The permanence of the losses caused by the pandemic depends on the size of the scars
Martin Wolf
© James Ferguson
“Covid-19 is the most adverse peacetime shock to the global economy in a century.”
Moreover, this recession “is the first since 1870 to be triggered solely by a pandemic”.
Both observations come from the World Bank’s excellent new Global Economic Prospects.
They illuminate the scale of the damage. Never can there have been a greater need for an ambitious and co-operative response. Alas, not for a long time have these qualities been so absent.
One of the report’s salient conclusions is the scale of uncertainty about what lies ahead. We know that we are in the midst of an extraordinary global economic contraction. We do not know how deep and persistent it will be, nor how long its adverse effects will last.
We are, after all, at an early stage in managing the disease. That is particularly true for emerging and developing countries, where Covid-19 is still taking off. Measures to contain it are especially hard to implement there, given the dependence of so many on work in the informal sector and the limited health and fiscal capacities of governments.
Their sole advantage is the relative youth of their populations.
Yet managing the disease is only a part of the challenge now confronting emerging and developing countries. Many of them are highly vulnerable to global economic shocks. This one is of devastating proportions. They have been buffeted, to varying degrees, by a global slump, sharp falls in commodity prices, flight from risk in financial markets, a huge decline in remittances and receipts from tourism and a large decline in world trade.
Many are likely to be forced into default. Moreover, the impact on their economies is unlikely to be brief. Many economies and billions of people are likely to be scarred. This might be the beginning of many lost years, or even worse, for multitudes.
Much depends on the economic consequences.
The bank indicates that the range of possible outcomes for global economic growth this year (at market exchange rates) falls between minus 3.7 and minus 7.8 per cent. For emerging market and developing economies, it falls between minus 0.5 and minus 5 per cent.
The bank expects a return to growth in 2021, at between 1.3 and 5.6 per cent in the world and between 2.7 and 6.4 per cent in emerging and developing economies. This means that output is quite likely not to recover to 2019 levels before 2022 in emerging and developing countries. It will not return to levels implied by a continuation of pre-pandemic growth until well after then, if ever.
The permanence of the losses depends on the nature of the scars. As the report notes, “severe recession has been associated with highly persistent losses in output”. Low levels of capacity use deter investment and leave a legacy of obsolete capacity. Expectations of weak future growth discourage investment and so become self-fulfilling.
Long periods of unemployment cause loss of skills and may permanently deter workers from seeking jobs. Countless companies will disappear for ever.
Beyond this, in emerging and developing countries, the crisis threatens severe underfunding of important health and welfare programmes. The loss of sustenance for many may cause severe longer-term damage to health and other malign consequences for workers and their families.
Many may die of maladies unrelated to the pandemic. The education of many children may be permanently damaged.
Other important longer-term threats include short-sighted policy reactions. There may, as in the 1930s, be a permanent shift away from market economics and international trade. The self-defeating policies of import substitution followed by many developing countries after the second world war had their roots in that era’s calamities.
Today, it is almost conventional wisdom to condemn globalisation and the international integration of supply chains. But, as the report stresses, both have proved powerful engines of economic development. Remember that we saw an extraordinary decline in the proportion of people in extreme poverty, from 43 per cent in 1980 to 10 per cent in 2015.
Avoiding both enduring damage and permanent mistakes is crucial. But so, too, is providing adequate assistance today. A recent high-level plea to the Group of 20 leading countries noted that the crisis may plunge 420m people into extreme poverty.
Moreover, it adds, 80 per cent of children have been out of school. It is a matter of high moral and practical urgency, given the interdependence among countries, to contain such outcomes, with all the dire consequences they must bring.
More help is needed.
The IMF has argued that emerging and developing countries need $2.5tn, far more than now available. Further debt relief is a necessity for the poorest countries and also for debt-encumbered emerging countries. It is crucial, too, to help emerging and developing countries meet the public health challenges confronting them.
Beyond this, there is an opportunity to accelerate the world’s shift away from a carbon-intensive pattern of economic activity. Needless to say, the outcomes depend also on policy choices made by leaders of the emerging and developing countries themselves.
When future generations look back at this crisis, will they view it as a decisive turning point and, if so, in which direction? Will they conclude that we understood that a pandemic is a shared crisis needing an effective and co-operative response?
Or will they conclude, instead, that we allowed our capacity for co-operation and the fragile progress of economic development to wither away?
We do not know their answer.
That depends on what we now decide.
We know what we should do: act, together.
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