TRADE, INVESTMENT AND COMPETITIVENESS TRADE, INVESTMENT AND COMPETITIVENESS EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Private Enterprise after the Pandemic: A Review of Alternative Scenarios Authors: Shahid Yusuf, George Washington University and Center for Global Development. Ernesto Lopez-Cordova, World Bank. Neil Gregory, International Finance Corporation. © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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EFI Insight - Trade, Investment and Competitiveness. Washington, DC: World Bank. Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third- party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Cover design and layout: Diego Catto / www.diegocatto.com >>> Contents Abstract 4 Acknowledgments 5 Abbreviations 6 1. Introduction: How is the Private Sector Landscape Changing? 7 2. Scenarios Are Built on Shifting Sands 8 3. Scenario 1: A Global Economy on the Mend 12 4. Scenario 2: A Slow, Uneven Recovery 18 5. Post-Pandemic Challenges, Old and New 23 References 24 >>> Abstract The COVID-19 pandemic has had strong adverse impacts on the private sector in low- and middle-income countries. The future course of the pandemic remains highly uncertain, so consideration of alternative scenarios may be more helpful in assessing investment opportunities and designing policy responses. Based on private sector responses to the pandemic shock, and lessons learned from previous exogeneous shocks, this paper outlines two alternative scenarios for private enterprise during the recovery phase. The scenarios consider a stronger as well as a weaker global economic recovery, and both of these are based on the information available as of end-June 2021. Thus, the scenarios do not discuss developments that have taken place since June 30, which include the emergence of the Delta variant of COVID-19, and the evolution of vaccine deployment around the world. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 4 >>> Acknowledgments The authors wish to acknowledge the following colleagues for their helpful comments, suggestions, and advice: Laura Alfaro (Harvard Business School), Erik Berglof (Asian Infrastructure Investment Bank), Anselm Dannecker (IFC), Agathe Demarais (The Economist Intelligence Unit), Sebastien Dessus (IFC), Mark Dutz (World Bank), Caroline Freund (World Bank), Stephanie von Friedeburg (IFC), Mary C. Hallward-Driemeier (World Bank), Ricardo Hausmann (Harvard Kennedy School), Cleo Rose Innes (IFC), Michael Klein (Frankfurt School of Finance and Management), Susan Lund (McKinsey Global Institute), Denis Medvedev (World Bank), Mark Mobius (Mobius Capital Partners), Alexandros Ragoussis (IFC), Philip Schellekens (IFC), and William Sonneborn (IFC). We also wish to thank the editor, Ann Bishop (IFC consultant). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 5 >>> Abbreviations a type of coronavirus, which was declared a pandemic by the World Health COVID-19 Organization on January 31, 2020 DFI development finance institution EMDEs emerging markets and developing economies EU European Union FDI foreign direct investment An intergovernmental organization of seven countries that meets periodically G-7 to address international economic and monetary issues An international forum for the governments and central bank governors from G-20 19 countries across the world and the European Union (EU) GDP gross domestic product Global Economic Prospects (a World Bank report published twice a year in GEP January and June) GPT general purpose technology GVC global value chain IFC International Finance Corporation IMF International Monetary Fund LAC Latin America and the Caribbean MENA Middle East and North Africa (Region) OECD Organisation for Economic Co-operation and Development PPE personal protective equipment SDGs Sustainable Development Goals (United Nations) SME small and medium enterprise SSA Sub-Saharan Africa UK United Kingdom UNCTAD United Nations Conference on Trade and Development US United States WTO World Trade Organization Note: Unless otherwise indicated, all dollars are US dollars. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 1. >>> Introduction: How is the Private Sector Landscape Changing? In emerging markets and developing economies (EMDEs), can the private sector sup- port a vigorous recovery from the impact of the COVID-19 pandemic, and correct some of the ills that afflicted these economies before the crisis? While the pandemic continues to affect lives and livelihoods around the world, we are finally seeing the start of recovery from the worst health and economic crisis since World War II. As a result, international development agencies are discussing the role that private firms and investors could play toward achieving the United Nations’ Sustainable Development Goals (SDGs) and, in the process, build back better. However, with the pandemic still raging in some countries,1 uncertainty continues about how the private sector in EMDEs will operate in a post-pandemic world. Will firms adopt new technolo- gies and venture into new industries and value chains, enabling them to boost productivity? Or will the pandemic push more firms into bankruptcy, upend whole