rising automation; the need for these initiatives is now clearer than ever before. There are no more excuses.

We also need to start thinking seriously about a global minimum corporation tax. There are questions as to how exactly this would be managed but it could help curb escalating social unrest, by ensuring a more equal distribution of wealth and resources.

This crisis is global; it needs global solutions and countries need to work more closely than ever before to make sure that the world recovers from this as one. Otherwise we risk emerging in a place of great divergence, with rising geopolitical tensions.

 

Elias Papaioannou’s conversation with Gita Gopinath is part of the Wheeler Institute’s Rethinking Capitalism series. Please follow the link to view previous conversations with leading academics including Professors Esther Duflo, Abhijit Banerjee, Thomas Philippon and Rebecca Henderson.