'Covid-19 has left many patients with debilitating symptoms after the initial infection has cleared. This is "long Covid". What is true of health is likely to be true of the economy, too. The pandemic is likely to give the world not just a deep recession, but years of debility. To meet the threat of a "long economic Covid", policymakers must avoid repeating the mistake of withdrawing support too soon, as they did after the 2008 financial crisis.' - 'The threat of long economic Covid looms' by Martin Wolf
According to International Monetary Fund's October edition of the World Economic Outlook (WEO), the global economy has been forecast to grow at negative 4.4 per cent during 2020, with advanced economies to have an even more grim recession at negative 5.8 per cent, while emerging and developing economies to also have a significant recession at negative 3.3 per cent; where Pakistan has been projected to have an economic recession at negative 0.4 per cent during the current year.
While it appears in the Report that the Fund expects a rather quick economic recovery, of the sort of a slightly stretched 'V' shape, since it expects global economic growth to enter well into the positive zone next year at 5.2 per cent - with advanced economies following the global trend and slightly under at 3.9 per cent, while emerging and developing economies even surpassing the global economic outlook for 2021 at 6 per cent, and within it Pakistan at 1 per cent - the second wave of the pandemic already getting underway as the first months of winter set in, such optimism although hoped for, is quite misplaced for both developed and developing countries.
Having said that, China remains an exception, which after falling into recession only for first quarter of 2020 at negative 6.8 per cent, grew in the second and third quarters at 3.2 per cent, and 4.9 per cent, respectively. China, according to WEO, is expected to grow at 1.9 per cent during 2020. Yet, according to a Wall Street Journal article 'China's acceleration may not rescue world from coronavirus slowdown', it is unlikely that the country could play the same role it played after the 2008 financial crisis, as the article points out: 'But some economists warn that expecting China to continue spending, producing and exporting at these levels is wishful thinking - especially as the government clamps down on debt and global uncertainties pile up because [a] its stimulus has been much more subdued than in 2008, and focused not on handing cash directly to consumers but on indirect boosts... [b] Chinese consumers' ability to spend has also been constrained by rising debt... [c] Chinese exporters' surprise gains this year aren't likely to hold up as other exporting nations resume production and reclaim market share... [and d] frictions with the Western world, from the U.S. to Europe to Australia, are at a historic high.'
Another issue with the optimism of WEO whereby expecting drastic growth rebound in 2021 is that 2020 has rather presented a 'K' shaped economic recovery - the economic returns for the rich, and there too mostly in tech companies, and in the shape of rise in portfolio investments and not in the real economy, while the economic growth recovery pattern for all the rest is likely to take time to be on any sort of sharp positive growth trajectory. Hence, while the real economy is likely to continue to suffer in terms of growth prospects, the boom in stock market for mainly tech companies is likely to continue - as being witnessed in Pakistan also - and therefore this divergent growth trajectories of the nature of the letter 'K', along with possibilities of more waves of Covid and the presence of 'long Covid' phenomenon as well, all mean that the economic growth recovery would more likely remain an up-and-down sort of a 'W' shape in the short run, and a rather prolonged 'U' shape in the medium term, taking more time than is being hoped for by the WEO.
The existence of a 'K' shaped recovery is given further credence by a study done by Swiss Bank UBS, which highlighted that in terms of economic gains billionaires performed 'extremely well' during the pandemic - whereby the wealth of the world's richest people increased at a phenomenal rate of 27.5 per cent during April-July 2020 to reach US$ 10.2 trillion (where billionaire count also increased from 2,158 in 2017 to 2,189), while according to WEO the living standards and prospects of people generally fared quite miserably during the pandemic whereby 'close to 90 million people could fall below the $1.90 a day income threshold of extreme deprivation this year. In addition, school closures during the pandemic pose a significant new challenge tha could set back human capital accumulation severely.' IMF's chief economist, Gita Gopinath, recently highlighted in this regard that 'The persistent output losses imply a major setback to living standards relative to what was expected before the pandemic. Not only will the incidence of extreme poverty rise for the first time in over two decades, but inequality is set to increase.'
