Last two years have been unprecedented. 2020 witnessed the deepest but shortest recession in recorded history followed by an unusual and uneven recovery in 2021 when supply struggled to keep up with demand. We are entering the new year with normalcy yet to be redefined as the vestiges of the pandemic refuse to leave.
The geometry of recovery
Recovery from the recession in 2020 was the buzzword going into 2021 in the light of easing restrictions, vaccine arrival, and demand revival. We heard a lot about the likely shape of recovery – V, U, W, and L – letters indicating the performance of an economy measured by real gross domestic product (GDP) over time.
GDP growth in 2021 diverged across income groups, continents and countries with a V-shape for the world underpinned by sharp upturn in the advanced and emerging economies (IMF, October 2021). Such has not been the case for low-income countries where the shape of growth recovery looks more like an L. Per capita income in advanced economies grew at 5% compared to only 0.5% in low-income countries (World Bank 2021). The divergences between countries correlate significantly with differences in the timing of reopening, vaccine access, policy support. and exposure to supply chain bottlenecks.
The V-shape growth recovery was prominent in large Asian and Western economies. China saw GDP expand by 9.8% in the first 3 quarters of 2021, India 8.4% in July-September 2021 and growth in Japan moved up to 2.1%. Growth remained resilient in the US at 2.1% and the euro area is projected to grow 5% in 2021. Private consumption, investment and exports have been the main drivers in varying degrees in these recoveries.
In Bangladesh, GDP growth rose back to 5.2% in FY21 following a decline to 3.5% in FY20 from 7.9% in FY19 (official data). Exports bounced back owing to a surge in global demand for clothing. The urban economy rebounded with easing of mobility restrictions and unleashing of pent-up consumption. High frequency indicators such as electricity consumption and private credit growth suggest the culmination of a V-shaped GDP growth recovery in 2021. The IMF is projecting 6.6% growth in FY22.
The risks of derailments and persistent scarring in heavily impacted economies remain. The V for the global economy could change to U when more complete data covering 2021 become available.
An unpleasant twist
Inflation accelerated to multi-year highs around the world as consumers returned with a vengeance and industries faced shortages. Paul Krugman has described 2021 as "the year of inflation infamy".
Global headline inflation increased to 4.6% in October. Inflation in advanced economies rose to 3.6% – the highest since November 2008. In the seven largest emerging market economies excluding China, inflation increased to around 8% in October. Inflation in developing economies reached a 13-year high. At 2.3%, inflation in China was the highest since August 2020. In Bangladesh non-food inflation leaped to nearly 7% in November.
A Pew Research Center (PRC) analysis of data from 46 nations finds third-quarter 2021 inflation rate higher in 39 of them relative to the third quarter of 2019. Many show variations on the same pattern: relatively low inflation before the pandemic; flat or falling inflation entering 2021, and rising inflation in the second and third quarters of 2021.
The acceleration in the rate of inflation is fundamentally different from other inflationary episodes that were more closely tied to the regular business cycle. Explanations for the current phenomenon include sharp increase in global oil prices, disruptions in global supply chains; labor shortages; release of pent-up consumer demand after local economies reopened; and base-effects (prices in 2021 measured against deflated prices during 2020 shutdowns). Global trade has been disrupted by insufficient shipping containers and congestion at ports.
Supply has struggled to keep pace with the abrupt swings in the level and composition of global demand. A relative lack of supply disruption in developing Asia explains the smaller increase in inflation the region has seen with growth recovery (ADO, December 2021). As supplies were easing somewhat in November, the threat from Omicron variant and inflation persistence have thrown economic policymakers' calculations into confusion making the outlook deeply uncertain. The global V can turn into W in 2022 if the downside risks materialize.
The economic recovery is not following the usual trajectories seen in previous crises.
The K-variant: The pandemic had different consequences for different sectors. Sectors with resilience experienced a V-shape while the vulnerable languished in L-shape or even further declines relative to pre-crisis level. A combination of these two stylized patterns in a time-output diagram resembles K.
