Economic recovery masks the dangers of a divided world

Nothing would be more foolish than policymakers in rich countries turning away from global challenges

Martin Wolf 

© James Ferguson

The big story from the recent meetings of the IMF and the World Bank is that the world economy is recovering substantially more quickly than expected even six months ago. 

But the recovery in the global economic aggregate masks what is happening to the world’s people. 

Both within countries and among them, the disadvantaged seem set to suffer the slowest recoveries. 

Moreover, this house divided may not stand: what is going on — above all, the slow global rollout of the vaccines — will worsen prospects for everybody.

The striking feature of the new forecasts from the IMF is that cumulative growth in global gross domestic product per head between 2019 and 2022 is now forecast to be only 3 percentage points less than was forecast in January 2020. 

This is far better than the 6.5 percentage point shortfall last year and the 4 percentage shortfall forecast for this year. 

This then is the picture of a world economy in both strong and better than expected recovery. (See charts.)

Even more striking, however, is the divergence. 

Advanced economies are now forecast to enjoy cumulative growth in GDP per head between 2019 and 2022 just 1 percentage point less than in January 2020. 

But emerging markets and low-income developing countries are forecast to suffer hits to growth in GDP per head of 4.3 (5.8, without China) and 6.5 percentage points, respectively. 

To those who have, it shall be given back. 

But, from those who have not shall be taken even the little that they had: in January, the World Bank reported the rise in the number of people in extreme poverty last year as a result of Covid-19 at between 119m and 124m. 

Given the dire forecasts, this calamity seems unlikely to reverse soon.

In essence, the IMF now forecasts that advanced economies and China will emerge from the crisis largely unscathed economically, with the US economy even a bit bigger than forecast beforehand, while emerging and developing countries suffer a large and long-term hit. 

But remember that two-thirds of humanity live in the latter.

This is the reverse of what happened after the global financial crisis of 2007-09. 

That is partly because it originated in the high-income countries. 

It is also because China’s recovery in 2009 was so strong. 

But the biggest reason for the difference now is that the high-income countries both possessed and employed the ability to manage this shock in ways that few other countries (China being the main exception) could do: rich countries could cushion the economic and social blow with exceptional fiscal and monetary policy responses; and they could develop, produce and deliver vaccines at high speed.

According to the IMF’s Fiscal Monitor, “in the past 12 months, countries have announced $16tn in fiscal actions”. 

But the bulk of this was in advanced countries. 

The fiscal deficit of advanced economies rose by 8.8 per cent of GDP between 2019 and 2020, to 11.7 per cent. 

It will still be 10.4 per cent in 2021. 

In emerging economies, the fiscal deficit rose by 5.1 per cent of GDP between 2019 and 2020, to 9.8 per cent. 

But in low-income developing countries it rose by just 1.6 per cent of GDP, to 5.5 per cent. 

Moreover, the Monitor stresses, “the rise in deficits in advanced economies and several emerging market economies resulted from roughly equal increases in spending and declines in revenues, whereas in many emerging market economies and low-income developing countries, it stemmed primarily from the collapse in revenues caused by the economic downturn”.

It would be unwise to take for granted the strong recovery forecast for the advanced economies. 

It is possible that new variants invulnerable to today’s vaccines will sweep across the world. 

It is highly likely that it will prove impossible to reopen borders soon. 

It is possible, too, that monetary and fiscal policies will turn out to have been too strong, especially in the US, as Larry Summers has argued, generating a strong upsurge in inflation, inflation expectations and real interest rates. 

If so, this would force policymakers to slam on the brakes and might generate debt crises among vulnerable borrowers both at home and abroad.

Moreover, even if high-income countries, China and a few others do recover strongly, many emerging and developing countries are likely to remain in great difficulty, as a result of a painfully slow rollout of vaccines, problems in managing debt, the stresses caused by worsening poverty and limited policy space.

