The Global Economic Reset—Promoting a More Inclusive Recovery

IMF Blog, June 11, 2020

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The COVID-19 crisis is inflicting the most pain on those who are already most vulnerable and could lead to a significant rise in income inequality.
New estimates suggest that up to 100 million people worldwide could be pushed into extreme poverty, erasing all gains made in poverty reduction in the past three years.
More than half a billion children worldwide have lost their access to education as a result of coronavirus lockdowns; many won’t return to the classrooms after the pandemic, with girls more likely than boys to drop out.
Low-income households face higher health risks, record-high unemployment, less access to distance learning, and risks to children’s nutrition from disruption to school-provided meals.

Governments have deployed extraordinary policy measures to save lives and protect livelihoods, including extra efforts to protect the poor with food aid and targeted cash transfers.
Globally, fiscal actions so far amount to about $10 trillion.
Debt service suspension has been championed by the IMF and the World Bank as a fast-acting measure for countries that lack the financial resources to adequately respond to the crisis; the G20 agreed to suspend repayment of official bilateral credit for the poorest countries, from May 1 through the end of 2020.
Public debt in emerging markets has risen to levels not seen in 50 years.

Major epidemics often exacerbate pre-existing income inequality, according to IMF analysis.
Education disruption risks “learning poverty,” defined as being unable to read and comprehend a simple text by age 10, driven by poor access to quality schooling—already high especially in emerging markets and low-income nations.
Evidence: a 10-point increase in a country’s Gini coefficient (with such increases observed in some economies around the time of the global financial crisis) is associated with significantly lower educational attainment of about half a year—potentially reducing lifetime earnings and making income and opportunity gaps persistent across generations.

Substantial fiscal stimulus will have to be deployed during the recovery phase to boost growth and employment; securing a return to growth alone is not enough.
Fiscal stimulus should:
- Scale up public investment in health care to protect the most vulnerable and minimize the risks from future epidemics.
- Strengthen social safety nets.
- Expand access to quality education, clean water, and sanitation.
- Invest in climate-smart infrastructure.
- Expand access to high-quality childcare in some countries to boost female labor force participation and long-term growth.
Over the medium term:
- Improve the efficiency of spending and mobilize higher public revenue.
- Consider tax reform: some advanced and emerging economies could raise their top personal income tax rates without slowing growth.
- Ensure corporate tax systems capture an appropriate part of the unusual gains received by the “winners” of the crisis, including perhaps from digital activities.
- Combat illicit flows and close tax loopholes, both domestically and internationally.

Need more investment in education: not just spending on schools and distance-learning capacity, but also improving quality of education and access to life-long learning and re-skilling.
Simulation finding: based on a model reflecting an economy like Brazil, reducing the educational attainment gap by a quarter, relative to the OECD average, could boost economic output by more than 14 percent.
Protecting children’s education is framed as safeguarding future growth, productivity, and living standards.

COVID-19 has accelerated migration from analog to digital, but a growing digital divide risks becoming a legacy of the crisis.
Key priority: broaden access of low-income households and small businesses to financial products to smooth consumption and enable productive investment.
Examples of emergency cash transfer reach: in Pakistan and Peru, new support programs cover one-third of the population.
Developing-economy challenges: nearly 70 percent of employment is informal, making reaching the most vulnerable harder but opening fintech opportunities.
Financial inclusion statistics:
- About two-thirds of all unbanked adults (1.1 billion people) have a mobile phone.
- One-quarter have access to the internet.
- Moving routine cash payments by governments into accounts could reduce the number of unbanked adults by 100 million globally.
Reforms needed to manage fintech risks: promote competition, enhance consumer protection, and fight money laundering.
Research finding: greater access to finance and technology is associated with higher intergenerational income mobility.
Estimated long-term growth difference: there is a 2- to 3-percentage-point GDP growth difference over the long term between financially inclusive countries and their less inclusive peers.

The IMF is working with the World Bank and many other partners to support countries through hands-on technical assistance, policy advice, and lending programs, with increased focus on social spending issues including safety nets, health, and education.
Governments should gear up for a more inclusive recovery by taking the right measures—especially on fiscal stimulus, education, and fintech—while sharing ideas, learning from others, and fostering a greater sense of solidarity.
Concluding guidance: society is only as strong as its weakest member; this should be the compass to a more resilient post-pandemic world.

Source: Kristalina Georgieva, June 11, 2020 — The Global Economic Reset—Promoting a More Inclusive Recovery