Tue, May 4, 2021

The global economic recovery is a concerning tale of two worlds

Blog Post by Jeff Goldstein

China Economy & Business Europe & Eurasia Fiscal and Structural Reform India Macroeconomics United States and Canada

The global economy is recovering from the COVID-19 pandemic faster than expected. This spring, the IMF made an upward revision to its forecast and projected the world economy will grow by 6 percent in 2021. In the first quarter of 2021, growth (on an annualized basis) was 6.4 percent in the United States and 18.3 percent in China. Despite the legitimately optimistic picture these numbers paint, a tale of two worlds is unfolding. Recoveries in low-income developing countries (LIDCs) and emerging markets (EMs) are expected to be weaker and slower than richer countries, creating a “K-shaped” global recovery. This divergence creates serious economic risks in the short and long term for all countries, even those recovering well like the United States.

The primary drivers behind the IMF’s optimism were “additional fiscal support in a few large economies” and “the anticipated vaccine-powered recovery in the second half of 2021.” However, fiscal support, public health measures, and vaccine distribution have been major challenges for many LIDCs and EMs. As a result, the World Bank estimates 119 to 124 million people were pushed into extreme poverty in 2020–reversing decades of gains in living standards– and slow recoveries in LIDCs and EMs will continue to lower incomes for those most in need.

Aside from the devastating humanitarian implications of fractured growth trajectories, if for no other reason, stronger performing economies should have a vested interest in addressing this dynamic for their own well-being. In the interconnected and globalized economy of the 21st century, cross-border spillovers and impacts are difficult to prevent.

First and foremost, as long as COVID-19 is a threat anywhere, it is a threat everywhere. As Federal Reserve Chairman Jerome Powell noted, “viruses are no respecters of borders.” If just one variant that is vaccine-resistant starts spreading, every country may be back in a precarious public health economic position. Although vaccines currently appear to be mostly effective against known variants, new cases globally are at record highs; in India there is a tragic surge leading to higher daily reported cases than any other country has faced. Moving forward, experts are saying vaccine booster shots will probably be needed in some regular cadence to protect against variants. Trying to constantly identify new variants, adjust vaccines, and quickly manufacture and distribute them could lead to an ongoing game of “whack-a-mole with a constantly mutating virus.”

In addition to the direct public health and corresponding economic risks to higher performing economies, the world’s K-shaped recovery also threatens other key aspects of their economic conditions. Frequent border restrictions would slow people’s movements and further disrupt already strained global supply chains. Financial stability is also a concern; as interest rates rise in growing advanced economies the speed of adjustment could generate volatility in global markets and further challenge LIDCs and EMs with tighter financial conditions.

In the long-term, divergent recoveries also have important implications for tackling climate change. While the United States and China unquestionably need to play a major role in addressing climate change, LIDCs and EMs (excluding China) are also a crucial block of nations. Collectively, they approximately generate between 35 and 40 percent of global greenhouse gas emissions, and projections suggest that the share of emissions coming from some of these countries is expected to grow. Environmentally sustainable growth was already going to be a challenge for many LIDCs and EMs, and shaky recoveries from the pandemic will further exacerbate the difficulties. For example, driven by EMs, global energy demand is expected to increase 4.6 percent in 2021, while green energy investment in EMs just decreased by 20 percent in 2020. If quickly recovering economies want to avoid the most harmful economic effects of climate change, it will take a global effort.

To mitigate these risks and help deliver more convergence across economic recoveries, stronger economies should take several steps as soon as possible.

Most importantly, countries that have financial means and sufficient vaccine and medical supplies should provide resources to countries struggling with COVID surges. To date, vaccine logistics have been lopsided globally as richer countries have the lion’s share of supply and doses administered. COVAX (the WHO’s vaccine distribution initiative) aims to cover up to 20 percent of the people within the program’s 100+ participating countries, a modest goal according to experts, but may not be able to. The Biden Administration recently announced that it will share 60 million vaccine doses and supplies with India and other countries, however more public health support for LIDCs and EMs is needed from the global community.

In addition to public health support, LIDCs and EMs also need fiscal support to manage higher borrowing costs and mounting debt while making essential investments for their economic recoveries. The IMF estimates that in 2020 advanced economies provided fiscal policy support amounting to 24 percent of their GDP on average, compared to 6 percent for EMs and 2 percent for LIDCs. Governments recently authorized the issuance of $650 billion of the IMF’s Special Drawing Rights (a reserve asset exchangeable for currency) and the G20 extended the moratorium on debt-service payments from poor countries until the end of the year, but more fiscal transfers are required. Public and private creditors also must work together with EMs and LIDCs on debt restructuring and flexibility.

Lastly, advanced economies should further support EMs and LIDCs with green financing and technological know-how. Financial aid to vulnerable countries was a large component of the Paris climate accord, and to date the rich world is well below previously set targets for climate financing support. Environmental advocates have suggested as much as $800 billion will be needed through 2030, and LIDC and EM leaders have highlighted how important financial and capacity support is to meet their climate targets. 

As the global economy continues its recovery, policymakers should remember a key lesson of the pandemic itself: what happens in one part of the world can reverberate across the rest of it. The risks of a K-shaped recovery should not be ignored, as if they are, the world might regret it sooner rather than later. 

Jeff Goldstein is a director of strategy and consulting at Fidelity Investments. During the Obama administration he served as the deputy chief of staff and special assistant to the chairman of the White House Council of Economic Advisers. He also worked at the Peterson Institute for International Economics. The views and opinions expressed in this article are strictly his own.

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