industrial segments, and leave deep scars that hamper future growth? Most likely, the future will combine these diametrical op- posites, with new opportunities emerging, while the pre-pandemic challenges continue. As the pandemic subsides, better understanding of the future would allow investors, government, and development finance institutions to stimulate economic growth, revive private business activi- ties, and create new jobs. This note considers alternative scenarios regarding the outlook for economic recovery, and its implications for the private sector. It draws on a large and continuously expanding body of literature that looks, from different angles, at how the pandemic has been evolving; how it has been impacting businesses; and how it is reshaping the environment in which the private sector operates. The note begins by discussing the difficulties in forecasting the future, given the lingering uncertainties of the global economy. The authors then discuss two alternative sce- narios regarding the level of optimism in resolving the crisis. These alternatives are based on the state of the global economy at the end of June 2021 and, therefore, this paper does not reflect developments since that date. The two alternative scenarios hinge, to a good degree, on the speed with which the health emergency is resolved; on the effectiveness of individual countries’ policy responses in restoring economic activity; and how businesses respond after being hard hit by the pandemic. The note concludes that even under the more benign scenario, some private firms and banks will suffer from scars inflicted by the crisis, and the private sector will continue to face some of the same challenges that existed prior to the pandemic. 1 The analysis reflected in the present document is based on the data and information that were available as of end-June 2021. Thus, the document does not fully discuss developments after that date, including the emergence of the COVID-19 Delta variant and the evolution of vaccine deployment around the world. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 2. >>> Scenarios Are Built on Shifting Sands The ability to cope with the health and the economic impacts of the pandemic has varied markedly across countries. To assess macroeconomic impacts, Fernandez-Villaverde and Jones (2020) combined data on gross domestic product (GDP), employment, Community Mobility Reports, and deaths (Figure 2.1). One important finding of their study is that a significant number of advanced and emerging economies initially experienced minimal impacts. In Figure 2.1, these economies are clustered in the lower left-hand quadrant of the graph. Emerging economies such as Cambodia, China, and Vietnam suffered the least in 2020. These countries minimized both the number of deaths and their macroeconomic losses. Other countries including Brazil, Colombia, Ecuador, India, Iran, Mexico, Peru, and South Africa have been hard hit (van Elsland & Johns 2020; Mwai 2021; Over- gerg et al. 2021; Rice et al. 2021). Fernandez-Villaverde and Jones (2020) concluded that good outcomes for both GDP and COVID-19 mortality rates are possible if countries have sound policies, enacted by decisive leaders; a capable administration and science; plus a dose of good luck. This would enable more countries in the world to move into the lower, left-hand quadrant of Figure 2.1 where both COVID-19 mortality and GDP losses are lower. Which countries and regions are likely to demonstrate the greatest economic resilience (Noy et al. 2020)? Is it likely that economic recovery will be U-shaped, as it was in past financial crises such as the one in 2008, when private investment and factor productivity remained below pre-crisis levels for several years?2 As epidemiologists warned, starting in the last quarter of 2020, and extending through the first half of 2021, second and third waves of COVID-19 infections and deaths have hammered a number of countries. The severity of these subsequent waves was exacerbated by the emergence of new variants of the coronavirus. By the second quarter of 2021, new and more virulent strains were taking a toll on countries that had eased restrictions too quickly be- cause they thought that the worst had passed, despite having an adult vaccination rate below 75 percent and/or they were some distance from achieving herd immunity. Although the increasing availability of vaccines in 2021 could blunt the momentum of the pandemic, this will depend on how rapidly producing and administering vaccines can be ramped up (Callaway 2021). Up to July 1, 2021, worldwide dissemination of vaccines had proceeded slowly due the unprecedented scale required, and the logistics of getting vaccines into people’s arms.3 In Sub-Saharan Africa (SSA), for example, only 1 percent of the population had been vaccinated by the end of June 2021, and the continent had received just 32 million doses (Financial Times 2021). 2 Studies looking at the impact of the 2008 Global Financial Crisis include Reinhart and Tashiro (2013), Schularick and Taylor (2012) , Barnichon et al. (2018), and Cerra and Sexena (2018). 