The stimulus packages should be carefully designed to rebuild the social protection and national health systems. It is well known that “universal systems find it easier to mobilise resources and adapt rules and practices than fragmented, private ones that have to worry about who pays whom and who is liable for what”
The Covid-19 pandemic has impacted the $90 trillion global economy beyond anything experienced in nearly a century. While the full impact cannot be known for some time as many countries are still struggling to contain the virus spread, the pandemic-related economic and human costs will undoubtedly have long-term repercussions through the tragic loss of lives and livelihoods.
The pandemic has exposed the vulnerability of the global economy that has been building up for decades since the counter-revolution against Keynesian and development economics in the 1980s; but gathered paced since the multinational corporations (MNCs)-led super globalisation in the 1990s.
Not only has the world become more inter-dependent through financial linkages and webs of supply chains of MNCs, but also deregulation, privatisation, liberalisation and financialisation benefited only a small fraction of the population at the expense of falling or stagnant productivity and wages. As a result, inequality widened and economic insecurity increased, exacerbated by declines in public provisioning of basic services, undermining public health and social protection systems.
Policymakers shied away from addressing the fundamental causes of several crises in the late 1990s (e.g., Asian, Mexican and Russian financial crises) and during the first decade of this century (e.g., dotcom, food, fuel and global financial crises). It seems that policymakers are failing once again as they focus on an immediate rescue path to "business as usual".
Stimulatory packages are based on the assumption that the "shock" of the pandemic will be short-lived and reversible. They miss the significance of the structural weaknesses in their economies and social systems that were coming to a head before this health crisis emerged.
Fluid global growth forecasts
Understandably, the global economic situation remains highly fluid due to the uncertainty about the length and depth of the pandemic-induced economic recession. There are also uncertainties concerning the effectiveness and sustainability of government policies to cushion the shock.
This fluidity is reflected in the growth forecasts by major international organisations. For example, the Organisation for Economic Cooperation and Development (OECD) lowered its forecast of global economic growth for 2020 in June to -6.0 percent or -7.6 percent, depending on a single or double wave of infections. The World Bank also lowered its forecast of global growth to -5.2 percent.
Labelling the pandemic response as the "Great Lockdown" in April, the International Monetary Fund (IMF) projected a decline in global economic activity by 3.0 percent in 2020, the "worst recession since the Great Depression". In June, the IMF lowered its growth forecast further to -4.9 percent. But it remained optimistic that the global economy would grow by 5.4 percent in 2021, even though it would be "more gradual than previously forecast", and would "leave 2021 GDP some 6 and a half percentage points lower than in the pre-Covid-19 projections of January 2020.
While the pandemic significantly affected almost all economies in the world, obviously the impacts will vary across countries, depending on the extent of the health crisis and policy measures put in place.
Massive injection of funds
Most central banks have cut interest rates and increased liquidity in their financial systems through a combination of measures, such as lowering reserve requirements and Basel 3 recommended capital conservation and countercyclical capital buffers, creating temporary lending facilities for banks and businesses, and easing loan terms. It is estimated that central banks have committed $17 trillion to support their economies to counter pandemic-related economic effects.
Supporting monetary actions, governments have adopted various fiscal measures to sustain economic activity. These measures include cash transfers to households, an extension of unemployment insurance or social security benefits, temporary postponement of tax payments, and increasing guarantees and loans to businesses.
The IMF estimated that government spending and revenue measures to sustain economic activity adopted through mid-June 2020 amounted to $5.4 trillion and that loans, equity injections and guarantees an additional $5.4 trillion, totalling $11 trillion.
The IMF also estimated that the increase in borrowing by governments globally could rise from 3.7 percent of global gross domestic product (GDP) in 2019 to 9.9 percent in 2020.
Multilateral organisations and financial institutions also extended their support. For example, the IMF announced that it "stands ready to mobilise its $1 trillion lending capacity to help its membership." It is also tapping its Catastrophe Containment and Relief Trust Fund to cover six months of debt payments owed by 29 low-income countries to the IMF, and proposed to double its emergency financing to about $100 billion.
The World Bank in March 2020 promised an additional $14 billion to assist governments and businesses address the pandemic. But as of June 1, 2020, the Bank had approved or was in the process of approving, 150 Covid-19 projects, totalling $15 billion, in 99 countries. Other multilateral development banks have committed roughly $80 billion over the next 15 months to respond to Covid-19.
On March 3, 2020, G-7 finance ministers and central bankers released a statement, indicating that they will "use all appropriate policy tools" to sustain economic growth. The statement also promised "a strongly coordinated international approach", but mentioned no specific actions. Countries have pursued their divergent strategies, in some cases, including banning exports of medical equipment.
There are also concerns about the G20's ability to deliver as the Trump Administration prioritise "America First" over multilateralism. Saudi Arabia, the 2020 chair of the G20, itself is embroiled in its domestic economic issues with falling oil revenues, made worse by its oil price war with Russia.