Economies dependent on travel and tourism will find recovery particularly slow, especially if new variants continue to emerge. 

None of this is helped by the fact that many governments are corrupt, ineffective, or both. 

This always matters. 

In abnormal times, such as these, it matters even more.

Nothing would be more foolish than for policymakers in rich countries to breathe a sigh of relief and turn their eyes away from the global challenges they confront. 

They must instead do whatever it takes to get the whole world vaccinated by the end of next year and support the development of booster shots for all, if necessary. 

They must do what it takes to ensure that all countries have the resources they need to cope with these health and economic shocks. 

They must do what it takes, too, to ensure that, if debt crises emerge, they know who the creditors — official and private — are and how to manage the resulting negotiation.

Last but not least they must learn the lessons from this pandemic. 

It has so far killed 3m people and inflicted a big economic shock. 

The next one could quite easily be far worse in both these sad respects. 

Islands of supposed safety will not thrive in a world of menacing sickness.

Pandemic will leave little lingering damage for advanced economies, says IMF

Success in managing fallout will not be replicated in emerging economies, fund forecasts

Chris Giles in London

The IMF said it was confident about prospects of a rapid US recovery without inflationary pressures © Michael Nagle/Bloomberg

Most advanced economies will emerge from the coronavirus crisis with little lasting damage, thanks to the relatively rapid rollout of vaccines and their willingness to increase sharply public spending and borrowing, according to the IMF.

The likely success in managing the economic fallout from the pandemic will not be replicated in emerging economies, however, highlighting the divergence in economic fortunes, the fund said.

Even with differing fortunes, the global economic outlook had improved notably since the fund’s previous forecasts at the start of this year, it said on Tuesday, revising upward its expectations for almost all countries.

The global economy is set to enjoy two years of rapid growth in 2021 and 2022 of 6 per cent and 4.4 per cent, the IMF forecast. 

It also revised down the estimated scale of the contraction in global output caused by the advent of the pandemic last year.

The fund’s projections suggest the economic legacy of the pandemic will be nothing like the 2008-09 financial crisis, which left countries nursing a hangover of weak growth for a decade afterwards.

By 2024, advanced economies will produce about 1 per cent less output than their pre-pandemic growth path, according to the IMF forecasts. 

In contrast, after the 2008-09 recession they suffered a gap of more than 10 per cent.

Overall, the pandemic’s economic impact is “much smaller than the [2008-09] global financial crisis”, said Gita Gopinath, the fund’s chief economist, adding that advanced economies “are getting very little [economic] scarring and [in] the US [there is] effectively no scarring”.

The IMF revised upwards its forecast for US growth in 2021 by 1.3 percentage points from its previous projections in January. 

Canada’s projection rose 1.4 percentage points, Italy was up 1.2 percentage points and the UK up 0.8 percentage points.

The fund was particularly bullish about prospects of a rapid US recovery without inflationary pressures. 

Gopinath said: “The US is really the only large economy whose [economic output] for 2022 is projected to exceed what it would have been in the absence of this pandemic.”

However, the IMF noted that the economic and social pain of the crisis had hit certain countries, and groups of people within countries, much harder than others. 

Parts of Europe that are suffering another wave of coronavirus are likely to take longer to recover, but the IMF was optimistic that the EU would catch up with other advanced economies such as the US in just a few years.

By 2024, the IMF expects that even many of these lagging European economies will have almost returned to their pre-pandemic growth path.

That is largely because advanced nations and their companies have proved much more resilient to lockdowns than the fund had previously expected.

By contrast, the IMF expects the crisis to be a lingering drag on emerging economies where, with the exception of China, economic output in 2024 is forecast to be almost 8 per cent below the level the IMF had expected before the pandemic.

Nations most at risk of a sluggish recovery are emerging economies with little access to Covid-19 vaccines, those with weak public finances and those that are heavily dependent on tourism, the IMF said.