3 Ahuja et al. (2021) estimate that a monthly worldwide death toll of 300,000 reduces global GDP by half a trillion dollars. Hence, speedy dissemination of vaccines could drastically reduce losses, including health costs and human capital. Torres et al. (2020) noted that ensuring equitable access by all countries will be an issue requiring global cooperation, which, in turn will be influenced by the supply of vaccines. Furthermore, Torres et al. (2020) state “Development of vaccines that meet regulatory and licensing requirements involves high costs in terms of facilities, equipment, and human resources and is a lengthy process that often fails.” EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 > > > F I G U R E 2 . 1 . - COVID deaths and GDP losses 7 Spain Philippines 6 India France United Kingdom Italy Portugal GDP loss (percent years) 5 Mexico Slovakia Slovenia Colombia Belgium Greece South Africa 4 Austria N.Z Brazil Singapore Germany Switzerland 3 Turkey Denmark Israel Netherlands United States China Luxembourg Ireland Japan Poland 2 Norway Sweden Chile Korea, South Russia 1 0 Taiwan -1 0 100 200 300 400 500 600 700 800 900 Covid deaths per million people Note: COVID-19 deaths are through October 9th, 2020; GDP losses are based on annualizing data from Q1&Q2 of 2020. Source: Fernandez-Villaverde and Jones 2020. Economic activity and world trade rebounded in the first as the United States and the United Kingdom, which have half of 2021, but normality will only be restored after most advanced healthcare systems, and top ratings on the Global of the world’s population has been vaccinated. This may Health Security Index in 2019, fumbled their response to the prove to be a great challenge given that a substantial per- crisis, and suffered from a high incidence of COVID-19 infec- centage of people, and not only those in affluent countries, tions and deaths. Fortunately, predictions based on the Span- may resist vaccination (Eichengreen et al. 2020). Currently, ish Flu epidemic of 1918, which caused millions of deaths, the threat posed by scattered outbreaks makes it advisable to have been proven wrong (Ionnaidis et al. 2020). So have the maintain health protocols such as washing hands, wearing a many medical practitioners and researchers who predicted mask, and social distancing, until, and even beyond when the that it would take 3–4 years to develop an effective vaccine threat of the virus is eliminated. This would reduce the risk of (Caldwell 2021). further outbreaks of COVID-19, as well as the emergence of new, and potentially vaccine-resistant variants. “Prediction is very difficult, especially if it’s about the fu- ture.” The COVID-19 pandemic has made prediction dou- Also, the pace of recovery will vary across countries de- bly challenging because it combines the most worrisome pending on their degree of economic scarring;4 the po- features of past crises. “[It] combines a simultaneous sup- tential for remote work where employers and infrastruc- ply and demand shock; domestic, regional, and global scope, ture allow it; the failure of many smaller businesses; and [with virtually all economies simultaneously plunged into re- the pace of start-up activities.5 Modelling likely outcomes cession]; a projected long duration; and a degree of uncer- as the pandemic evolves has been challenging according to tainty.” In addition, according to Bloom and DaFurceri (2021), Murray (2020) because “the quality of the data does not al- there have been uncertainty spillovers from key systemic eco- ways improve, and key parameters can shift in unpredictable nomic problems, which are unmatched by past crises (see Ta- ways.” Some of the predictions voiced in the early stages of ble 2.1 and Figure 2.2). This, as Carmen Reinhart (2021) has the pandemic have proven to be inaccurate. Countries such observed, “makes forecasting little different from guessing.” 4 Scarring is a potential threat with longer-term consequences. (Apedo-Amah et al. 2020; Fuentes and Moder 2021). A study of individuals drawn from a random sample in rural Indonesia showed that those exposed to a disaster tend to become more risk averse because they fear that the likelihood of disasters has increased. On risk taking behavior, see Cameron and Shah (2015). Lockshin, Kolchin, and Ravallion (2020) found that countries with memories of high World War II death rates responded more quickly to the first wave of the pandemic, although they were no more successful in coping with the second wave. However, the 1957 flu epidemic that killed between 70,000–100,000 people, and led to a plunge in U.S. GDP, is barely remembered. (Lokshin, Kolchin, and Ravallion 2020). Regarding evidence of potential long-run scar- ring effects from past crises, see Apedo-Amah et al. (2020). 5 According to Ma, Rogers, and Zhou (2020), recovery of investment, employment, and trade in countries hit by six pandemics that have occurred since the mid-1960s (1968 flu, 2003 SARS, 2009 H1N1, 2012 MERS, 2014 Ebola, and 2016 Zika) took over five years. Lower potential output can result from a decline in total factor produc- tivity and lower output per worker (Ollivaud and Turner 2015). Jordà, Singh, and Taylor (2020) paint a darker picture. They found that the aftermath of pandemics dating back to the 14th century was prolonged, with real rates of return remaining depressed for decades, and aggregate demand depressed by precautionary saving. Using data from 190 countries, papers by Cerra and Saxena (2008, 2018) corroborate these findings. For people at the bottom of the economic pyramid, banking and political crises can cause long-term economic damage. