15 April 2020   Leave a comment

The International Monetary Fund has published its annual World Economic Outlook, and its estimates for global economic growth in 2020 are dismal. Those results reflect the effects of the COVID-19 pandemic on economic activity. According to the report:

“The COVID-19 pandemic is inflicting high and rising human costs worldwide, and the necessary protection measures are severely impacting economic activity. As a result of the pandemic, the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis. In a baseline scenario–which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound—the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support. The risks for even more severe outcomes, however, are substantial.”

My own view is that the IMF is overly optimistic for the prospects for growth in 2021. The projection assumes that the recovery from COVID-19 will mimic recovery from earlier pandemics which almost invariably take what is known as a “V-shaped” recovery–a sharp decline followed by a sharp uptick as things return to normal. I do not think that COVID-19 will follow this pattern because there is a great deal of uncertainty whether infections confer immunity. There are too many examples of people who are asymptomatic as well as people who apparently have been reinfected. This anomalous pattern suggests to me that a vaccine will be more problematic than in earlier viruses.

Second, I think that the IMF was not able to take into account what I believe will be a devastating impact on poor communities. So far, the virus has not been tracked effectively in Latin America and Africa, and we have no idea how it will be transmitted in societies that lack the resources for effective medical equipment as well as infrastructures that will make social distancing virtually impossible. The richer countries have always significantly underestimated the significance of the markets and resources in poor countries for economic health. COVID-19 will deprive the global economy of those important resources for economic activity.

Third, and most importantly, the IMF baseline for recovery relies upon experiences that assume fairly effective policy responses by governments in cases such as H1N1, SARS, and MERS. Those epidemics were addressed by multilateral responses that were, generally speaking, cooperative. What we have witnessed thus far in COVID-19 is essentially a free-for-all response dictated by the activities of the US: outbidding and hijacking supplies, nationalistic rhetoric of blame which has undermined trust, and the hollowing out of international organizations such as the World Health Organization. Politico outlines some of these issues:

“The coronavirus pandemic is pushing countries around the world into a cutthroat competition for medical resources — and the United States is being cast as a leading villain.

“President Donald Trump’s administration stands accused of effectively hijacking shipments of masks and additional crucial supplies meant for other countries, including U.S. allies, and strong-arming private firms to prioritize America over other parts of the world. On Friday, Trump announced he was invoking the Defense Production Act to restrict U.S. exports of key medical gear.

“Developing countries, where Covid-19 has yet to fully wreak havoc, are terrified of being left behind in the race for personal protective equipment, or PPE, and other materials because they cannot match the purchasing power of the U.S. and other wealthy countries.

“Independent aid organizations that cater to the neediest corners of the globe are finding themselves competing for attention from medical goods manufacturers. The Trump administration has even asked aid groups to share those supplies with the U.S. government, in a bizarre reversal of the usual dynamic between the world’s leading power and those it typically helps.

“’It’s ‘Lord of the Flies: PPE Edition’,’ said Jeremy Konyndyk, a former U.S. official who specializes in disaster response. ‘We need some global solidarity, and instead we have global competition.’

“The international scramble mirrors the beggar-thy-neighbor competition among U.S. states for ventilators and other items considered vital to halting the spread of infections. It’s a reflection of the astonishing dearth of coordination among world leaders on the response to the virus, which has appeared in more than 180 countries.

“It also could exacerbate and extend the crisis: If poorer countries are unable to stop the virus, it is even more likely reemerge in more developed parts of the world that thought they had defeated it.

Just for perspective, and not for an analogy, The New York Times provides some information about the Great Depression in the 1930s:

“According to the I.M.F., the global economic contraction from 1929 to 1932 was approximately 10 percent. Advanced economies shrank by 16 percent during that period.

“Barry Eichengreen, the University of California, Berkeley, economist who is a scholar of the Great Depression, said there were several parallels between now and then. He pointed to the jobless rate in the United States, which he expects could top the 25 percent that was reached in 1933, and the global nature of the downturn, which could prolong the crisis as poor countries struggle to combat the virus.

“While the Great Depression started in the financial sector and played out over several years, Mr. Eichengreen notes that the drop in economic activity this year has been sudden and the bottom remains unclear. But some of the spillover effects could be similar, he said, with skittish households increasing their savings and businesses growing wary of large capital investments. And as deficits soar, some countries could push for austerity measures.”

Do not take the Great Depression analogy too seriously. If we have stupid people pushing for deficit reduction (good riddance, Paul Ryan) or for interest rate hikes, then maybe. But I think Pelosi and Schumer will make sure that such steps are avoided.

Posted April 15, 2020 by vferraro1971 in World Politics

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