The hit to emerging economies in the short term will be compounded by the interruption of schooling during the pandemic, which has taken what the fund described as a “severe toll” on education in poorer countries because they have only limited capacity to deliver schooling online.

Gopinath said there was little cause for immediate concern about the unprecedented levels of fiscal stimulus on both sides of the Atlantic driving a rise in inflation, because global forces are likely to keep a lid on price rises and there is no sign yet that central banks or governments would lose control.

But it highlighted the risk that the US might need to lead the world in tightening monetary policy rapidly if inflationary pressures did rise rapidly. 

This could hit emerging markets particularly hard by driving capital flight back to developed economies.

However there is no sign so far that Us president Joe Biden’s $1.9tn stimulus has destabilised international markets, Gopinath said, flagging that as an encouraging sign.

The biggest losers from covid-19

Covid-19 is a disease of the poor and the powerless

During the pandemic one part of the workforce did not get to wear pyjamas during the day or join in marathon sessions of “Tiger King”. 

The people known as “key”, “frontline” or “essential” workers had to be in public spaces and often in close proximity with their colleagues. 

Many died.

Describing a worker as “key” is an arbitrary exercise (the label covers most journalists, for example). 

It usually includes occupations necessary to meet everyone’s basic needs—food, heating and transport, not to mention health care. 

Most such jobs cannot be done from home. 

Essential workers are more likely to be ethnic minorities. 

They are also relatively badly paid. 

The Institute for Fiscal Studies (ifs), a think-tank, reckons that the average key worker in Britain earns 8% less than other employees.

The pandemic has reminded key workers that without them society would grind to a halt. 

In its early phase homebound folk in Britain stood outside their front doors once a week and applauded the “heroes”. 

Yet as Camilla De Camargo and Lilith Whiley, two sociologists, argue in a paper, giving essential workers “an almost mythologised status and value” obscures the human suffering that many have endured.

Going to work during a pandemic can be a terrifying experience. 

According to a study in England, frontline workers have had “significantly higher prevalence estimates of depression, anxiety, and ptsd”. 

Part of the difficulty facing many key workers is that they cannot easily voice their grievances. 

Head offices are closed, and many do not have access to internal communication channels, such as a corporate email account.

Many essential workers have little bargaining power, so that if they feel unsafe there is not much they can do about it. 

One courier in England reports that his firm did not supply personal-protective equipment, leaving many riders unprotected. 

Colleagues who complain about clients not respecting anti-covid protocols have been fired. 

Governments are slow to hold careless employers to account, notably in the meatpacking and warehousing industries.

Imbalances of power are bigger in some places than others. 

A study in Toronto found that the death rate from covid-19 in the neighbourhood with the most essential workers was more than twice as high as in the one with the fewest. 

A study in California found that people of working age saw a 22% increase in mortality from March to October 2020. 

But bakers saw mortality rise by 50%, and line cooks by 60%. 

One class of people stayed home in their pyjamas; others went into workplaces that probably killed them.

Robert A. Mundell

He was an architect of supply-side economics and the euro.

By The Editorial Board

Professor Robert A. Mundell gives a keynote address in Asia Society Spring Gala Dinner Grand Hyatt, Wan Chai, May 3, 2007./ PHOTO: SOUTH CHINA MORNING POST VIA GETTY IMAGES

The pantheon of great 20th-century economists includes John Maynard Keynes, Friedrich Hayek, Joseph Schumpeter and Milton Friedman, among a few others. 

Less well known but as tall as any of those giants was Robert Mundell, who died on the weekend at age 88.

A Canadian by birth who settled at the University of Chicago and later Columbia, Mundell made his economics reputation as the foremost student of the international monetary system. 

He won the economics Nobel in 1999 for his work on “optimum currency areas” and the monetary theory of the balance of payments.

His work led him to advocate fixed exchange rates, famously disagreeing with Friedman, who favored a floating-rate system. 