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 The degree of current uncertainty is captured by three mea- prospects were revised upward. Now for 2021, both the World sures: the World Uncertainty Index,6 which shows perceived Bank and the International Monetary Fund (IMF) have project- uncertainty rising sharply in 2020, and then slipping back to ed global GDP growth of 6 percent (IMF 2021a; World Bank long-run average levels (see Figure 2.3); the World Pandemic 2021a). The economies of both the United States and China, Uncertainty Index of the International Monetary Fund (Bloom which together account for 41 percent of global GDP, are pro- and DaFurceri 2021); and the World Bank’s COVID-19 Busi- jected to grow by 7 percent, and over 8 percent, respectively. ness Pulse Surveys.7 Not only has the pandemic battered a If their growth is sustained, the strong performance of these world economy that was already in a fragile state due domes- two economies will boost growth in EMDEs through 2022, tic investment slowing since 2010, the growth of global trade is with countries in East Asia leading the rest. However, the IMF down to half of what it was before 2008. Also, since 2015 there (2021c) in its July 2021 projections expected the growth rates has been a downward shift in the volume of foreign direct in- of other regions to diverge. The Middle East and North Africa vestment (FDI), and beginning in 2020, a sharp drop in FDI. (MENA) Region and the Sub-Saharan Africa Region could turn in the weakest performances in 2021 (4.0 percent and 3.4 per- Inevitably, as information is updated, medium-term forecasts cent, respectively), with many countries “expected to lose a de- are adjusted. Between January and April 2021, global growth cade or more of per capita income gains” (World Bank 2021a). > > > T A B L E 2 . 1 . - Ranking of the types of crises and the characteristics of shocks Characteristics of shocks Scope Scope Duration Certainty Domestic / Very Supply Demand Global Short Long Uncertain Types of crises regional uncertain Pandemics x x x x x x Wars x x x x x Macroeconomic mismanagement (e.g. hyperinflation) x x x x International financial crises x x x x Natural hazards x x x x Source: Loayza et al. 2020. The crisis caused by the pandemic has generated its own ‘alphabet soup’ of recovery predictions, ranging from a V- shaped recovery as the most optimistic, to a middling K-shaped (two-speed) recovery (Ritholtz 2020), and the worst—an L-shaped recovery (Sheiner & Yilla 2020). Given these widely varying predictions, in this report we present both a high- and a low-case scenario, between which the actual outcome may be expected to occur. These are comparable to two of the three sce- narios in the World Bank’s Global Economic Prospects (GEP) report for January 2021 (World Bank 2021b)—the pessimistic one and the optimistic one (see Box 1.4 in the GEP). The GEP’s optimistic scenario assumes that rapid deployment of vaccines will be effective in bringing down infections, and that economic activity will revive with assistance from “exceptionally accommodative monetary policy.” The GEP’s pessimistic scenario assumes a persistently high level of cases in leading economies, with vaccina- tions proceeding at a slower pace, and financial conditions depressing economic recovery. 6 World Uncertainty Index (https://worlduncertaintyindex.com). 7 According to Apedo-Amah et al. (2020), the surveys show businesses in EMDEs tended to be more pessimistic about recovery, and their perception of uncertainty was higher. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 > > > F I G U R E 2 . 2 . - Severity and worldwide impact of crises 100 8 Post-WWI & Depression The Great COVID-19 GDP per capita growth contraction, percent (red) WWII Depression Financial disruption, exchange rate crisis 7 Economies in recession, percent (blue) 80 and end of Cold War Monetary and fiscal Global 6 tightening Oil price shock, global financial inflation, monetary policy & crisis Bank Latin American debt crisis 5 60 panic 4 Oil price shock 40 3 2 20 1 0 0 1876 1885 1893 1908 1914 1917-21 1930-32 1938 1945-46 1975 1982 1991 2009 2020 Source: Loayza et al. 2020. > > > F I G U R E 2 . 3 . - World Uncertainty Index (through 4th Quarter, 2020) 60,000 50,000 40,000 30,000 20,000 10,000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Note: This figure depicts the percentage of times the word “uncertain” appears in the country reports of the Economist Intelligence Unit, multiplied by 1,000,000. A higher number means higher uncertainty, and vice versa for a lower number. Sources: World Uncertainty Index (https://worlduncertaintyindex.com); Ahir et al. 2021a and 2021b. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 3. >>> Scenario 1: A Global Economy on the Mend The first scenario comprises the following assumptions, and the rest of this section elaborates on why such a scenario may arise: • • • • • • Following the large-scale production and administering of several adequate vaccines in the advanced economies and some EMDEs, starting in the first quarter of 2021, the pub- lic health crisis begins subsiding by the third quarter of 2021. The vaccines provide some crossover immunity (Tanne 2021; McCaffrey 2021) and are broadly effective against CO- VID-19 variants for an extended period. Governments avoid excessive fiscal prudence, and the EMDEs manage to skirt debt crises, although debt burdens grow. Firms accelerate the adoption of digital technologies, which helps maintain online com- merce and boosts firms’ productivity. There is limited destruction of capital, bankruptcies are checked or resolved, financial fragil- ity is managed thanks to stronger bank balance sheets, and bad debts are written down (Re- inhart 2021). Continuation of lending by banks, plus fiscal support, enable broad recovery. Services rebound (including some of the hard-hit, customer-facing ones), as do most other industries, many of which have avoided the full force of the crisis (for example, medical sup- plies and equipment, electronics, food products, and automotive equipment). Trade growth resumes; global value chains (GVCs) emerge largely unscathed (although there is some consolidation because of the elimination of marginal suppliers, and measures taken by major GVC firms to enhance their supply chain resilience through diversification and onshoring); trade tensions begin to subside; multilateralism is revitalized (Evenett and Baldwin 2020; Kentikelenis and Voeten 2020; Stiglitz 2020); and the fear of deglobalization is put, at least temporarily, on hold. • Coordinated action by the G-20 countries continues to speed up recovery. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 In the first quarter of 2021, several vaccines became avail- disposal (subsidies, transfers, unemployment benefits, tax able in quantity from American, European, Russian, and relief, infrastructure spending, and procurement) to crowd in Chinese companies.8 Facilities for producing vaccine doses private consumption and investment. According to Tomer and on a mass scale were operating, and solid progress had been his co-authors (2020), investing in infrastructure projects that made to rapidly qualify, register, package, refrigerate, trans- promise good returns and high job multipliers would be prefer- port, and administer vaccines. This was mainly in economi- able to untargeted income transfers. In addition, to comple- cally-advanced countries, but EMDEs such as Brazil, China, ment public investment, economic recovery programs could India, and Russia were redoubling their efforts to vaccinate prioritize investment in green infrastructure projects through their populations, with India receiving assistance from the leveraging public-private partnerships (World Bank 2021a). United States, the European Union (EU), and others. A waiver However, measures aimed at supporting firms have been on vaccine patents was under consideration in order to aug- used much more sparingly by lower income countries that are ment supplies in countries with production capacity; however, subject to fiscal and borrowing constraints, and support has most economists favored high-income countries purchasing been primarily directed at well-connected and easier to target, vaccines at the prevailing prices, and then distributing them, large firms (Cirera et al. 2021). free of charge, to countries in need. The approximately $12 billion such a program would cost would be far outweighed by The pandemic has highlighted the utility of digital tech- the benefits of worldwide immunity.9 Meanwhile, doctors had nologies. Digital technologies have enabled remote work gained a better understanding of how the virus attacks the (Özgüzel et al. 2020; Bartik et al. 2020; Yglesias 2020) by body, the efficacy of treatments was improving, and the num- a small percentage of the urban workers who are engaged ber of fatalities was declining in the United States and the EU in professional activities, and know how to use the technol- (Ledford 2020; Crow 2020; Kuchler 2020; Budd 2018). New ogy . But this is largely in upper-middle-income countries. E- innovations had simplified testing, and the turnaround time commerce has enabled many businesses to survive, despite for results had been reduced (Billingsley 2021; NIH 2020). In the decline in customers visiting their physical premises. Af- addition, the infrastructure for tracking and tracing people ex- ter a lag of several decades, productivity gains from digital posed to the virus had evolved, and its workability had been technologies could again appear in GDP statistics, with eight tested by a number of countries.10 sectors, including healthcare, construction, and retail stand- ing to reap significant benefits.11 The shock resulting from the Governments have demonstrated the capacity to en- pandemic could also serve as the tipping point for business gage in expansionary fiscal spending, often on a large digitization. Both large and small businesses can now see the scale, and they have also exhibited a readiness—fiscal advantages