The five card trick for recovery
Reflections on this year’s World Bank — IMF Spring Meetings
“We have had to perform at one and the same time the tasks appropriate to the economist, to the financier, to the politician, to the journalist, to the propagandist, to the lawyer, to the statesman-even, I think, to the prophet and to the soothsayer’ — Lord Keynes at the founding of the IMF and World Bank
The pandemic is not over but a panorama on life after lockdown is now a little clearer. This week, the chaos wreaked by Covid to the world economy was lit up at the Spring meetings of the IMF and World Bank and from the debates has emerged the five card trick politicians must now perform to get us up the hill ahead.
There is at least some good news. A more rapid global economic recovery is now forecast. The sheer speed and scale of the economic shock this last year was cataclysmic; an economic contraction three times deeper and two times faster than the great financial crash a decade ago. But there hasn’t been huge damage to balance sheets and savings rates are very high. The service sector which has taken the brunt of the damage is likely to recover fast and as such there’s unlikely to be deep scarring to the economy — as long as long term unemployment is not allowed to grow. So far, there has been no bank crash because policy makers moved so fast with the economic CPR as central banks across the globe surged in an unprecedented $10 trillion in monetary stimulus
But here’s the challenge.
Left to itself, this recovery will not fairly shared.
Covid brutally exposed inequalities in the gig and informal economy along with those countries with big inequalities in access to technology. Now the risk is what’s called in a polite society ‘a multi-speed recovery’. In other words, good for some; and bad for others. ‘Large firms and public-sector institutions’, says the World Economic Foundation, ‘with direct access to government and central bank stimulus packages will make some areas of the economy recover fast but leave others out. Those that get left out are the usual whipping boys: small and medium-sized enterprises (SMEs), blue-collar workers, and the dwindling middle class’.
So, the first priority of politicians everywhere is make sure lives and livelihoods are safe. While millions were infected by Covid, billions were affected; the lockdown required to control 127 million infections and manage 2.8 million deaths has pushed more than 100 million people into extreme poverty, cost the equivalent of 250 million jobs, and plunged a quarter-billion people driven into acute hunger.
‘Pre-existing inequalities have amplified the adverse impact of the pandemic’ argued Vitor Gaspar, the director of the IMF’s fiscal affairs department this week, ‘And, in turn, Covid-19 has aggravated inequalities. A vicious cycle of inequality could morph into a social and political seismic crack’.
That means challenge number one is to drive through the vaccination programme and drive down spiralling levels of unemployment. This is absolutely key to avoiding a ‘great divergence’ of a K-shaped recovery, where the fortunes of some rise and the fortunes of others fail.
Cooperation has produced miracles. The Covid virus was sequenced and published within days and in just a year vaccine output scaled from 5 million to 10 billion doses. Many countries that got the initial response wrong — the UK, the USA, Israel — learned fast and did well during the second phase of vaccination.
But global vaccination is far from finished. By the very nature of a rapidly mutating virus, no-one is safe until everyone is safe, and South America and parts of Africa — could take until 2023 or later to reach widespread vaccination.
Yet, there now is no trade off between health and economic policy. Vaccine policy is economic policy, and frankly that is unlikely to change in a world that now understands zoonotic pandemics aren’t some sort of black swan events; 75% of all emerging infectious diseases are zoonoses like SARS, MERS, Ebola, rabies, Zika, or avian and swine flu. These are now emerging approximately every five years.
Second, politicians have to act to rescue sectors, workers and families hit disproportionately hard. Some 250 million jobs have been lost world-wide and global poverty has now risen for the first time this century. In advanced economies, the biggest rises in unemployment have been in the wholesale and retail trade, transportation, accommodation and food service, and arts and entertainment sectors which means different workers had different experiences. But the young, women and low skilled workers were hit hardest because their jobs are concentrated in contact-intensive services and the informal sector.
It is now critical that long term unemployment is not allowed to set in for these groups. Half of workers who are unemployed for longer than a year tend to be forced to switch occupations, and a switch of occupation generally entails a 15% pay cut.
‘Lower-skilled workers experience a triple whammy’ warns this year’s Global Economic Outlook, ‘they are more likely to be employed in sectors more negatively impacted by the pandemic; are more likely to become unemployed in downturns; and, those who are able to find a new job, are more likely to need to switch occupations and suffer an earnings fall’.
Third, politicians now have to re-surge investment into health and education systems. Along side the need for huge resources for health and vaccination programmes, the world is contending with the worst education crisis in a century. The cost of this for lost lifetime earnings for Generation Z is up to $10 trillion worth of lost lifetime earnings. That’s the equivalent of 10% of global GDP. Quite a price.
