Revisiting Covid Scarring in Emerging Markets

IMF Working Papers, August 4, 2023

Source details

Authors: Chris Jackson, Jason Lu
Date: August 4, 2023
Type: IMF Working Papers, Working Paper No. 2023/162
Pages: 26
Volume: 2023
Issue: 162
DOI: https://doi.org/10.5089/9798400252136.001
Stock No: WPIEA2023162
ISBN: 9798400252136
ISSN: 1018-5941
Summary purpose: Examine the impact of Covid-19 on output in Emerging Markets to date and implications for projections of economic scarring, and provide alternative sets of medium-term projections to indicate potential magnitudes.

The Covid-19 pandemic is expected to result in large and persistent losses in economic output, referred to as scarring.
These losses were expected to be more severe in Emerging Markets than in Advanced Economies.
While Covid has had a material impact on activity, the recovery has been stronger than initially expected.
Positive data surprises on recovery have been increasingly treated as transitory rather than as signals about the state of scarring.
The composition of output losses from Covid has been qualitatively different from past large shocks:
- Historical evidence suggests the main driver of scarring is weak productivity.
- Covid losses have so far been more skewed to employment with a smaller than usual impact on productivity.
Implication: Scarring, while substantial, may be ultimately less severe than initially feared, at least over the medium term.

The paper provides alternative sets of medium-term projections to indicate potential magnitudes of scarring.
Emphasis on distinguishing transitory positive surprises from persistent structural damage when updating scarring estimates.
Focus on decomposing output losses into productivity-driven versus employment-driven components to assess long-run scarring risk.

Reassess scarring projections in light of stronger-than-expected recoveries and the employment-skewed nature of losses.
Prioritize policies that address labor market recovery and reintegration given the observed skew toward employment losses.
Monitor productivity indicators closely given historical role of productivity weakness in driving scarring, despite smaller productivity impacts to date from Covid.

Subject: COVID-19, Emerging and frontier financial markets, Employment, Financial markets, Health, Labor, Production, Total factor productivity, Wages
Keywords: COVID-19, Emerging and frontier financial markets, Emerging Markets, Employment, GDP growth data, Global, medium-term output, output loss, POST-Covid GDP loss, revisiting Covid, scarring, scarring estimate, Total factor productivity, Wages

IMF Working Paper No. 2023/162 — “Revisiting Covid Scarring in Emerging Markets”, Chris Jackson and Jason Lu, August 4, 2023.