of using digital platforms and social media to sell headroom, and debt and borrowing constraints permit- products and services online, as well as settle transactions.12 ting—to continue using such policies to speed recovery This is apparent from the significant rise in online retail sales (Gaspar et al. 2020). Varoufakis (2020) rightly observed that in developed, as well as emerging economies. In the United “[The pandemic revealed] governments’ inexorable power [to States, for example, in the first two months of the COVID-19 spend].” Fiscal spending will have a significant and continu- crisis, online sales as a percentage of total retail sales, rose ing role to play over the medium term, and governments with from 16 percent to 33 percent (Kotz et al. 2021). In China, the fiscal headroom and external borrowing capacity could expe- share of online retail sales rose from 10 percent in 2014 to 45 dite the economic turnaround by using the instruments at their percent in 2020, and online sales are projected to exceed 50 8 Hundreds of thousands of people are receiving vaccinations in Russia and China, and these vaccines are now being made available in EMDEs at attractively low prices. The Russian Sputnik V vaccine is being marketed for under $10, and 20 countries have lined up to purchase doses (Litvinova 2020; Cohen 2020). Following emergency approval of vaccines in the United States and Europe in December 2020, the vaccination of the general public picked up speed in early 2021 (Zimmer, Corum, and Sui- Lee 2021; WHO 2020; Craven 2021; McKeever 2021). 9 Vaccines developed by Pfizer and Moderna received emergency authorization in December 2020 and similar approvals were obtained in early 2021 for vaccines pro- duced by AstraZeneca, Johnson & Johnson, and others. Chinese and Russian vaccines are also available (Zimmer and Thomas 2020). However, “An ideal pandemic vaccine [should] be acceptably safe for everyone, effective in inducing a durable protective immune response, rapidly scalable, stable at room temperature, single dose and cost effective. None of the current candidates has all these characteristics. Two of the front-runner mRNA vaccines demand (very) cold storage, at least two injections and, in some cases, site-of-care dilutions, raising costs and complicating delivery” (Bingham 2020; Cookson and Miller 2020; and Economist 2020b). “A vaccine with 90% efficacy will require 54%–72% of the population to be vaccinated to confer herd immunity” (Shretta et al. 2020). Regarding the case against waiving vaccine patents, see Vaitilingam (2021). 10 Estonia is one of those countries that has benefitted from a state-of-the-art IT system (Charette 2020). See Huang, Sun, and Sui (2020) and Huang (2020) regarding reservations about such systems’ potential invasiveness. 11 The productivity paradox has aroused much debate. Digital technologies have been diffusing for the past 40 years, and the rate of diffusion has been faster compared to earlier general purpose technologies (GPTs), but diffusion is far from complete, and the productivity gains have not materialized (OECD 2019). In fact, total factor productivity has been declining, worldwide, since around 2010. Some like Brynjolfsson, Rock, and Syverson (2017) and Mokyr (2014) maintain that technological change will be a continuing vital force, and that effective incorporation of a new technology takes time, and requires many complementary changes in organization management and working practices, plus the accumulation of skills and intangible capital. Others such as Gordon (2012, 2018) espouse the view that digital technologies cannot deliver productivity gains comparable to those resulting from, for example, the adoption of electricity and the internal combustion engine. One doubter of the technology revolution has recently expressed second thoughts (Ohnsman 2020), and Kotz et al. (2021) are optimistic that productivity could revive. 12 See Papadopoulos et al. (2020); Chow and Li (2020); and Abanmai (2020). Nigerian health authorities have used Twitter and Facebook to inform the public about COVID-19 symptoms and how to avoid infection (Jiang and Ryan 2020). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 percent in 2021 (U.S. Department of Commerce 2021; Gruen- past pessimistic forecast for U.S. productivity growth, and now wedel 2021; Cramer-Flood 2021; Ma 2021; CIW Team 2021). perceives the opportunity for improvement. World Bank (2020b) reports on the Philippines and the Rus- sian Federation also point to the benefits of digitalization for The COVID-19 shock has resulted in minimal destruction companies, as well as for public agencies. of capital. This, plus assistance from governments, has al- lowed many medium- and large-sized businesses in high- and While firms were forced to cut workers or put them on middle-income countries to survive.15 With some firms exiting unpaid leave, this situation has also given firms the flex- the market, the growth prospects for the remaining firms could ibility to make organizational changes in order to exploit improve as the global economy revives. Likewise, countries digital technologies more fully (Brynjolfsson et al. 2017). with robust domestic supply chains