Fourth, we now have to redirect investment to help new sectors grow, and this will mean job losses in some industries and new jobs elsewhere. Some of these investments are colossal; a deep dive into urban investments found that cities across emerging markets alone could attract more than $29 trillion in green buildings, public transport, electric vehicles, waste management, water treatment and renewable energy. ‘The only place where there’s friction-free change is in economic models’ said one IMF official this week, ‘It doesn’t happen in the real world.’ So, governments will need to help industries and workers transition from old industries to new.
Finally, policy makers have to navigate a riptide. On the one hand, we need to surge new investment in vaccine delivery, tackling unemployment, rescuing affected sectors and workers, rebuilding health and education systems, and redirecting investment into decarbonisation. All while paying down the costs of the crisis. Not only has lockdown collapsed tax revenues worldwide, it has required huge subsidies to businesses and workers. The April 2021 Fiscal Monitor estimates that global fiscal support reached nearly $16 trillion, and an incredible $24 trillion has now been added to the global debt burden.
If the Biden stimulus triggers inflation and US rates rises follow, that could have disastrous knock on consequences for the rest of the world. Today, the IMF is sanguine about that risk — but such is the debt mountain, that policy makers at the IMF are moving beyond the traditional simplicities of ‘high-debt-bad, low-debt-good’ to a more sophisticated take on borrowing.
A decade ago, writers like Ken Rogoff and Carmen Reinhardt (now chief economist of the World Bank) were counselling that debt burdens of 100% of GDP were a recipe for slower growth. Now there’s a lot more nuance. ‘The key is to understand what the debt is for’ advised one IMF adviser this week, ‘I think of debt as good, bad or ugly……’. Some debt is caused by high subsidies to bad activities. But, ‘good debt’ helps build infrastructure and human capital development which is good for growth.
Taxes will have to rise for some. Vitor Gaspar, the IMF’s head of fiscal affairs, told the Financial Times that a symbolic rise in taxation from those who have prospered over the past year was a good idea. The G20 has got to get its act together on carbon pricing, and this is a vital argument the UK must lead at COP this year; the IMF believes today’s carbon price at $2 a ton is at fraction of where it should be, which at least $75 a ton.
We will have to get better at shifting subsidies — like toxic subsidies to carbon generating forms of agriculture (about $600 billion a year globally) or carbon-heavy energy use — towards cleaner methods and cleaner infrastructure, especially in cities (although cities occupy only two percent of global land area, they account for over 70 percent of global green house gas emissions) to help us decarbonize the key sectors that account for more than 90% of global greenhouse gas (GHG) emissions; energy, transport and food systems. Every year, G20 countries put tens of billions of dollars into subsidizing high carbon industries. That has to change.
But many countries are going to need huge amounts of support. Half of all low-income countries were already in debt distress or at a high risk of it before Covid, and now some nations like Sudan are crushed by a burden of over $50 billion of external debt.
So what are the international agreements the world’s leading nation’s should consider at the G7 in June?
First, they should push for a large issuance of special drawing rights (SDR’s), the International Monetary Fund’s global reserve asset. While Trump was in the White House, this was impossible. Now that has changed. As matters stand, the IMF could immediately issue about $650 billion in SDRs without seeking approval from member-state legislatures. Crucially, a re-allocation of Special Drawing Rights currently held by countries which do not use them would help significantly.
Second, there is still huge amounts of IMF borrowing capacity still available from the $1 trillion of capacity put in place by the G20, led by Gordon Brown, back in 2009. More may soon be needed to be surged through the IMF’s Rapid Credit Facility designed to provide low-access, rapid, and concessional financial assistance to Low Income Countries facing an urgent balance of payments need.
Third, government’s need to step up the pressure behind the G20 Debt Service Suspension Initiative (DSSI). This has already helped 43 countries postpone $5.7 billion in debt-service payments, with further savings of up to $7.3 billion expected by June. Yet, bondholders and other private creditors have continued to collect full repayments throughout the crisis. This is wrong.
Some nations are paying 6 or 7% on their official bilateral debt at a time when high-income advanced economies have enjoyed a collapse in short- and long-term interest rates to nearly zero. These benefits of “low for long” need to be extended to poor countries. And they could if G20 countries instructed and created incentives for all their public bilateral creditors, including national policy banks.
Fourth, the UK needs to step back up to 0.7% of GDP as its international development target as part of a campaign to lead financing for the this year’s round of International Development Association funding. Founded in 1960 to help the world’s poorest countries, IDA reduces poverty by providing grants and very long-term, zero-rate or near-zero-rate loans, providing $30 billion last year, a quarter of it as grants.
With just ten and half thousand days to go until the 2050 climate deadlines, the perils of the K-shaped recovery will dominate policy thinking as we move from the pandemic to the Paris Climate deadlines while conquering poverty along the way. Markets alone will not solve this. Between now and 2050, global GDP is forecast to double as we shift from lockdown to liftoff. That in theory is plenty to invest in going green and ending poverty. Our International Finance Institutions are moving well beyond the economic orthodoxies of the past. Creatives states — led by creative politicians — will now be required to make the same move.
ENDS
