In the latest issue of Foreign Affairs, Carmen Reinhart and Vincent Reinhart, after an in-depth analysis of the current economic depression, launch a not too veiled appeal: “Officials need to press on with fiscal and monetary stimulus. And above all, they must refrain from confusing a rebound for a recovery.”
The authors explain that unlike the 2008 financial crisis, the current “pandemic depression” has new characteristics and will require a slower and longer recovery period. Indeed, while 2008 was primarily a banking crisis affecting 11 advanced economies, offset by the growth of the Chinese economy, rising commodity prices and lean balance sheets, the cross-border nature of today’s crisis will have more profound consequences on the global economy. Citing the most recent data from the World Bank, the authors estimate that this crisis will hit families and low-income countries the hardest: up to 60 million people worldwide will be pushed into extreme poverty by this pandemic.
The two economists note that despite the positive signs in the US labor market and the reopening of some major economies, “this rebound should not be confused with a recovery. In all of the worst financial crises since the mid-nineteenth century, it took an average of eight years for per capita GDP to return to the pre-crisis level.” While any kind of prediction in this context cannot be taken for granted, the authors analyze three indicators that together seem to suggest that the road to recovery will be long:
- The volume and prices of exports. Border closures and lockdowns will further burden export-dependent economies, which have already seen a contraction in global demand for goods as a result of the recent US-China trade war and a general decrease already recorded between 2008 and 2018. For economies where tourism is an important source of growth, the collapse in international travel has been catastrophic. The International Monetary Fund has predicted that in the Caribbean, where tourism accounts for between 50 and 90 percent of income and employment in some countries, tourism revenues will “return to pre-crisis levels only gradually over the next three years.”
Furthermore, “[n]ot only is the volume of trade down; the prices of many exports have also fallen.” In particular in the oil sector, this change was most visible: ” The slowdown has caused a huge drop in the demand for energy and splintered the fragile coalition known as OPEC+, made up of the members of OPEC, Russia, and other allied producers, which had been steering oil prices into the $45 to $70 per barrel range for much of the past three years.”
- Unemployment. The most vulnerable are recent graduates who enter a compromised economy: “the relative wage performance of those in their 40s and 50s can be explained by their job status during their teens and 20s.” Those who start at a disadvantage will struggle over the years to catch up. Furthermore, “those still in school are receiving a substandard education in their socially distanced, online classrooms; in countries where Internet connectivity is lacking or slow, poorer students are leaving the educational system in droves.”
Reinhart and Reinhart also note that although national policies can help offset these effects of the pandemic, “In emerging economies, people mostly operate without much of a safety net. But regardless of their relative wealth, governments are spending more, and taking in less”, both locally and nationally, with shrinking tax bases also linked to lost wages.
- This crisis is highly regressive within countries and between countries. This means that the effects of the crisis will be much greater for those who already had lower incomes. “Such people generally do not have the ability to work remotely or the resources to tide themselves over when not working.” In developing countries, where social safety nets are in an embryonic state or non-existent, the decline in the standard of living will mainly occur in the poorest sections of society. “The regressive nature of the pandemic may also be amplified by a worldwide spike in the price of food, as disease and lockdowns disrupt supply chains and agricultural labor migration patterns. The United Nations has recently warned that the world is facing the worst food crisis in 50 years. In the poorest countries, food accounts for anywhere from 40 to 60 percent of consumption-related expenditures; as a share of their incomes, people in low-income countries spend five to six times as much on food as their counterparts in advanced economies do.”
The authors also point to some glimmer of hope: as the public health crisis slowly comes under control, there will likely be impressive-looking gains in economic activity and employment, fueling financial-market optimism. However, this rebound effect is unlikely to deliver a full recovery.” Furthermore, “the fiscal and monetary policies used to combat the contraction will mitigate, rather than eliminate, the economic losses.”
They are more cautious about the social consequences “harder to predict”, but generally any change “as a result of technological advances or the opening of international trade routes,” shifts resources “creating winners and losers.”
The authors conclude by explaining that “There is no one-size-fits-all solution to these political and social problems. But one prudent course of action is to prevent the economic conditions that produced these pressures from worsening.” A picture that leaves little room for optimism, but perhaps it is now time for more realistic expectations and grounded policy actions.