The differential impacts of the pandemic have been felt in a lot of different ways though the causal effects are not easy to disentangle. Lower-wage workers suffered far greater employment losses than high-wage workers. The pandemic exposed the vulnerability of informal employment, the main source of jobs in many countries, which offers less job security, social protection, and access to healthcare. Women, burdened by increased homecare duties, suffered significant job and income losses. The "2020 marked the steepest increase in global billionaires' share of wealth on record" (World Inequality Report 2021).
Historical experience seems to suggest that the mechanisms leading to an increase in inequality and poverty in the aftermath of the pandemic could prevail if societies fail to come together in supporting the most affected vulnerable groups. The lower spoke of the K-variant owes big time to the great divergence in the provisioning of global public goods such as vaccination, digitisation, and financing.
Jabs and jab-nots: About 58% of the population in advanced economies has been fully vaccinated, with hesitancy being the main constraint on further gains. By contrast, about 36% in emerging market economies and less than 5% in low-income countries are fully vaccinated where supply and distribution remain the primary constraints.
Vaccine rollouts continue to exhibit vast inequality compounded by wealthy nations buying up doses. This despite universal recognition that the pandemic won't be over until it is beaten everywhere. Wealthy countries have received over 16 times more Covid-19 vaccines per person than the poorer nations who rely on the World Health Organization's COVAX program. "This was mostly a policy decision by the rich countries," as stated by Moderna CEO Stéphane Bancel (The Financial Times).
Supply is the main driver of vaccination rates. Vaccination starts with a good supply of doses so there isn't a need for qualifications on who is eligible. Only wealthier nations have been able to manufacture vaccines locally, although wealth is not the entire story. Public trust, well-trained healthcare workers, quality clinics, outreach programs, safety, and a robust response to misinformation turn vaccine supply into vaccinated population.
The prevailing multilateral regime for intellectual property rights (TRIPS) protection and manufacturing capacity constraint vaccine supply. Arrangements in providing access to technologies, know-how, and critical ingredients are currently the key constraints in scaling up manufacturing capacity. The shortcomings of an incentive-based system need to be addressed without throwing the baby with the bathwater. As WTO Director-General Ngozi Okonjo-Iweala pointed out the IP waiver is of no use without manufacturing capacity and vice-versa.
The low vaccination rates combine with digital inequities and differences in policy response to make the adverse effects of the pandemic last longer than necessary. These, left unaddressed, will nourish the two-speed recovery, in which some countries will recover stronger in 2022 while others are left behind facing a risk of a "lost decade of development".
Digital inequities: Among the many inequalities exposed by the pandemic, the digital divide has been the starkest and among the most surprising. Even in developed countries, internet access is often lower than one could imagine.
There has been a growth in the use of digital technological solutions in many sectors in response to the pandemic, from that of consumption to digital health of various sorts. It has not been uniform. In many cases, citizens found themselves unable to take advantage of digital opportunities due to their lack of access to instrumental and network resources. Many rural and low-income communities around the world, including those in large urban areas, lack reliable, affordable access.
Remote learning during the pandemic has been far from universal. Primary and secondary school students from a vast number of poor families suffered from the digital divide. People without robust internet access were left behind academically and economically. Currently, fewer than 1 in 5 people in low-income countries are connected. Nearly half of the global population are unable to access the Internet.
The pandemic intensified inequalities created around technology. The global digital divide, as measured by cross-national differences in Internet use, is the result of the economic, infrastructure, regulatory, and sociopolitical characteristics of countries and their evolution over time. Differences in Internet use are the result of forces over which governments and multilateral organizations have varying degrees of influence.
The financing divide: Fiscal and monetary response to the pandemic have been dramatically different in size. Average overall fiscal deficits as a share of GDP in 2021 reached 9.9% for advanced economies, 7.1% for emerging economies, and 5.2% for low-income countries. The large increase in debt was justified by the need to protect people's lives, preserve jobs, and avoid a wave of bankruptcies.