The latter has dominated world monetary affairs since the collapse of Bretton Woods in 1971, but not for the better if frequent bouts of economic and financial instability are evidence.

Mundell’s work laid the foundation for the euro, which has become a remarkably resilient reserve currency as he predicted in a paper as early as 1969. 

Mundell argued that fixed rates anchored in price stability allow more efficient trade and capital flows, while rapidly fluctuating rates lead to economic dislocations or worse. 

He often called the euro-dollar rate the most important price in the world.

The euro is in bad odor these days with economists who say you cannot have a common currency without an underlying fiscal union. 

But Mundell himself believed that the euro would lead to closer fiscal collaboration (see his writing nearby), in particular that the euro’s monetary discipline would reduce the ability of politicians to devalue their way out of borrowing and spending to excess. 

The eurozone’s problems today aren’t due to the euro but to the failure of politicians to implement the supply-side reforms necessary to prosper in a system of monetary restraint.

Mundell is best known to readers of these columns as an architect of supply-side economics. 

The left derides this part of Mundell’s legacy as a political sideline unrelated to his Nobel work, but the two are linked. 

It’s forgotten now, but the stagflation of the 1970s was a colossal failure of the Keynesian model. 

Mundell understood this partly as a failure of international economics, with the collapse of Bretton Woods triggering global inflation.

Mundell’s prescription, working with his Chicago colleague and friend Art Laffer, was to use different policy levers to solve different economic problems. 

Tax cuts would stimulate growth, while tighter money would slay inflation. 

In that sense Paul Volcker, the great 1980s Federal Reserve Chairman, was a Mundellian. 

Global capital markets would finance U.S. budget deficits until faster growth restored tax revenues, which is what happened.

The Keynesians predicted none of this. Mundell’s ideas ushered in the economic boom of the 1980s that, with the exception of the brief recession of 1990 caused by the savings and loan crisis and an ill-advised tax increase, continued to the end of the century.

International monetary reform was the one unfinished part of Mundell’s policy mix, and these days we doubt anyone in Washington even understands the issue. 

The global economy is an afterthought. 

The exception are China’s central bankers, who became students of Mundell and are working to turn the yuan into a reserve currency to challenge the dollar and establish a yuan currency zone.

Bob Mundell’s ideas will live on, even if the country that first put them to work now forgets that they brought two decades of prosperity.

The New China Shock

Like China's accession to the World Trade Organization in 2001, the country's new strategy for achieving economic self-reliance and geopolitical dominance poses an unprecedented challenge to the West. The difference this time is that Western leaders are no longer committed to a fanciful vision of "reciprocal engagement."

Mark Leonard

BERLIN – Some months ago, the Chinese authorities approached some of the biggest foreign companies in the country and asked them to tap a representative to participate in a small closed-door gathering on China’s new economic strategy. 

The meeting was to be with a senior official at an undisclosed time and location, and, according to two people with direct knowledge of the matter who insisted on anonymity to discuss it, companies were asked to send only ethnic Chinese representatives. 

In both content and form, the episode captured China’s eagerness to make its economy more recognizably Chinese, developing its own technologies and energy sources while relying on domestic consumption rather than on foreign demand. 

Chinese President Xi Jinping’s new strategy centers on the concept of “dual circulation.” Behind the technical-sounding phrase lies an idea that could change the global economic order. 

Instead of operating as a single economy that is linked to the world through trade and investment, China is fashioning itself into a bifurcated economy. 

One realm (“external circulation”) will remain in contact with the rest of the world, but it will gradually be overshadowed by another one (“internal circulation”) that will cultivate domestic demand, capital, and ideas.

The purpose of dual circulation is to make China more self-reliant. 

After previously basing China’s development on export-led growth, policymakers are trying to diversify the country’s supply chains so that it can access technology and know-how without being bullied by the United States. 

In doing so, China will also seek to make other countries more dependent on it, thereby converting its external economic links into global political power.

