Seizing the Opportunity for a Pro-Growth, Post-Pandemic World
IMF Blog, July 20, 2021
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Bibliographic details
- Authors: Geoffrey Okamoto
- Published: July 20, 2021
Overview
- Author: Geoffrey W.S. Okamoto
- Date: July 20, 2021
- Context: Since March 2020, governments and central banks enacted unprecedented support to stabilize economies during the COVID-19 pandemic.
Fiscal and monetary response: scale and necessity
- Governments have spent $16 trillion providing fiscal support amid the pandemic.
- Global central banks have increased their balance sheets by a combined $7.5 trillion.
- Deficits are the highest they have been since World War II.
- Central banks have provided more liquidity in the past year than in the past 10 years combined.
- IMF research indicates that if policymakers had not acted, last year’s recession, which was the worst peacetime recession since the Great Depression, would have been three times worse.
Measured economic loss and correction
- The world lost $15 trillion in output as a result of COVID-19, relative to what the IMF expected in January 2020.
- Correction: This blog has been updated to show that cumulative output losses totaled $15 trillion over 2020-24 relative to pre-pandemic projections.
Rationale for a shift to growth-oriented reforms
- As vaccines roll out and economies reopen, policymakers should shift from crisis containment to strengthening economies for the future with growth-oriented reforms.
- The same energy invested in vaccination and recovery spending should be invested in measures to make up for lost output and reduce long-term scarring.
Recommended reform areas and specific policy actions
- Enhanced debt restructuring mechanisms
- Resolve unviable firms expeditiously.
- Channel investment to new ideas and companies.
- Stronger active labor market policies
- Job-search monitoring and support.
- Retraining to help workers shift to more promising jobs in dynamic parts of the economy.
- Improved competition policy frameworks
- Reassess frameworks actively debated in Europe and the United States.
- Reduce barriers to entry in sclerotic sectors to prevent entrenched market power.
Expected payoffs and scenarios
- Aggregate gains from comprehensive reforms:
- The IMF estimates that comprehensive growth-enhancing reforms cutting across product, labor, and financial markets could raise annual growth in GDP per capita by over one percentage point in emerging market and developing economies in the next decade.
- These countries would be able to double their speed of convergence to advanced economies’ living standards relative to the pre-pandemic years.
- For advanced economies:
- A growth-reform tailwind would help repay the debts incurred to provide unprecedented support.
- Increases space for critical investment and reduces the need to raise taxes.
- Supply-side growth reforms provide insurance against persistent inflationary risks from demand-side pressures.
- For emerging market economies with market access:
- Reforms can strengthen fundamentals and bolster investor confidence as financial conditions tighten.
- For low-income countries with depleted policy space:
- Returns on growth-oriented reforms can be high enough to avoid harsh fiscal austerity.
- Allows protection of social and health spending in the short run while boosting capacity to invest in people in the long run.
Implementation timing and strategic approach
- Recovery will take years for most countries; reforms do not all need to be implemented at once.
- Pairing growth reforms with recovery spending can use current stimulus as a springboard to a more sustainable, higher-growth future rather than a crutch for a weaker pre-COVID-19 economy.
- Policymakers should be bold, using this crossroads moment to deliver post-COVID-19 prosperity and improved living standards.
Source: Seizing the Opportunity for a Pro-Growth, Post-Pandemic World (Geoffrey W.S. Okamoto, July 20, 2021).