Letter IEDI n. 1045–Demand revival and post-COVID-19 dilemmas, according to Unctad
This Letter IEDI resumes the discussion on the actions necessary for post-pandemic economic recovery. Previous editions have, for example, dealt with the views of the IMF (Letter n. 1043), the European Union (n. 1039), IPEA (n. 1028) and internationally renowned economists (n. 1026). In the document “Coronavirus Crisis and Industrial Strategy,”, the IEDI presented its position on the conditions for a trajectory of growth and economic and social development in the country.
Today, we summarize Unctad's view articulated in the second chapter of its Trade and Development 2020 report, in which it built alternative scenarios for 2021 and for the next decade, examining how the three main sources of aggregate demand growth—public spending, private demand and net exports expansion— worked in practice in the years leading up to the COVID-19 crisis (2018 and 2019).
The first scenario, which would take the world to a “new lost decade,” is based on the continuity of policies that were already being adopted in recent years and on the opposition, seen as unjustifiable by Unctad, to the proactive use of fiscal policy in the face of the economic cycle. If materialized, annual global GDP growth would be only +2% between 2022 and 2030, that is, 1/3 less than the average of 2010–2019 (+3.1%).
In the second scenario, marked by a sustained recovery with average global GDP growth of +3.8% per year in 2022–2030, Unctad presupposes a reorientation of economic policy and the international financial architecture in favor of development and financial stability. Not in this situation nor in the first are additional waves of contagion from COVID-19 expected to justify new total confinements.
In Unctad’s assessment, the current context resulting from COVID-19— characterized by rising unemployment, risk of businesses' bankruptcy, weak supply chains, shaken confidence, anemic demand and high levels of public and private indebtedness—requires from policy makers a change in mentality and bold actions. In other words, it would be time for a “new normal” in economic policy, too.
In the past four decades, according to Unctad, a fiscal policy stance excessively geared towards generating budget surpluses and reducing public debt, while adopting tax schemes favorable to foreign investors, has led to the corrosion of government revenues, crumbling wages and reduced domestic demand.
For the world as a whole, the result was a significant weakening of global demand and a consequent slowdown in economic growth. This contributed to the world economy becoming unprepared to face any serious shock, in particular one of COVID-19's nature and scale.
For Unctad, it's time to learn from the mistakes of the past. Previously, the emphasis on fiscal austerity caused countries to prematurely withdraw the fiscal stimuli introduced in response to the great international financial crisis of 2008–09.
Unctad fears that policies that do not incorporate the teachings of the last decade could trigger new adverse shocks to world GDP growth, not only preventing a full recovery from the COVID-19 crisis, but also resulting in another lost decade to the global economy.
For developing countries—whose ability to respond to the coronavirus health and economic crisis has been hampered by years of misguided restrictive fiscal policies, unsustainable debt volumes, high levels of informality and a political space constrained by rules chosen to manage globalization—the “lost-decade” threat is even more serious.
Unctad believes a robust growth revival post-COVID-19 crisis requires a sustainable global macroeconomic strategy that articulates medium-term objectives, such as industrialization and productive development, inclusion, employment, financial stability and, above all, climate change mitigation.
At the domestic level, economic planning and industrial policies, as well as efforts to make economic growth more inclusive, will be essential. At the international level, policy coordination will be crucial to reduce financial imbalances and mitigate climate change.
However, Unctad argues that the immediate priority of economic policy is to guarantee an effective revival of economic expansion. This requires putting people back to work, restoring income growth and, at the same time, guaranteeing the repair of the financial imbalances left by COVID-19, as governments, companies and households are expected to come out of the crisis with higher debt.
Thus, as the IMF has already pointed out, Unctad also stresses that, due to its strong multiplier effects on aggregate demand, public sector spending is the obvious candidate to reactivate, in a sustained manner, the global productive capacity that is idle today.
For Unctad, only a strong fiscal expansion can quickly reduce unemployment, although it recognizes that for developing countries the use of such an instrument is more complex. The adoption of a climate change mitigation strategy is also seen as a means of creating jobs, even considering the losses of posts related to the decarbonization of the economy.
In addition, the Institution emphasizes that these fiscal stimuli must be maintained as long as the COVID-19 outbreak lasts and until the full recovery of private sector demand occurs.
In the event that governments make the same mistakes as in the 2008–2009 crisis (opting once more for a premature fiscal tightening) and as companies adopt cost-cutting strategies (in the pursuit of competitiveness and debt reduction), the recovery from the COVID-19 crisis is likely to fail, warns Unctad.
If so, a new recession would become a real possibility in many countries in 2022, increasing the risks that the world economy will experience a new lost decade.
The document recognizes, however, that there are restrictions to a demand-driven growth path. One is the high level of debt, particularly in the private sector, both in developed and developing countries. For the latter, access to foreign exchange and limited industrial capacity are also important.