The shift to a dual-circulation strategy raises the specter of a new “China shock” that could dwarf the impact of the first one, which struck Western economies after China’s accession to the World Trade Organization in 2001. 

Although China’s inclusion in the WTO generated a huge amount of wealth and lifted millions of Chinese out of poverty, it also created losers in places like the American Rust Belt and the United Kingdom’s “red wall” districts, setting the stage for the UK’s Brexit referendum and former US President Donald Trump’s election in 2016.

The West’s political class took a long time to wake up to the China shock, because it had committed to a strategy of “reciprocal engagement,” whereby Western consumers would benefit from low-cost Chinese imports, and Western companies would profit from China’s economic growth by tapping its massive market. 

These dynamics, it was assumed, would pressure China into opening up its market and society even more. But this assumption has not been borne out.

The new China shock’s impact on the West will differ fundamentally from the first one. 

For starters, the dual-circulation strategy will affect different parts of the economy and society. 

Rather than endangering legacy industries, the goal is to dominate cutting-edge sectors and compete with legal and financial firms in the City of London, automakers in Baden-Württemberg, and biotech firms in Sweden.

Specifically, Xi’s 2015 “Made in China 2025” plan emphasizes sectors such as artificial intelligence, semiconductors, batteries, and electric vehicles, and aims to increase the domestic content of core technological components to 40% by 2020, and to 70% by 2025. 

The goal is to use state subsidies, export controls, and controls on data to allow Chinese firms to replace foreign ones – or to make the foreign firms more Chinese. 

If Xi’s plan succeeds, the new China shock could hollow out as many high-paid jobs in tech and services as the first one did in heavy industry and textiles.2

The shock will not end there. 

Today’s main geopolitical contest is not just about enforcing global rules; it is about who makes them. 

Whereas the West previously struggled to secure Chinese compliance with the trade, investment, and intellectual property (IP) frameworks it had crafted, China is now also seeking to make and enforce the rules. 

There are already or have been Chinese heads at the International Telecommunication Union, the International Organization for Standardization, and the International Electrotechnical Commission, and Chinese companies are increasingly trying to define the future of technology. 

Huawei alone holds more than 100,000 active patents, particularly in 5G technology, where it is competing with Western companies like Ericsson and Nokia to set global standards.

Moreover, today’s competitive tensions are no longer contained within a bilateral Western-Chinese relationship. 

With its Belt and Road Initiative, China has already established a network of economic ties with more than 100 countries, and it will not hesitate to use these channels to export Chinese standards along with its model of state capitalism and state subsidies. 

Soon (if not already), Western companies will face the same uneven playing field in third markets as they do in China itself.

One implication of the new China shock is that the new rules on data, research and development, and standards will force prominent Western companies to acquire Chinese characteristics, unless they withdraw from China altogether. 

As one well-placed private-sector observer put it to me, “China’s idea is that if companies like Daimler or Volkswagen want to work in China, they will have to move services, R&D, and new products there. 

Beijing hopes that dual circulation will transform them into Chinese companies.”

Needless to say, the new China shock demands a different set of responses than the old one did. 

Rather than trying to transform China or make inroads into the Chinese market, the West’s priority must be to transform itself, not least by developing industrial and investment policies to spur innovation and protect its IP. 

And to ensure that their economic “champions” have access to economies of scale, Western countries must establish shared standards for privacy, data protection, carbon pricing, and other issues. 

Ideally, this cooperation would formalize new trade agreements, investment packages, financing, and regulations to expand the share of the global economy that is open to non-Chinese technologies and frameworks.

Europeans, for their part, will need to enact domestic reforms to protect themselves from economic coercion in a world of gated globalization and weaponized interdependence. 

While much of the attention now is on China’s crackdown in Hong Kong and repression of the Uighur minority in Xinjiang, there is an even bigger shockwave approaching. 

Western leaders must not be caught off balance again.

Mark Leonard is Co-Founder and Director of the European Council on Foreign Relations.