A sharp resurgence of Covid-19 in the US and Europe is a brutal reminder that both the health and economic crises are by no means in the rear-view mirror. What are the immediate challenges facing the global community?
Recovery, resurgence, and fatigue
The global economy recovered in the third quarter of 2020. Production and trade improved. Most commodity prices recovered from their mid-2020 lows as demand firmed. Exceptional monetary policy accommodation kept markets liquid. Fiscal stimulus supported employment. Just as recovery gained some foothold, the virus has started to rage. Stricter measures are pouring cold water on the prospect of a robust V-shaped recovery. Supermarkets are struggling. A double dip is around the corner even though the stock markets are bullish.
Flare-ups are occurring in countries that eased their guards prematurely. America and Europe appear to be back at where they were in March. However, in November the world knows more about the virus and how to deal with it. There is no lack of face masks, so you feel less vulnerable going to shops. Some countries have massively ramped up testing capacity and improved medical treatment in the hospitals. Vaccines are on their way, signaling, hopefully the beginning of the end of the pandemic. But the end may still take a year or more depending on how the challenges of vaccination are handled across the globe.
Fatigue with taking coronavirus precautions is spreading along with a grudging recognition of what needs to be done. It is not easy to reorganise life around a risk that doesn't seem real to those still removed from the consequences of getting Covid-19 and to those who get a bit of a thrill from doing something risky and escaping consequences. Yet the stricter regulations come as force majeure when public health systems are overwhelmed.
The conditions for a solid restart—near universal adherence to public health measures and effective vaccination limiting the community spread as well as sustained policy support—are currently missing. Getting people to do the right thing to keep themselves and others safe at the cost of a slight inconvenience is sociologically orders of magnitude more daunting than appears on the surface.
Poverty and inequality
Covid-19 dumped millions into extreme poverty by pushing income well below their pre-pandemic levels for a prolonged period in rich as well as poor countries. Poverty trends took the wrong turn after more than two decades of steady reduction globally. The World Bank is projecting poverty rates to rise back to levels seen in 2017. Between 110 to 150 million people are expected to be pushed into extreme poverty with more than one-half of this increase occurring in South Asia and about one-third in Sub Saharan Africa.
The pandemic has accentuated inequities in the global economy. It has pushed several of the Sustainable Development Goals (SDGs) further out of reach. Digital divide, dampened investment, loss in schooling and prolonged spells of unemployment have eroded earlier gains in human capital and productivity.
The fight back on the health front is highly uneven. A large-scale rollout of vaccines among developing economies is certain to lag behind that of advanced economies. Covid-19 is also on the precipice of indirectly triggering a surge in many other deadly and debilitating infectious diseases in some of the world's poorest nations. They are missing out on life-saving vaccinations due to disruption caused by the pandemic. The Global Alliance for Vaccines and Immunization reports that 14 major vaccination campaigns targeting polio, measles, cholera, meningitis, and other diseases have been postponed.
Covid-19 will leave lasting wounds on productivity and employability, particularly among workers from low income households, through its effect on the accumulation of physical and human capital and automation of production and exchange. The goal of bringing the global extreme poverty rate under 3% by 2030 cannot be reached without swift and substantial policy action at the national and international levels.
The policy challenge to combat the economic fallout from the pandemic is akin to navigating blind in troubled waters. Alan Greenspan, former chairman of the Federal Reserve in the US, remarked recently "we know very little, so we pretend a great deal."
The pandemic has drastically altered the policy landscape. It has expanded the role of the state from labor and business support to the de-facto nationalisation of airlines. Government funded furlough schemes paid wages to millions of workers across Europe. Seven in ten job losers in the US earned more from unemployment-insurance payments than they had done on the job last summer. Despite high debt levels, countries have implemented unprecedented fiscal support to confront the collapse in activity and bolster recovery.