A good number of G20 members are dragged into the US-China tensions, stoking conspiracy theories to shift blame to China for the pandemic, and thus making it more difficult for a unified G20 response. Recently, China-India relations deteriorated significantly, dashing all hopes of coordinated international efforts to revive the global economy and tackle the health crisis.
Synchronised slowdown in global economic growth, especially in manufacturing and trade, had developed prior to the viral outbreak. Yet, the pandemic's economic effects were expected to be short-term supply issues as factories were closed and strict lockdowns were enforced to reduce the spread of the virus. The drop in economic activity, initially in China, has had international repercussions as supply chains were disrupted.
However, virus-related supply shocks are creating more prolonged, and wide-ranging demand shocks as reduced activity by consumers and businesses lead to a lower rate of economic growth. The longer the crisis persists, the greater the economic impacts are likely to be as the effects are spread through trade and financial linkages to an ever-broadening group of countries, firms and households.
Therefore, absent globally coordinated actions, the initial relief measures quickly turned into trillions of dollar fiscal stimulus packages, contributing to global public debt reaching its highest level in recorded history, at over 100 percent of global GDP, in excess of post-World War II peaks. Failure to revive the global economy reasonably quickly will create a massive debt burden leading to a vicious circle of stagnation and debt unsustainability.
Countries acting alone also seem to have ignored long-term consequences, or efficacies of commitment to continued liquidity support through unconventional monetary policies. A massive increase in liquidity due to such measures since the 2008-2009 global financial crisis (GFC) has fuelled asset price bubbles, and thus not only increased the fragility of the financial sector but also contributed to growing inequality.
The global debt level was already high and growing before the pandemic, reaching 230 percent of global GDP in 2018, according to the World Bank. Public debt grew to over $63 trillion in absolute terms or around 81 percent of GDP. Paradoxically this happened despite cuts in government expenditures, especially in public health and social protection sectors in the name of reigning deficits and debts.
The public debt situation was aggravated by tax cuts which failed to boost investment and growth contrary to the claims by the proponents. The failure to create a robust recovery from the GFC also played a significant role in the rapid rise in the debt-GDP ratio.
As governments retreated from initial fiscal measures, the task of reviving the economy from the GFC fell entirely on monetary authorities who resorted to so-called unconventional monetary policies of providing liquidity at very low or even negative interest rates.
While governments did not take advantage of the historically low interest rates to boost productivity enhancing public investments, the private sector used the easy cash to buy-back shares and to engage in speculative activities, creating stock or asset price bubbles instead of productive investment.
Thus, ironically, unconventional monetary policies have increased the financial sector's fragility as central banks have been unable to mop up excess liquidity fearing collapse of the financial sector. Unconventional fiscal policies also helped loss-making "zombie" firms to survive.
The decision of US Federal Reserve and European Central Bank's decision to buy corporate debts created moral hazards by incentivising firms to take a greater risk on the assumption that the Fed and ECB will step into the rescue them.
In short, policy responses since the GFC did not systematically address deeper structural malaises such as stagnant (and in some cases falling) productivity growth and wages, growing inequality and economic insecurity, chronic underfunding of the health sector and social protection, and of course, all-encompassing climate crisis.
Most governments eschewed productivity enhancing public investment, revenue enhancing measures through improved tax progressivity, strengthening universal public health and social protection systems, curtailing monopoly power, capping executive pays and curbing speculative finance.
The design of policy measures matters. As countries prepare for recovery, they should ask what 'recovery' can and should mean. To address the many problems we have to contend with, it should not mean a return to 'business as usual'.
First, as workplaces and social spaces – where people meet, socialise, shop, etc. – have to be redesigned and repurposed to meet precautionary public health requirements, such as physical distancing. Second, the pre-Covid-19 unsustainable, financialised and grossly unequal economy needs to be fundamentally transformed.
Therefore, the stimulus packages should be carefully designed to rebuild the social protection and national health systems. It is well known that "universal systems find it easier to mobilise resources and adapt rules and practices than fragmented, private ones that have to worry about who pays whom and who is liable for what", as recently highlighted in The Economist (March 12, 2020).
For longer-term resilience, sustainability, social cohesion and shared prosperity, governments should recalibrate their policies to achieve balanced global growth; to create decent jobs; to address rising inequality; and to tackle climate crisis.
This would require inclusive policymaking at the national and global levels. At the national level, institutionalising social dialogue – involving workers, professionals, businesses and civil society organisations – will be necessary. At the global level, developing countries must be involved in redesigning global economic governance architecture in addition to heightened policy coordination among major economies.
Anis Chowdhury is an Adjunct Professor at Western Sydney University and the University of New South Wales (Australia). He has held senior United Nations positions in New York and Bangkok.