are capitalizing on the re- According to Comin and Mestieri (2018), this should accel- covery of trade (WTO 2020; Kim 2020). For example, China’s erate the diffusion of innovation, and narrow the productivity exports rose by 3.6 percent in 2020, topping $2.6 trillion (al- gap between large firms and small and medium enterprises though the yuan appreciated by 6.1 percent against the dol- (SMEs). Thus far, only a small number of firms in EMDEs ap- lar). The Wall Street Journal noted in early 2021 that China’s pear to be taking advantage of digital technologies. Accord- economy ended “the Year of the COVID” stronger than when ing to the World Bank’s COVID-19 Business Pulse Surveys it started, and exports in the first half of 2021 were 28 percent in 2021, only one in three firms in EMDEs had increased the higher than in the first half of 2020.16 Vietnam’s exports were use of digital technology in response to COVID-19 (Apedo- 5.3 percent higher, year-on-year, so that country also entered Amah et al. 2021). Nevertheless, an experiment in a rural area 2021 on a strong footing (Thuy 2020). Kenya’s floriculture in- of China suggests that providing infrastructure, user-friendly dustry, which contributes 1 percent of the country’s GDP, has platforms, and technical assistance can facilitate the entry of seen its fortunes revive, and in January 2021, it was employ- small suppliers in rural areas (Luo 2018; Wang 2017; World ing more workers than a year earlier (Economist 2021). In fact, Bank 2019). It is also possible to envisage institutional and global trade, which was initially forecast to decline by 18 per- regulatory innovations that improve the functioning of the pub- cent or more in 2020, actually fell by only 5.3 percent. In 2021, lic sector. In the EMDEs, the pandemic and the threat of other trade showed signs that it will make up for the ground lost in shocks to come may change the future of work (Baldwin 2020; 2020 due to stretched supply chains, and considerable pres- Seric and Winkler 2020) and drive home the advantages of sures on container shipping from a surge in demand for com- artificial intelligence (AI), machine learning, and automation, modities and manufactured goods. Some consolidation of the especially for larger, export-oriented firms. As some of these hard-hit retail, leisure/hospitality, and transportation industries are asset-light investments, firms may be readier to commit to is likely, and while this could lead to an increase in industrial full integration. In addition, firms might also be more ready to concentration, and higher profit margins, it may benefit pro- embrace greater factory automation so that they minimize the ductivity (although doubts have been expressed about this).17 disruption from the shocks that could come in future.13 A rever- If larger firms achieve greater scale and harness new tech- sal of the downward plunge in productivity could be possible if nologies, they could more easily mobilize the resources they firms seize the opportunities to make the needed investments, need to “build back better.”18 and increase their research so that they can push technology frontiers.14 According to di Mauro and Syverson (2020), this Falling oil prices have favored energy importers at the would be good for growth and, hopefully, for employment as cost of petroleum exporters. Thus, the economies of oil- well, although the distributional consequences are less easy producing Middle Eastern and North African countries may to anticipate. Gordon (2021), for example, has tempered his recover more slowly, although the uptick in oil prices since 13 Firms may be less eager to accelerate the automation of light manufacturing—for example, garment and footwear manufacturers—as there is an abundant supply of low-wage workers who can be laid off in a downturn without incurring high severance costs. Over the medium term, some 40 percent of firms in the EU see the need for more digitalization to adapt their product/services portfolio and improve supply chain resilience (Revoltella and de Lima 2020). 14 The private and social returns from research and development (R&D) are in the double-digit range. Restrictions imposed by the pandemic have affected research in some areas. Luckily, the sectors most affected by the pandemic are among the ones that spend very little on research¬—retail, real estate, and travel. In the aftermath of the 2008 Global Financial Crisis, the large private firms that undertook the bulk of R&D continued to invest in R&D because their competitiveness hinges on innovation. Since the pandemic began, the information and communications technology (ICT), pharmaceutical, and biotechnology industries with large cash reserves have ramped up their research (Dutta 2020). 15 For more information on government assistance catalogued by the International Monetary Fund, see the IMF’s website (https://www.imf.org/en/Home). 16 Xie, Jeong, and Cherney (2021) and Cheng (2021). Net exports may have added 0.3 to 0.4 percentage points to China’s growth in 2020, which was estimated at about 2.2 percent. 17 Marin (2021) has expressed doubts based on concerns regarding disruption of supply chains and the time taken to absorb new technologies and automate production. 