Slow-Healing Scars: The Pandemic’s Legacy
IMF Blog, March 31, 2021
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- Authors: Sonali Das, Philippe Wingender
- Published: March 31, 2021
Overview of the shock and its uniqueness
- The contraction from the COVID-19 pandemic was sudden and deep: using quarterly data, global output declined about three times as much as in the global financial crisis, in half the time.
- Systemic financial stress has been largely avoided so far, owing to unprecedented policy actions.
- The path to recovery remains challenging, especially for countries with limited fiscal space, and is made harder by the differential impact of the pandemic.
Medium-term output projections and cross-country divergence
- We expect world output in the medium-term to be about 3 percent lower in 2024 than pre-pandemic projections.
- Because financial stability has largely been preserved, this expected scarring is less than what we saw following the global financial crisis.
- Emerging market and developing economies are expected to have deeper scars than advanced economies, with losses expected to be largest among low-income countries.
- Example: GDP in the Pacific Islands is estimated to be 10 percent lower in 2024 than pre-pandemic projections.
- Differential impacts reflect:
- Varying economic structures (e.g., reliance on tourism, share of high-contact sectors).
- Size and scope of countries’ fiscal policy responses.
- Limited policy space and capacity to mount major health responses or support livelihoods in many vulnerable countries.
Channels of scarring and productivity effects
- Severe recessions, particularly deep ones, have historically been associated with persistent output losses from reduced productivity.
- The pandemic has accelerated digitalization and innovation in production and delivery in some countries, but:
- The resource reallocation needed to adapt to a new normal may be larger than in past recessions, potentially affecting productivity growth going forward.
- Pandemic-driven rise in market power of dominant firms is a risk, as competitors collapse and dominant firms become increasingly entrenched.
- Disruptions to production networks matter:
- High-contact sectors (arts and entertainment, accommodation and restaurants, wholesale and retail trade) are less central to production networks than sectors like energy, but shocks to peripheral sectors can be amplified via spillovers (example: closure of restaurants and bars affects farms and wineries, lowering demand for tractors and other agricultural equipment).
- Although initial impact concentrated in higher-contact service sectors, the size of the disruption produced a broad downturn.
Human capital and distributional legacies
- Widespread school closures have occurred across countries.
- Adverse impacts on learning and skills acquisition have been larger in low-income countries.
- Resulting long-term individual earnings losses and damages to aggregate productivity could be a key legacy of the COVID-19 crisis.
- The pandemic is likely to raise inequality without targeted policy responses.
Policy priorities to limit scarring
- Lessons from past recessions underscore the importance of avoiding financial distress and ensuring effective policy support until recovery is firmly underway.
- Policies should be tailored to pandemic stages and combine better-targeted support for affected households and firms with public investments.
- As vaccine coverage improves and supply constraints ease, focus on three priorities:
- First, reversing the setback to human capital accumulation:
- Expand social safety nets.
- Allocate adequate resources to healthcare and education.
- Second, supporting productivity:
- Facilitate job mobility.
- Promote competition and innovation.
- Third, boosting public infrastructure investment:
- Prioritize green infrastructure to help crowd-in private investment.
- Strong international cooperation is needed to address growing divergence across countries:
- Ensure financially constrained economies have adequate access to international liquidity for development spending.
- Ensure adequate production and universal distribution of vaccines—including through sufficient funding for the COVAX facility—to help developing countries beat back the pandemic and prevent even worse scarring.
Based on Chapter 2 of the World Economic Outlook, “After-Effects of the COVID-19 Pandemic: Prospects for Medium-Term Economic Damage,” by Sonali Das (co-lead), Weicheng Lian, Giacomo Magistretti, Evgenia Pugacheva, and Philippe Wingender (co-lead), with support from Srijoni Banerjee and Savannah Newman, and with contributions from Philip Barrett, Mariya Brussevich, Marina Conesa Martinez, Allan Dizioli, Jungjin Lee, and Futoshi Narita.