Given these divergent growth prospects, and also because business confidence and liquidity are running low in the private sector, the International Monetary Fund's other important publication in the shape of October 2020 'Fiscal Monitor' therefore underlines the importance of enhancing public investment - given in these times of uncertainty and damage to liquidity position of private businesses in this recession - is extremely important; something similar to what was pointed out after the 2008 financial crisis, but which is even more relevant given the relatively greater gravity of the recession now, by Roger Farmer in his article 'Confessions of a Keynesian heretic' as 'Governments can, and should, restore demand and engineer a smooth return to sustainable growth.'
Moreover, in a recent article 'Public investment for the recovery' Vitor Gasper quantifies such an impact as 'Public investment has a central role to play. Our new Fiscal Monitor shows that increasing public investment in advanced and emerging market economies could help revive economic activity from the sharpest and deepest global economic collapse in contemporary history. It could also create millions of jobs directly in the short term and millions more indirectly over a longer period. Increasing public investment by 1 per cent of GDP could strengthen confidence in the recovery and boost GDP by 2.7 per cent, private investment by 10 per cent, and employment by 1.2 per cent if investments are of high quality and if existing public and private debt burdens do not weaken the response of the private sector to the stimulus.'
Having said that, while in developed countries the impact of public investment on economic growth has traditionally been quite significant given their strong institutional fundamentals, the developing countries will have to make a larger effort in terms of not only raising the level of public investment, but also drastically enhancing the quality of public economic institutions, through providing better governance and incentive structures, for both underlying organizations and markets. This is important to reduce the high level of pilferage in public expenditure, as highlighted in a recent IMF publication 'Well spent: how strong infrastructure governance can end waste in public investment': 'Losses and waste in public investment are often systemic. On average, more than one-third of the resources spent on creating and maintaining public infrastructure are lost because of inefficiencies. These inefficiencies are closely linked to poor infrastructure governance - defined as the institutions and frameworks for planning, allocating, and implementing infrastructure investment spending. Estimates suggest that, on average, better infrastructure governance could make up more than half of the observed efficiency losses.'
At the same time, raising the level of public investment would require a greater debt relief effort by both the debtor- and creditor countries/private creditors. This is important not only because of a significant level of stimulus provided during the pandemic by countries overall up till now, but also due to the heavy backlog of sovereign debt amassed by frontier and emerging economic since 2005, which increased from US$ 1 trillion in 2005 to recently at US$ 3.2 trillion.
Also, Martin Wolf highlighted in the same article that according to the WEO 'All this spending is going to raise public deficits and debt substantially. The global general government fiscal deficit is forecast to hit 12.7 per cent of GDP this year; in high-income economies, it will reach 14.4 per cent. The global ratio of general government debt to GDP is forecast to jump from 83 to 100 per cent of GDP between 2019 and 2022, with that for high-income countries going from 105 to 126 per cent.' At the same time, in terms of where to focus more in terms of public investment, IMF's fiscal affairs deputy director, Paolo Mauro indicated that 'The place to start is maintenance, which is very labour intensive and can address crumbling infrastructure.'
Hence, along with debt relief effort and reducing the pilferage of public expenditure, the IMF points out that countries will have to come up with innovative ideas for an enhanced public resource mobilization effort to support needed deep- and long-ended public investment effort in the wake of the pandemic. In this regard, the WEO recommends: 'Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis - including increasing tax rates on higher income brackets, high-end property, capital gains and wealth.'
Such innovative ideas are all the more important for emerging economies, as pointed out by a Financial Times article 'Pandemic will cause 'lasting damage' to living standards, IMF warn' by Chris Giles. According to Giles, 'Because economies will be smaller, the risk that tax revenues will be inadequate to service public debt in the medium term will rise, the IMF said. This is particularly the case in emerging economies, which have not been able to borrow on financial markets at as low a level of interest rates as leading advanced economies have.'
(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund)
Copyright Business Recorder, 2020