Most developing economies are on the opposite side of the financing divide. Advanced economies and China accounted for more than 90% of the $28 trillion debt surge in 2020, thanks to low interest rates, the actions of central banks, and well-developed financial markets. Yet they failed to honor their promise to mobilize a meager $100 billion per year for climate action in developing countries.
If rich countries stopped sponsoring money laundering and tax havens, developing countries would have more revenues to fund investments in sustainable development. An encouraging sign is the international corporate tax agreement endorsed by more than 130 countries in 2021. The devil will be in the details that hopefully will reach implementation readiness in 2022.
The difference in the intended and implemented size and composition of policy support in many countries, Bangladesh included, is noteworthy. Policy support behaved like the K-variant with respect to different socio-economic groupings.
The critical transitions in 2022
Going into 2022, economies everywhere will transition into a yet to be fully defined new normal that is destined to require significant changes to working models in business and governance in an environment of unwinding policy support.
Settling into new normal: Since early 2020, the course of the pandemic has determined the course of the global economy and economic policy. Omicron stalled, not reversed, 2021's march towards normalisation.
Omicron has brought home the fact that the virus is here to stay. The world will need to find long-term strategies to co-exist with covid strains by accepting some level of risk as the price for sustaining the ordinary business of life locally and globally.
It's not as if we are in the same place as a year ago despite the unknowns that surround the dynamic of virus mutations. Vaccines, treatments, masking, ventilation, social distancing and even embracing our own germaphobes must be socially mobilised so that the virus can be contained to a point where it is not disruptive. The danger is as much from a policy overreaction as from emergence of new Covid variants.
Business model changes: Supply chains are far more fragile than we may have suspected. The pandemic highlighted the immense dependence that nations have on output from China and Southeast Asia. The desire for additional resilience and economic security will drive some production closer to home. The fortunes of nations will change with shifts in the world's economic geography.
It's not all bad news. The pandemic accelerated movement up the digital adoption curve that is unlikely to reverse. Billions of people around the world changed behavior in 2020 and 2021. Enterprises compressed a decade of digital transformation into a single year. Government agencies accelerated implementation of new operating models to meet a host of new requirements. The Covid-19 crash course in remote work taught companies ways of working that may induce them to tap more into young talent pools in developing countries. The expansion of cross-border digital-business can help smaller companies go global.
Workers and owners with modest levels of education and skills will face rockier paths. Governments and businesses will need to build their workforces so they can better adapt to the new capabilities required of them. Investments in digital access and education will need to be a major driver of pulling everyone along.
Rethinking policy stimulus: In a world of different but related financial and economic systems, the easing of stimulus in one country affects others. Financing conditions have tightened as yields on government bonds increased and depreciation pressures reemerged across many developing economies, Bangladesh included.
A disorderly normalisation of monetary and fiscal policies in developed economies can increase volatility everywhere. With risks to inflation skewed to the upside, an expanding community of central banks in advanced economies may move away from balance sheet growth and the zero lower bound in 2022. As they raise interest rates, borrowing costs will rise for all. The challenge is to strike the right mix of fiscal and monetary policies in an environment of high debt and rising inflation.
Multilateral institutions need to support mitigation of financial distress in developing economies through more funding and oversight. The general allocation of $650 billion SDRs by the IMF provided additional liquidity needed to address the difficult policy trade-offs facing developing countries. The channeling of SDRs from rich nations to developing nations will be like a booster dose. The World Bank in December 2021 announced a $93 billion International Development Association replenishment package, the largest in IDA's 61-year history, to help the poorest countries respond to the Covid-19 crisis.
Walking the walk along the last mile in multilateral financing is often the difference between intentions and outcomes.
Collective action at a premium
Pandemics, financial crises, security risks, and climate change pose threats to stability and living standards everywhere. The provision of global public goods is a pre-requisite for sustained future progress both in rich and poor countries. Unfortunately, progress in 2021 was well short of the push needed on many critical fronts. There is both the moral and prudential case for the world to try to do a lot better.