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Although the rapid spread of covid led it to be regarded as a pandemic, covid-related mortality, equalized to deaths per million, varies sharply across countries. On average, covid mortality in the Transatlantic- Mediterranean region (comprising the Americas, Europe, Middle East, North Africa and Central Asia) is about 10 times than in more populous South and East Asia. Covid mortality has been selected as a proxy for the relative virulence of covid, rather than the number of infections, as testing rates and protocols vary greatly across nations.

The policy response, comprising lockdowns, wearing a mask, restrictions on movement and gatherings, has however been largely undifferentiated across countries. The Global Financial Crisis (GFC) a decade ago was also largely a Transatlantic phenomenon. While there was monetary and fiscal easing across the globe, the policy response in Emerging Markets and Developing Economies (EMDEs) was muted and tailored to their circumstances. Their financial systems also held up. EMDEs continued to grow relatively strongly, cushioning the decline in global growth. This time around, in sharp contradistinction to the GFC, the decline in growth and output loss is largely similar. It is, therefore, unsurprising that global growth has suffered far more during the covid pandemic than during the GFC.

The corona effect
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The corona effect

Economic growth varies from year-to-year around an average trend, sometimes growing above this line, and sometimes below. This trend growth is indicative of a country’s potential gross domestic product (GDP). Economic recessions are steep declines in growth relative to the trend line. Recessions that are a natural part of a business cycle incline to a strong V-shaped recovery, where an economy grows sharply, but briefly, above its trend line to recoup lost output before reverting to its trend. When a recession is caused by an underlying structural crisis, the economy might lose some output permanently before returning to its former trend line once the underlying problem is resolved. If the crisis is severe and protracted, the trend line itself might shift lower through a process of hysteresis, as the growth potential or productive capacity of the economy declines.

The covid-related steep fall in economic activity was not part of a natural business cycle. International Monetary Fund (IMF) projections indicate that there would be permanent losses in output going forward. Ordinarily, we should expect that higher the mortality, the greater the economic disruption and larger the loss of output. That having been said, countries may fare better or worse than what one would expect on the above assumption. A relatively large output loss with relatively low mortality can be assumed to indicate poor management of covid’s economic fallout. Conversely, a relatively low output loss despite high covid mortality suggests good economic management.

The accompanying table, based on IMF and Worldometers.info/coronavirus/data, attempts an assessment of the management and impact of covid on the economies of G20 countries. This grouping includes the world’s largest economies that together account for over three-fourths of global output, trade and population.

The trend growth base taken to calculate the output loss/gain each year is the average of actual growth in 2019 and the growth projected for 2020 by the IMF’s World Economic Outlook (its October 2019/January 2020 updates, i.e., just before the pandemic). The output gain/loss is calculated by aggregating the difference between the estimated/projected and trend growth for the years 2020-2022. On average, the output loss estimations are lower than those obtained by the methodology used by IMF chief economist Gita Gopinath, as outlined in some interviews, which takes IMF’s pre-covid projections for 2020 as its base.

As is to be expected, economic performance varies sharply across countries and groupings. Their relative performance has been graded between A (best), B and C (worst). The US and Germany have been graded A on account of a relatively low covid-related output loss (less than about 2% of GDP) and high (above 600 per million) covid- related mortality. At the other end, India and Indonesia with relatively high (exceeding 4.5%) output loss and low (less than 150 per million) mortality are graded C. The rest of the G20 countries are placed in the B category, further differentiated into B+, B and B-, based on relative combinations of their mortality and output data.

Output loss is notional, based on unobserved data. It is very sensitive to the estimation of trend growth. Trend growth, and consequently output loss, might be underestimated in countries where growth was unstable in the pre-covid period. This is particularly the case in Argentina and Turkey, where there is an usually large difference between 2019’s growth and 2020’s estimated growth. Pre-covid instability in Argentina and Turkey was too great to make an assessment of economic management.

The average output loss in G7 countries is 2.86% of GDP, while it is 3.34% in the BRICS countries of Brazil, Russia, India, China and South Africa, despite mortality being twice as high (953 versus 474) in G7 countries. This indicates that while G7 countries lost more lives to covid, they have managed its economic fallout better on the whole. This could be on account of a combination of better health care systems and a more aggressive fiscal and monetary policy stance.

According to the IMF’s Fiscal Monitor (January 2021 update), G7 countries have on average put in place stimulus of around 33.4% of GDP (12.4 % fiscal with liquidity support accounting for the rest), compared to 8.6% (4.9% fiscal and the rest liquidity support) by BRICS. The US (19.2% of GDP) and Germany (38.9% of GDP), both rated A, have some of the most aggressive fiscal and monetary stimulus. On the other hand, countries with far lower mortality may have overdone the lockdown of their economies. China’s performance assessment of B and Indonesia’s C might come as a surprise, since neither country had a big contraction of its economy. However, their trend growth is high, and so too the notional output loss relative to their low covid mortality.

Alok Sheel is RBI chair professor of macroeconomics, ICRIER.

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