Emerging
Stronger From the Great Lockdown
The
managing director and the chief economist of the International Monetary Fund
lay out a strategy for sustained recovery.
BY KRISTALINA GEORGIEVA, GITA
GOPINATH
SEPTEMBER 9, 2020, 8:00 AM
LORENZO
PETRANTONI ILLUSTRATION FOR FOREIGN POLICY
For more than six months, the world has
grappled with the severe health and economic consequences of the COVID-19
pandemic. Global economic activity collapsed in the second quarter of 2020,
when about 85 percent of the global economy was in lockdown for several weeks.
As the International Monetary Fund (IMF) first stated in its April World Economic Outlook, this is without
historical parallel.
In its severity, the Great Lockdown of 2020 has
naturally evoked comparisons to the Great Depression, which began in 1929. But
today’s crisis is truly like no other. Although it’s too early to make a
definitive judgment, we can already say that the severity and speed of the
declines in economic output, employment, and consumption during the Great
Lockdown were far greater than at the onset of the Great Depression. In just
one month, from March to April, the U.S. unemployment rate roughly tripled
to 14.7 percent, a level not reached in the Great
Depression for nearly two years.
Equally unique has been the sharp rebound of output,
consumption, and employment. With more than 80 percent of countries easing
lockdown restrictions, the global economy has begun to recover from the depths
of the downturn. The speed of this turnaround is also in dramatic contrast to
the Great Depression, during which negative growth persisted for four years and
the cumulative global contraction far exceeded that which is projected for the
Great Lockdown.
The ongoing recovery is the result of the easing of
lockdown restrictions as well as the rapid implementation and unprecedented
scale of supportive policies by the world’s central banks and governments—a
third major distinction from the Great Depression. This crisis, however, is far
from over. The recovery remains very fragile and uneven across regions and sectors.
To ensure that the recovery continues, it is essential that support not be
prematurely withdrawn.
The recovery is the result of the easing
of lockdown restrictions as well as the rapid implementation and unprecedented
scale of supportive policies by central banks and governments.
Even as people return to work, employment rates in
many countries have not returned anywhere close to pre-crisis levels. Job
losses have hit younger and lower-skilled workers especially hard. Globally,
the International Labor Organization estimates that the equivalent of 400
million full-time jobs were lost in the second quarter of 2020. And we know
from recent global surveys that next to the
virus itself, unemployment is people’s highest concern. The impact on global
poverty is expected to be severe, with the World Bank projecting 71 million additional people
falling into extreme poverty.
Securing a sustained recovery and emerging stronger
from the Great Lockdown will require action on three fronts: First, the health
crisis must be brought to an end—durably and everywhere. Impressive advances in
vaccine development raise hopes that this objective can be achieved. Second,
people need to be able to find productive jobs. This requires preventing
excessive firm bankruptcies and creating an environment for job-rich growth.
Finally, our future must be more sustainable and inclusive than our past. This
requires policies to arrest global warming and reverse rising inequality.
Many countries will face daunting fiscal challenges in
trying to reconcile the spending required to fight the crisis with the
constraints imposed by higher debt and declining revenues. Low-income countries
will require continued financial support from the international community.
Though the world has learned to live with
the virus, a full recovery is unlikely without a permanent medical solution.
Lingering uncertainty about the virus and the fear of recurring outbreaks are
weighing on mobility and the confidence of consumers and businesses. The
availability of a vaccine, or therapies with proven success in treating
COVID-19, will materially lift the global outlook.
The speed with which countries have committed
resources to developing a vaccine is without historical precedent and can only
be commended. As of Sept. 8, at least 128 vaccines are under
development, and 37 have reached human trials. Historical evidence suggests
that an effort of this scale has a 90 percent chance of developing a
successful product.
But concerning the vaccine, we must urgently devise
multilateral solutions for three looming challenges: timely production, a
globally adequate supply, and an equitable distribution.
The human and financial costs of delaying a vaccine
will be substantial. Delaying production until a vaccine has successfully
passed all medical trials could add up to 18 months to its distribution in many
countries, potentially choking the recovery. Governments can act now to
introduce risk-sharing mechanisms—such as purchase guarantees, financing, or
collaboration with public research institutions—in order to prompt private
firms to commit to production before trials can be successful completed.
Even once a vaccine is found, not every
country will have the capacity to produce enough doses to immunize all its
citizens.
