James Ferguson illustration of Martin Wolf column ‘Economic recovery masks the dangers of a divided world’
© James Ferguson

The big story from the recent meetings of the IMF and the World Bank is that the world economy is recovering substantially more quickly than expected even six months ago. But the recovery in the global economic aggregate masks what is happening to the world’s people. Both within countries and among them, the disadvantaged seem set to suffer the slowest recoveries. Moreover, this house divided may not stand: what is going on — above all, the slow global rollout of the vaccines — will worsen prospects for everybody.

The striking feature of the new forecasts from the IMF is that cumulative growth in global gross domestic product per head between 2019 and 2022 is now forecast to be only 3 percentage points less than was forecast in January 2020. This is far better than the 6.5 percentage point shortfall last year and the 4 percentage shortfall forecast for this year. This then is the picture of a world economy in both strong and better than expected recovery. (See charts.)

Chart showing  revisions to cumulative per capita GDP growth

Even more striking, however, is the divergence. Advanced economies are now forecast to enjoy cumulative growth in GDP per head between 2019 and 2022 just 1 percentage point less than in January 2020. But emerging markets and low-income developing countries are forecast to suffer hits to growth in GDP per head of 4.3 (5.8, without China) and 6.5 percentage points, respectively. To those who have, it shall be given back. But, from those who have not shall be taken even the little that they had: in January, the World Bank reported the rise in the number of people in extreme poverty last year as a result of Covid-19 at between 119m and 124m. Given the dire forecasts, this calamity seems unlikely to reverse soon.

In essence, the IMF now forecasts that advanced economies and China will emerge from the crisis largely unscathed economically, with the US economy even a bit bigger than forecast beforehand, while emerging and developing countries suffer a large and long-term hit. But remember that two-thirds of humanity live in the latter.

Chart showing revisions to projected 2024 GDP between the Jan 2020 and Apr 2021 IMF forecasts

This is the reverse of what happened after the global financial crisis of 2007-09. That is partly because it originated in the high-income countries. It is also because China’s recovery in 2009 was so strong. But the biggest reason for the difference now is that the high-income countries both possessed and employed the ability to manage this shock in ways that few other countries (China being the main exception) could do: rich countries could cushion the economic and social blow with exceptional fiscal and monetary policy responses; and they could develop, produce and deliver vaccines at high speed.

Chart showing how Covid-19 has hit economies very differently from the financial crisis

According to the IMF’s Fiscal Monitor, “in the past 12 months, countries have announced $16tn in fiscal actions”. But the bulk of this was in advanced countries. The fiscal deficit of advanced economies rose by 8.8 per cent of GDP between 2019 and 2020, to 11.7 per cent. It will still be 10.4 per cent in 2021. In emerging economies, the fiscal deficit rose by 5.1 per cent of GDP between 2019 and 2020, to 9.8 per cent. But in low-income developing countries it rose by just 1.6 per cent of GDP, to 5.5 per cent. Moreover, the Monitor stresses, “the rise in deficits in advanced economies and several emerging market economies resulted from roughly equal increases in spending and declines in revenues, whereas in many emerging market economies and low-income developing countries, it stemmed primarily from the collapse in revenues caused by the economic downturn”.

Chart showing how the financial impact of the Covid crisis has been far smaller

It would be unwise to take for granted the strong recovery forecast for the advanced economies. It is possible that new variants invulnerable to today’s vaccines will sweep across the world. It is highly likely that it will prove impossible to reopen borders soon. It is possible, too, that monetary and fiscal policies will turn out to have been too strong, especially in the US, as Larry Summers has argued, generating a strong upsurge in inflation, inflation expectations and real interest rates. If so, this would force policymakers to slam on the brakes and might generate debt crises among vulnerable borrowers both at home and abroad.

Chart showing doses of Covid-19 vaccine given in G20 countries

Moreover, even if high-income countries, China and a few others do recover strongly, many emerging and developing countries are likely to remain in great difficulty, as a result of a painfully slow rollout of vaccines, problems in managing debt, the stresses caused by worsening poverty and limited policy space. Economies dependent on travel and tourism will find recovery particularly slow, especially if new variants continue to emerge. None of this is helped by the fact that many governments are corrupt, ineffective, or both. This always matters. In abnormal times, such as these, it matters even more.

Chart showing US 10-year bond yields and inflation expectations

Nothing would be more foolish than for policymakers in rich countries to breathe a sigh of relief and turn their eyes away from the global challenges they confront. They must instead do whatever it takes to get the whole world vaccinated by the end of next year and support the development of booster shots for all, if necessary. They must do what it takes to ensure that all countries have the resources they need to cope with these health and economic shocks. They must do what it takes, too, to ensure that, if debt crises emerge, they know who the creditors — official and private — are and how to manage the resulting negotiation.

Last but not least they must learn the lessons from this pandemic. It has so far killed 3m people and inflicted a big economic shock. The next one could quite easily be far worse in both these sad respects. Islands of supposed safety will not thrive in a world of menacing sickness.


Letter in response to this column:

India finds the promise of vaccines help rings hollow / From Divya Vaze, Hong Kong

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