A global recovery’s leading variables

As we head into a new year, this much is patently clear: covid-19 is not just going to disappear, as outgoing US President Donald Trump repeatedly suggested it would. Although there has been a substantial economic recovery from the depths of the initial lockdowns last spring, the losses to GDP and employment around the world are enough to make this the second- or third-worst downturn of the last hundred years. And this is true even as it appears increasingly clear that an effective vaccine is in the offing.

Even then, returning to normal will take time, raising the question of how much damage will be incurred in the interim. The answer will depend on the economic policies that major countries pursue in the coming months. There is already significant potential for hysteresis (long-lasting) effects. Household and firm balance sheets that have been eviscerated will be restored only gradually; firms that have gone bankrupt during the pandemic will not suddenly become “un-bankrupt” when the virus is brought under control.

In managing these effects, an ounce of prevention would be worth a pound of cure. Yet at this point, the near-term outlook remains tremendously difficult to read.

One reason is China. After the 2008 crisis, China played a central role in the global recovery, achieving annual growth of around 12% by 2010. But this time, China’s post-crisis growth is more muted, and the increase in its trade surplus implies less support for the global economy it provided in the past.

More broadly, while the world’s advanced economies have been able to run huge fiscal deficits to prevent significant losses to GDP, governments in developing countries and emerging markets cannot provide anywhere close to the same level of support.

Beyond the uncertainties associated with potential future waves of covid-19 infections – like the one that descended on Europe and the US in late 2020 – there will be two paramount questions in 2021. Will the European Union and the US enact recovery programmes of the magnitude needed to restore the global economy? And will the international community come together to provide the developing world with the assistance it needs?

The 2020 US election has not resolved these uncertainties. With the Democrats performing below expectations in many Senate and House races, the Biden administration may not have the congressional support it needs to go big on stimulus spending. Before the election, Trump – who never saw a constraint, budget or otherwise, that he did not want to violate – had been exploring the possibility of another stimulus package, only to run into resistance from Republican Senate Majority Leader Mitch McConnell. It remains to be seen whether Biden’s efforts to restore bipartisan comity will succeed.

Having already cut taxes on billionaires and corporations, Republicans seem set to embrace fiscal austerity once again, in order to deny the Democrats any major achievements. To that end, Republicans will propose a “skinny” fiscal package that would do too little to help state and local governments or the unemployed. If this limited stimulus is all the federal government can muster, both the US and the world will be in for a hard time.

Europeans, for their part, have come together in historic fashion to confront the economic impact of the pandemic. And yet, the EU’s €750 billion ($886 billion) recovery fund is not enough, especially now that the region has been hit hard by a second epidemic wave. Will Europe be able to come together again to pass another round of mutual assistance? If not, its prognosis – politically as well as economically – will be mixed, at best.

That leaves the broader international arena, where the US president traditionally enjoys significant power. The head of the International Monetary Fund, Kristalina Georgieva, has already called for another $500 billion issuance of Special Drawing Rights, which would be enormously helpful in restarting the global economy, especially now that several rich countries have committed to donating or lending their allocations to the countries that need them most. For no apparent reason other than malice, the Trump administration opposed issuing new SDRs. The hope now is that Biden will reverse the US approach, not just on SDRs but also on international cooperation more generally. Similarly, there is an urgent need for more leadership on debt restructuring. The covid-19 recession has put many developing countries and emerging markets in a precarious financial position. What began as a liquidity problem has morphed into a solvency problem: many countries simply do not have the resources to repay outstanding debts. Rarely before has the time-honoured principle of force majeure – forbearance in the face of extraordinary events – been more relevant. Here, again, Biden could make a big difference by working with the leaders of creditor countries and reminding everyone that another global debt crisis would be in no one’s interest.

With Biden’s leadership and some cooperation from congressional Republicans and other world leaders, there is a chance to navigate our way quickly through the covid-19 crisis. The situation demands a commitment to do “whatever it takes.” If political leaders rise to the challenge, 2021 need not be the worst of times, even if it is not the best of times, either.

Biden’s campaign promise to “build back better” can and must be more than just a slogan. It is fully within our power to build a post-pandemic world that is more sustainable, fair, cooperative, and competent than the one we had before the crisis. ©2020/Project Syndicate (www.project-syndicate.org)

Joseph E. Stiglitz is a Nobel laureate in economics. His most recent book is People, Power, and Profits: Progressive Capitalism for an Age of Discontent.