Advance purchases have financial risks because
vaccines may fail, but those risks are trivial compared with the losses imposed
by this health crisis on the global economy, which the IMF projects will reach more than $12
trillion by the end of 2021. A foresighted strategy to provide government
support for vaccines will lead to long-run cost savings as economies recover
faster than they would otherwise.
Even once a vaccine is found, not every country will
have the capacity to produce enough doses to immunize all its citizens. The
world’s richer countries have struck agreements to secure doses in advance,
potentially squeezing the supply for the rest of the world. That is why several
global organizations have developed COVAX, a risk-sharing scheme for the rapid and
fair distribution of vaccines to all countries.
As the Bill & Melinda Gates Foundation has stressed, cooperation across countries can
decisively lower the risk of an inadequate vaccine supply. The world should act
immediately to coordinate manufacturing capacity across regions, significantly
increase the resources for production facilities, and commit to subsidizing
vaccines for the poorest countries.
Globally synchronized, equitable vaccine distribution
is in every country’s interest. An uneven rollout might improve economic
conditions in countries that secured the vaccine first but would not shield
them from weak demand from trade partners struggling to recover without a vaccine.
Next, we must ensure that workers have
quick access to productive work opportunities. Job loss has been shown to be
associated with long-lasting damage to productivity, wages, and human capital.
Firms must be supported to preserve jobs. In a
standard recession, the goal is to provide liquidity to solvent but illiquid
firms and to restructure insolvent firms so that capital and labor can be used
more productively. But the unique nature of this crisis warrants a fresh,
tailored approach. Firms in virtually all sectors of the economy have been
abruptly and simultaneously affected by the crisis, requiring a variety of
lifelines to prevent even larger job losses beyond what has already occurred.
Given the severity of the shock, there are likely to
be far more insolvent than illiquid firms in the months ahead, with high
potential for mass bankruptcies in the absence of widespread support for
insolvent firms. These are firms that would otherwise be viable in the absence
of the pandemic. If they are pushed into liquidation, the world will suffer
large social costs from the loss of organizational and human capital. At the
same time, it is increasingly evident that some sectors requiring close contact
between people, such as travel, may fall into prolonged decline. Many firms in
these sectors may no longer be viable. This will require gradually unwinding
the lifelines extended to these firms so that labor and capital may be
reallocated away from such shrinking sectors to growing sectors such as online
retail and other e-commerce.
Well-designed government interventions during the next
stage of the crisis will require a comprehensive differentiation between viable
firms, including those that may be currently insolvent, and unviable firms more
permanently affected by the crisis. Support should be provided to viable
businesses and to the employees of unviable business as they are wound down.
Where uncertainty about the path of the crisis makes the assessment difficult,
policymakers should err on the side of caution.
It is increasingly evident that some
sectors requiring close contact between people, such as travel, may fall into
prolonged decline.
Where governments have the fiscal resources, there is
a strong argument for equity-like interventions in large and small firms alike.
This includes direct equity injections or junior debt claims for larger firms
and grants in return for a temporarily higher future corporate tax rate for
small and medium enterprises.
In all countries, steps should be taken to tailor
bankruptcy procedures and resolution mechanisms to the needs of the current
crisis. Policymakers in many countries have reacted swiftly by amending
insolvency laws. Several countries in the European Union—including the Czech
Republic, Germany, and Spain—have suspended firms’ obligations to file for
bankruptcy. The U.S. CARES Act, which amended the U.S. bankruptcy code to
assist small businesses, is another example.
Policymakers should complement solvency support with
hiring subsidies and programs to reskill affected workers. But the reallocation
to new sectors will not be seamless. Displaced workers should be supported
during the transition, for example by expanding the scope and duration of
unemployment insurance. Labor market institutions should act flexibly for the
swift reabsorption of displaced workers. The abrupt rise in remote work
arrangements is a clear signal to invest in a large and inclusive expansion of
broadband internet connectivity and to subsidize enhanced data subscription
packages—especially where internet penetration remains low—in order to more
effectively prepare the labor force of the future.
In emerging markets and other developing economies where
the informal sector is large and labor market institutions are small or
nonexistent, policies can be geared toward expanding employment in the formal
sector through targeted hiring subsidies. Public works programs present an
additional opportunity to maintain income for low-income workers, including
through labor-intensive green jobs in soil and water conservation,
reforestation and flood protection, and the retrofitting of buildings to make
them more energy efficient.
