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The path to recovery in coming decade is fragile

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Photo: Reuters

  • The reduction in capital expenditures will reduce potential output for good, and workers who experience long bouts of joblessness or underemployment will be less employable in the future
  • As the race to control the industries intensifies, there will be increased deployment of AI/ML and other labour-replacing, skill-biased technologies

By the end of 2020, financial markets —mostly in the US—had reached new highs, owing to hopes that an imminent covid-19 vaccine would create the conditions for a rapid V-shaped recovery. And with major central banks across the advanced economies maintaining ultra-low policy rates and unconventional monetary and credit policies, stocks and bonds have been given a further boost.

But these trends have widened the gap between Wall Street and Main Street, reflecting a K-shaped recovery in the real economy. Those with stable white-collar incomes who can work from home and draw from existing financial reserves are doing well; those who are unemployed or partly employed in precarious low-wage jobs are faring poorly. The pandemic is thus sowing the seeds for more social unrest in 2021.

In the years leading up to the covid-19 crisis, 84 of stock-market wealth in the US was held by 10% of shareholders (and 51% by the top 1%), whereas the bottom 50% held barely any stock at all. The top 50 billionaires in the US were wealthier than the bottom 50% of the population (a cohort of about 165 million people). Covid-19 has accelerated this concentration of wealth, because what’s bad for Main Street is good for Wall Street.

By shedding good salaried jobs and then re-hiring workers on a freelance, part-time, or hourly basis, businesses can boost their profits and stock price; these trends will accelerate over time with the wider application of artificial intelligence and machine learning (AI/ML) and other labour-replacing, capital-intensive, skill-biased technologies.

As for emerging markets and developing countries, covid-19 has triggered not merely a recession, but what the World Bank calls a “pandemic depression," leaving more than 100 million people back on the verge of extreme poverty (less than $2 dollars per day).

After going into free fall in the first half of 2020, the world economy started to undergo a V-shaped recovery in the third quarter, but only because many economies were reopened too soon. By the fourth quarter, much of Europe and the UK were heading into a W-shaped double-dip recession following the resumption of draconian lockdowns. And even in the US, where there is less political appetite for new pandemic restrictions, 7.4% growth in the third quarter is likely to be followed by growth of 0.5% at best in the last quarter of 2020 and in the first quarter of 2021—a mediocre U-shaped recovery.

Renewed risk aversion among American households has translated into reduced spending—and thus less hiring, production, and capital expenditures. And high debts in the corporate sector and across many households imply more deleveraging, which will reduce spending, and more defaults, which will produce a credit crunch as a surge in non-performing loans swamps banks’ balance sheets.

Globally, private and public debt has risen from 320% of gross domestic product (GDP) in 2019 to a staggering 365% of GDP at the end of 2020. So far, easy-money policies have prevented a wave of defaults by firms, households, financial institutions, sovereigns, and entire countries, but these measures eventually will lead to higher inflation as a result of demographic aging and negative supply shocks stemming from the Sino-American decoupling.

Whether major economies experience a W- or a U-shaped recovery, there will be lasting scars. The reduction in capital expenditures will reduce potential output for good, and workers who experience long bouts of joblessness or underemployment will be less employable in the future. These conditions will then feed into a political backlash by the new “precariat," potentially undermining trade, migration, globalization, and liberal democracy even further.

Covid-19 vaccines will not ameliorate these forms of misery, even if they can be quickly and equitably administered to the world’s 7.7 billion people. But we shouldn’t bet on that, given the logistical demands (including cold storage) and the rise of “vaccine nationalism" and disinformation-fuelled vaccine fears among the public.

Moreover, the announcements that leading vaccines are over 90% effective have been based on preliminary, incomplete data. According to scientists I have consulted, we will be lucky if the first generation of covid-19 vaccines is even 50% effective, as is the case with the annual flu shots. Indeed, serious scientists are expressing scepticism about the claims of 90% effectiveness.

Worse, there is also a risk that in late 2021, covid-19 cases will spike again as “vaccinated" people (who may still be contagious and not truly immune) start engaging in risky behaviours like crowded indoor gatherings without masks. In any case, if Pfizer’s vaccine is supposed to be the key to our salvation, why did its chief executive officer dump millions of dollars of stock on the same day that his company announced its breakthrough test results?

Finally, there is the great political event of 2020: Joe Biden’s election to the US presidency. Unfortunately, this will not make much of a difference for the economy, because obstruction by congressional Republicans will prevent the US from implementing the kind of large-scale stimulus that the situation demands. Nor will Biden be able to spend heavily on green infrastructure, raise taxes on corporations and the wealthy, or join new trade agreements like the successor to the Trans-Pacific Partnership.

Even with the US set to rejoin the Paris climate agreement and repair its alliances, the new administration will be limited in what it can accomplish.

The new cold war between the US and China will continue to escalate, potentially leading to a military clash over Taiwan or control of the South China Sea. Regardless of who is in power in Beijing or Washington, DC, the “Thucydides Trap" has been laid, setting the stage for a confrontation between the established but weakening hegemon and the new rising power.

As the race to control the industries of the future intensifies, there will be even more decoupling of data, information, and financial flows, currencies, payment platforms, and trade in goods and services that rely on 5G, AI/ML, big data, the Internet of Things, computer chips, operating systems, and other frontier technologies.

Over time, the world will be firmly divided between two competing systems—one controlled by the US, Europe, and a few democratic emerging markets; the other controlled by China, which by then will dominate its strategic allies (Russia, Iran, and North Korea) and a wide range of dependent emerging markets and developing economies.

Between the balkanization of the global economy, the persistent threat of populist authoritarianism amid deepening inequality, the threat of AI-led technological unemployment, rising geopolitical conflicts, and increasingly frequent and severe man-made disasters driven by global climate change and zoonotic pandemics (that are caused in part by the destruction of animal ecosystems), the coming decade will be a period of fragility, instability, and possibly prolonged chaos. The year 2020 was just the start. ©2020/Project Syndicate (

Nouriel Roubini is CEO of Roubini Macro Associates and host of the broadcast, Professor of Economics at New York University’s Stern School of Business.

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