When the COVID-19 pandemic sent the global economy into a deep recession, it exposed structural weaknesses in economic institutions and highlighted the need for reform. The challenges countries face today are daunting, but this moment should be recognized as an opportunity to build back more sustainable and inclusive economies. David Dollar is joined by three Brookings experts—Eswar Prasad, Marcela Escobari, and Zia Qureshi—to discuss their forward-looking policy proposals for a post-COVID-19 world.
Prasad, Escobari, Qureshi, and Dollar are all contributors to a new report, “Reimagining the global economy: Building back better in a post-COVID-19 world.”
DAVID DOLLAR: Hi, I’m David Dollar, host of the Brookings trade podcast, “Dollar & Sense.” This episode is going to focus on a new publication from the Global Economy and Development program at Brookings called “Reimagining the global economy: Building back better in a post-COVID-19 world.” We launched this report with a webinar where I moderated a discussion with three senior fellows at Brookings, each of whom contributed a chapter to the report.
Marcela Escobari wrote about the dislocation of labor markets, Eswar Prasad about the international monetary and financial system, and Zia Qureshi about preexisting problems with inequality that have been exasperated by the pandemic. We are going to have a first round of comments where each one discusses the problem in their area and then a second round where we talk about possible solutions. We are going to start with Eswar because he is dealing with the more macro issue of the international monetary and financial system. So over to you, Eswar.
ESWAR PRASAD: I think the COVID pandemic and its fallout have really exacerbated some preexisting conditions in many emerging markets and developing economies. Some of these economies were already reeling under fairly heavy burdens of external debt, and many of them were experiencing growth slowdowns in part related to domestic problems, and, in addition, weak growth in the rest of the world, especially in China. Then the pandemic hit and it has made things much worse for many emerging market economies which have seen losses of their major export markets, much more difficult financing conditions making it harder for them to rollover their debt, and a much deeper economic malaise than even felt in some of the advanced economies because these economies are relatively poor and have very little room for maneuver.
Now, in the last couple of months, of course, there have been some signs of optimism. China, in particular, does seem to have righted itself. It’s not quite firing on cylinders, but on most cylinders. And, in fact, it is quite remarkable that China might be the only major economy in the world that registers positive growth for the whole year. There are some countries, like Japan, and of course the U.S., that suggest that things are turning around, but given of depths of the fallen economic activity after the second quarter, and even into the third quarter in some countries, it’s really only China that seems to have gotten back to where things were pre-pandemic.
One issue relative to, say, the 2008-2009 global financial crisis, when, again, China was a key contributor to the global economic recovery, is that this time China is recovering in a slightly different way. In the aftermath of the 2008-2009 global financial crisis, China had a surge of credit financed investment that boosted its economic growth but also pulled along much of the rest of the world. China had a much greater demand for commodities, started sucking in imports from the rest of the world. So, this helped a lot of other countries.
Right now, and this may be good for medium-term growth in China, China is growing not just because of investment, but also because retail sales and private consumption more broadly have picked up as well. In addition, China has continued to be an export machine, largely because, even though China is more of a service sector economy than it used to be, it still relies to a great deal on manufacturing and Chinese exports seem to be what the rest of the world wants. So, China can’t quite be relied upon to pull the rest of the world along quite as it did, so countries are going to have to rely on their own devices.
Now, many emerging market economies have undertaken, just like the advanced economies, fairly aggressive macro-economic stimulus measures. They want to take in significant amounts of fiscal stimulus—that is more government spending. In addition, some emerging markets’ central banks have actually started undertaking unconventional monetary policy measures, such as the quantitative easing measures—buying government bonds directly that many advanced economies, central banks, have been using as part of their playbook for a long time. This is all good in terms of supporting short-term growth.
Unfortunately, life is not quite fair. What the advanced economies can get away with, it’s much harder for the emerging market economies to get away with for as long. So far, global financial markets seem to have been relatively sanguine about emerging markets issuing more debt, undertaking unconventional monetary policy operations, but this could turn around quite quickly. So, I think it’ll be essential for emerging markets to undertake not just these macro-economic stimulus measures, but also show what they are going to do for secure medium-term growth.
The other group that is in even deeper trouble is low-income economies that are heavily reliant on external debt. For these countries, no matter how much they can do domestically— and their domestic resources, are, quite frankly, rather limited— they will also need external assistance. And as Dr. Brahima Coulibaly and I point out in our piece, there is going to have to be a much greater response from the international community—the multilateral financial institutions, but also many of the bilateral creditors—in order to prop up these economies. One might argue that these economies that are relatively small, perhaps less important in terms of global GDP, but ultimately, we are all in this together. And as Dr. Coulibaly and I point out, if the world community in these perilous times does not pay enough attention to helping these countries out, it could ultimately hurt the overall global economic recovery.
So, these are difficult times, David, and I think countries are doing all they can on their own, but I think a coordinated response and a broader international community response is really going to be necessary to pull the world out of where it is right now.