Central banks the world over have aggressively increased liquidity and brought down policy interest rates, leaving little space for further easing. "For the first time, in 60% of the global economy -- including 97% of advanced economies -- central banks have pushed policy interest rates below 1%. In one-fifth of the world, they are negative," according to Gita Gopinath, Chief Economist of the IMF. Fiscal policy is playing a growing role to buckle up the policy response.
The unprecedented economic measures have redefined the scope of both monetary and fiscal policy. Can the policy frontiers be pushed even further without risking institutional independence, undermining debt sustainability and de-anchoring inflation expectations? Cognisant of the liquidity trap the pandemic has pushed the global economy into, the global polity are advocating enhanced fiscal stimulus through prudent public investments in health, education, social protection, and digital and green infrastructure.
Stimulus packages, mobility restrictions and digitisation are widening inequality. Stimulus packages widen inequality through elite capture and increased debt. Big players get larger and quicker access to fiscal transfers and cheap credit. Both public and private indebtedness transfer income to rich savers who own the debt. Dramatic reductions in labor mobility across political borders has deactivated a great equaliser of labor incomes. The digital evolution is morphing into a divisive revolution.
The challenge is to get policies focused on redistribution by attacking the structural sources of high inequality such as a lack of digital access, declining bargaining power of workers in the labor market, and breaking the barriers to safe migration. Improved governance and reduced corruption can prevent growth of debilitating elite capture of policies largely by leveling the playing field for competition and cooperation.
Multilateralism and openness
This is a time to bend the arc of history on international cooperation. The top near-term global priority is pandemic control through timely and equitable access to vaccines across countries. The widely lip serviced refrain that no country is safe without containing the pandemic in all countries will take a while to get translated into behavior change on the part of national governments.
Resurrecting international cooperation requires new thinking, enlightened leadership, and a favorable distribution of power. In reaction to World War II, and the economic chaos that preceded it, an open, rules-based multilateral economic system emerged. The political and economic foundations for this cooperative world order came through the creation of the United Nations, the International Monetary Fund, the World Bank, the World Health Organization, and the World Trade Organization, among the most significant ones.
Responses to the pandemic have demonstrated the primacy of sovereign states, rationale for multi-polar competition, and obstacles to international cooperation. States moved swiftly to close or tighten borders as the virus struck, restricted movement within borders, and marshaled public health resources, scrambling for scarce items such as medical masks, ventilators, and intellectual property for treatment and vaccines.
Antagonism and strategic use of economic policy was on the rise even before the pandemic. The US, EU, Russia, China, and India have incompatible interests in several areas. The political environment to reverse the shifts towards protectionism is challenged by discords on what WTO reforms are needed to ensure that the rules of trade are generally perceived as fair. International institutions are weak global actors. They are neither alternatives nor challengers to states' prime position in international relations. Cooperation and openness are neither easy nor certain, but these are the only hopes for shared prosperity in a conflict-ridden global village.
Where from here?
The global political community is divided despite the common challenge humanity is facing. Western democratic models are under heightened scrutiny. Why have some societies lacked the discipline to test aggressively, contact trace, wear masks and practice social distancing? The jury is out on the role of populist leaders and illiberal regimes. Where science can rule the day, countries have protected both lives and livelihoods better irrespective of political regimes and leadership styles.
Drained and apprehensive, different societies are grasping for cheap narratives and easy solutions. The problems which gave us insomnia before the virus–climate threats, digital fragmentation, and political polarisation—have not disappeared. Nor has low productivity growth and excess savings in advanced economies. The pandemic has sharpened edges, exposing the vulnerabilities of the individual, communities, and states.
People turn to collective action spearheaded by governments, not markets, for solutions in times of crisis. Addressing the global dimensions of the health and economic crisis requires national governments acting collectively together with global non-state actors. Global leadership has been in quarantine. The world leaders to date have underperformed in uniting efforts to blunt the crisis.
There is no better testimony than the final statement of the G20 meeting concluded on November 22nd. The statement failed to specify how they will ensure that the vaccine reaches everyone and bridge the financing deficit to combat the virus globally.