In the January 2021 update of the World Economic Outlook, the IMF
revised global growth upward for 2021—reflecting the start of COVID-19
vaccinations, continued policy support in systemically large economies, and
adaptation to social distancing measures by firms and households. But the
projection is fraught with uncertainty and highlights the stark divergence
in prospects across countries. On the one hand, China returned to its
pre-pandemic projected level in the fourth quarter of 2020, and the United
States is projected to surpass its pre-COVID levels this year. On the other
hand, more than 150 economies are expected to have per capita incomes below
their 2019 levels in 2021. And more than half of the emerging market and
developing economies whose per capita incomes had been converging toward
those of advanced economies over the past decade are expected to diverge
over the next few years. Nearly 90 million people are expected to fall into
extreme poverty during 2020 and 2021, reversing the trend of the past two
decades.
These divergences partly reflect differences in the sectoral composition of
countries. But they also reflect the severity of the health shock and how
effectively governments dealt with the crisis. Averting the divergences in
growth prospects and exiting the pandemic with minimal scarring will
require policy actions on several fronts.
On the medical front, advanced economies and some emerging market and
developing economies have secured substantial doses of vaccine and
initiated large vaccination drives that hold out hope for faster easing of
containment measures and stronger recoveries. However, many developing and
low-income countries have had less success accessing vaccines. As a result,
they are dependent on the multilateral COVAX facility, which guarantees
vaccine coverage for just 20 percent of the population. But the pandemic is
not over until it is over everywhere. To vaccinate enough of the world’s
population to contain the pandemic will require global action on scaling up
of vaccine production, additional funding for COVAX, and financing the
logistics of getting people vaccinated.
The crisis has had not only health consequences, it has wreaked havoc on
many livelihoods. While advanced economies have the fiscal space to extend
widespread measures to support economically devastated households, other
countries, especially those with scarce fiscal space, will face difficult
trade-offs. To avert an even greater divergence in economic prospects, all
countries must continue to support livelihoods and keep viable firms afloat
until they are certifiably past the crisis.
Many countries can ramp up spending by borrowing and still maintain debt at
sustainable levels because of historically low borrowing costs that are
expected to stay low for the foreseeable future. But in countries with
limited fiscal space, spending should be prioritized for health and
transfers to the poor. International organizations and bilateral donors
must ensure that these countries have adequate access to concessional
financing and grants to support critical spending. Expanding the IMF’s
Special Drawing Rights (SDRs), an instrument that was designed precisely
for a global crisis like the one we are living through, should also be
considered.
For the hardest-hit countries—especially those that entered the crisis with
high levels of debt distress—globally coordinated measures to provide debt
relief, and in some cases outright debt restructuring under the new Common
Framework agreed to by the G20 countries, may be inevitable.
The pandemic has not just inflicted short-term economic damage, it has left
potentially long-lasting scars that can further exacerbate divergence. A
chief concern is school closures, which threaten the livelihoods of a
generation of children. These disruptions have been particularly costly in
emerging market and developing economies, where remote learning is
practically infeasible. Left unaddressed, this diminution of skills and
educational attainment can have lifelong implications—exacerbating
inequality and precipitating social unrest. Governments must swiftly take
action to ensure that all school-age children can benefit from distance
learning. They must provide vouchers to enable families to buy computers
and other IT equipment, ensure the return to school of the large number of
students from poorer households who dropped out, and create programs to
allow students to make up for lost learning.
Not only are there divergences across countries, there are worrisome
divides within countries too. Millions who lost jobs to lockdowns joined
the ranks of the long-term unemployed, and many have given up looking for
work. Low-skilled workers, women, and youth—who are vastly overrepresented
in jobs where social distancing is difficult or impossible—experienced the
largest increases in unemployment in many countries, exacerbating
pre-pandemic inequalities.