Long-term challenges such as climate change,
inequality, and sustainable development remain as important as ever. The
current phase of low energy prices presents policymakers an opportunity to
remove distortionary, environmentally damaging, and often regressive fuel
subsidies, freeing up these funds for more productive uses. To boost the
recovery, governments can accelerate green investment and implement
well-sequenced climate change mitigation strategies.
A two-pronged approach to mitigation can help make
faster progress toward our shared goal of lowering greenhouse gas emissions.
The first prong is a green investment push that supports a quick recovery. The
second element is to embark on a clear path toward higher carbon prices that
incentivize firms and households to switch to low-carbon activities and energy
sources while also generating some of the revenues required for green
investment and reducing public debt. Coordinating carbon pricing across
countries, ideally through an agreement that sets a carbon price floor for
major emitters, will make it more effective in reducing emissions at minimum
cost.
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Governments can also reorient policies toward making
economies more resilient to the catastrophic effects of climate change. This
requires prioritizing investment in smart infrastructure and other adaptation
strategies—such as energy-efficient buildings, district cooling systems,
floodwater management systems, storm shelters, embankments, and
drought-resistant crops. As climate change and weather shocks weigh heavily on
agricultural productivity and food security in some regions, well-designed
safety nets are also critical. Together with climate change mitigation
strategies, these investments in resilience can support green, job-intensive,
and innovation-driven growth.
The pandemic has exacerbated inequality by
its disproportionate impact on low-skilled workers, women, youths, and those
already living on the margins of society.
The pandemic has exacerbated inequality of income and
opportunity by its disproportionate impact on low-skilled workers, women,
youths, and those who were already living on the margins of society. In
addition, young children, especially those from poor households, may suffer
permanent losses in building up their human capital from a lack of schooling,
adequate nutrition, and medical access. These losses will have lifelong
implications, further raising inequality and lowering social mobility. Left
unchecked, growing disparities will lead to long-lasting grievances and
ultimately to social unrest.
Governments must address rising inequities with
comprehensive and wide-ranging actions. They must ensure the provision of
essential health services, widen social safety nets, and enable a rapid and
fair distribution of a vaccine as soon as it becomes available. They must
preserve access to schooling with measures to ensure that all school-age
children benefit from distance learning. Reliable access to affordable food for
the hardest-hit households is critical and will involve protecting local food
supply chains and, at the global level, coordinating food security policies and
disavowing food protectionism. Developing countries have made progress in
reducing poverty and improving people’s access to basic services. This
decades-long work must not be undone. Governments must remain committed to the
United Nations’ Sustainable Development Goals and prioritize policies that
support inclusive growth.
A sustainable future requires sustainable
finances. This crisis has put great demand on fiscal resources, and many
countries will be challenged by rising debt levels that could trigger debt
distress. To keep debt sustainable, governments may need to make tough choices
on spending during the crisis while ensuring their interventions are designed
for maximum efficiency. Over the medium term, many countries will have to
increase their revenue—including through greater tax compliance, progressive
taxes for individuals as well as companies that have made windfall profits
during the crisis, and by reducing poorly targeted and wasteful spending.
There has been remarkable adaptation and
innovation in medicine and technology, in government policies, and in everyday
living.
To ensure that developing countries can finance
critical spending, concessional credit must be made available for a prolonged
period. The global financial safety net should be strengthened—and in some
cases, global coordination will be required to reprofile or restructure debt.
In all these areas, vulnerable countries can count on the IMF’s continued
support and policy advice. The fund has already provided emergency financing at
unprecedented speed and scale to 75 countries, including 47 low-income countries,
and we are ready to provide further support to a wider range of middle-income
countries. Our lending commitments have now reached about $270 billion, a third
of which has been approved since March. We have an additional $730 billion in
lending capacity that we can put at the service of our member countries should
the need arise.
This crisis has tested people and governments around
the world in previously unimaginable ways. The human toll has been tragic, with
some 900,000 deaths worldwide as of September.
Yet there has been remarkable adaptation and
innovation in medicine and technology, in government policies, and in everyday
living—all of which has made it possible to restart the world economy. A major
financial crisis has been avoided so far. Vaccines are being developed at
historic speed, and remote work in the knowledge economy and telemedicine have
made the impossible possible.
The world’s collective reaction to this crisis should
give us confidence that we can build a more prosperous, sustainable, and
equitable future. And we must aspire to no less.
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Kristalina Georgieva is the managing director of
the International Monetary Fund. Twitter: @KGeorgieva
Gita Gopinath is the chief economist of the
International Monetary Fund. Twitter: @GitaGopinath
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