The Great Divergence: A Fork in the Road for the Global Economy

IMF Blog, February 24, 2021

Source details

Canonical URL: The Great Divergence: A Fork in the Road for the Global Economy

The IMF recently projected global GDP growth at 5.5 percent this year and 4.2 percent in 2022.
The recovery is long and uncertain due to slow vaccine rollout in most of the world and the spread of new virus mutations.
Most developing economies are expected to reach widespread vaccine coverage only by end-2022 or beyond.

By the end of 2022, cumulative per capita income is estimated to be:
- 13 percent below pre-crisis projections in advanced economies;
- 18 percent below pre-crisis projections in low-income countries;
- 22 percent below pre-crisis projections in emerging and developing countries excluding China.
Pre-crisis forecasts expected income gaps between advanced economies and 110 emerging and developing countries to narrow over 2020–22. Current estimates show:
- 52 economies will be catching up during that period;
- 58 economies are set to fall behind.
Uneven access to vaccines, exposure to hard-hit sectors (tourism, oil exports), and limited fiscal room are key drivers of divergence.
The pandemic is accelerating divergence within countries, disproportionately affecting the young, the low-skilled, women, and informal workers; millions of children still face disruptions to education.
For G20 economies alone (excluding India and Saudi Arabia due to data limitations), total employment losses are projected at:
- more than 25 million this year;
- close to 20 million in 2022;

relative to pre-crisis projections.

Fiscal measures deployed last year, on average:
- advanced economies: about 24 percent of GDP;
- emerging markets: 6 percent of GDP;
- low-income countries: less than 2 percent of GDP.
Cross-country comparisons show that more sizable crisis support was often associated with a smaller loss in employment.
Major central banks’ monetary easing helped several developing economies regain access to global capital markets and borrow at record-low rates to support spending.

Key actions called for:
- Much stronger international collaboration to accelerate vaccine rollout in poorer countries.
- Additional financing to secure doses and pay for logistics.
- Timely reallocation of excess vaccines from surplus to deficit countries.
- Significant scaling up of vaccine production capacity for 2022 and beyond.
- Consider insuring vaccine producers against the downside risks of overproduction.
- Ensure greater access to therapies and testing, including virus sequencing.
- Avoid restrictions on exports of medical supplies.
Economic case:
- Faster progress in ending the health crisis could raise global income cumulatively by $9 trillion over 2020–25.
- Around $4 trillion of that cumulative gain would go to advanced economies.

Past and ongoing policy response:
- Led by G20 countries, nearly $14 trillion in fiscal actions have been taken.
- Continued fiscal support is needed—appropriately calibrated and targeted to the stage of the pandemic, the state of economies, and policy space.
- Maintain favorable financial conditions through accommodative monetary and financial policies to support credit flows to households and firms.
Monetary policy considerations:
- Continued monetary policy support is essential given the gravity of the crisis.
- Legitimate concerns exist about unintended consequences, including excessive risk-taking and market exuberance.
- Major central banks must carefully communicate monetary policy plans to prevent excess volatility in financial markets domestically and internationally.

Domestic actions for vulnerable countries:
- Raise more domestic revenue.
- Make public spending more efficient.
- Improve the business environment.
International support and instruments:
- Scale up concessional financing and leverage private finance through stronger risk-sharing instruments.
- Consider a new SDR allocation to add a substantial, direct liquidity boost to countries without adding to debt burdens; an SDR allocation could expand capacity of bilateral donors to provide new resources for concessional support, including for health spending.
- Deal with debt through initiatives such as:
- The G20’s debt service suspension initiative (DSSI), which quickly freed up vital resources.
- The Common Framework to facilitate timely and orderly debt treatments for DSSI-eligible countries, with broad creditor participation including the private sector; treatments should involve debt service reprofiling and deeper relief where debt burdens are unsustainable.
IMF actions:
- The IMF has provided over $105 billion in new financing to 85 countries and debt service relief for its poorest members.
- The IMF aims to do even more to support its 190 member countries in 2021 and beyond.
Taxation:
- Support efforts to modernize international corporate taxation to fit the digital economy and be more attuned to the needs of developing countries, ensuring highly profitable firms pay tax in markets where they do business.

If poorer countries are left behind, consequences include:
- Entrenched abject inequality.
- Major threat to global economic and social stability.
- A historic missed opportunity to secure a strong and inclusive recovery.
The case for cooperation:
- The rapid international cooperation that produced effective vaccines in record time provides inspiration and a model for action now.
Summary call:
- Strong policy actions now are required across health, fiscal/monetary, and international support fronts to prevent a prolonged Great Divergence between and within countries.

Kristalina Georgieva, February 24, 2021 — The Great Divergence: A Fork in the Road for the Global Economy (IMF Blog).