18 While capital is available at low or negative rates of interest, only the larger, bankable firms are in a position to avail themselves of these resources. In 2021 and beyond, assuming that recovery does gather momentum, larger firms should face an abundance of opportunities, and have access to ample supplies of capital. Some of the excess savings resulting from the pandemic will be—and are—mopped up by governments, but this need not crowd out the private sector (Quiggin 2020; Mian, Straub, and Sufi 2020; Dvorkin 2020; UNCTAD 2020). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 the first quarter of 2021 could improve their fortunes.19 Also, the economy is likely in the latter part of 2021. In the United according to Buehler (2020), in most countries, bank balance States, the passage of a $1 trillion+ infrastructure bill and a sheets are in better shape thanks to measures taken after $3.5 trillion bill to fund family programs, clean energy, and ex- the 2008–2009 Global Financial Crisis, plus assistance from pand Medicare would further add to aggregate demand, and their central banks. In emerging markets, economic engines minimize the risk of secular stagnation. A U.S. economy that is could restart through the combination of selective government growing strongly would be good news for trade-oriented EM- assistance to viable firms, and portfolio and direct investors DEs. searching for higher yields and growth prospects, plus a fis- cal boost, where that is feasible, and aided by low interest Both tradable and non-tradable services could rebound rates.20 Given the wide range of new technologies disrupting rapidly and offer additional opportunities. In some middle- existing markets, the investment opportunities in a recovering and upper-middle-income countries, thanks to making good economy are plentiful.21 use of telemedicine, healthcare is enjoying a boom (Liu 2020). Given the accumulated experience, disruptive innovation in Consumer demand is poised to lead the recovery. The education, which is currently being trialed at scale, could, in a economic cost of the pandemic has been unevenly distrib- limited way, arrive in the classroom.23 Business services and uted. Those who are higher on the income ladder, and who export industries capable of remote operation have largely are doing white collar jobs and able to work remotely, have weathered the storm (Espitia et al. 2021). Construction activi- suffered much less worldwide (Adams-Prassl 2020). House- ties, which slowed, have begun recovering quickly. The same hold savings rose in the United States (Bilbiie et al. 2021); the applies to many informal activities. Other sectors such as re- European Union (Dossche and Zlatanos 2020; Crowley 2020; tail, restaurants, entertainment, and hospitality could begin Galletta and Giommoni 2020; Coibion et al. 2020); India (Bell- bouncing back, too, because entry barriers and start-up costs man 2021); and China, while household indebtedness also are low. But a return to the pre-COVID-19 status quo may not fell (Deaton 2021). Conversely, the high percentage of urban fully materialize until 2022. Barrero and his co-authors (2020) people who work in low-wage, manual jobs, and engage in speculate that, given the investment in equipment by the av- informal activities, have borne the brunt of the pandemic. In- erage telecommuting worker, as well as firms’ investment in come inequality has also risen, although so far if each country back-end information technology (IT) equipment and support, is treated as a unit, global inequality may have declined, be- working from home could persist in advanced economies and cause the losses in high income countries in the first quarter of some EMDEs, which could result in less spending on meals, 2021 were more severe (Deaton 2021). The divergence of in- entertainment, and shopping in central business districts. comes may strain social stability and demand government at- tention; however, higher savings could fuel consumer spend- Once the threat from the virus is controlled, and countries ing and speed recovery. This is what happened after World take measures to allay the concerns of travelers through War II, and a surge in spending was already apparent in 2020 insurance, sanitization of facilities, contactless entry/reg- (Davidson 2020; Bird 2020; Gagnon 2020; Bossie 2013). Un- istration, and COVID-19 vaccine passports/certificates, doubtedly, the sustained recovery of consumer spending will travelers’ pent-up demand could revive the tourism sec- depend on how convincingly the pandemic is brought under tor. This was already apparent from Dubai’s surge of visitors control in 2021. The turnaround in China’s economic perfor- at the end of 2020 and into 2021, as a vaccination saturation mance in the third quarter of 2020, its 6.5 percent per annum campaign served as a bulwark against the virus. Going for- growth in the fourth quarter of 2020, and its even faster growth ward, tourists are likely to favor destinations that have credibly in the first half of 2021, all suggest that China’s performance demonstrated their ability to bring the pandemic firmly under in 2021 should equal the forecast rate. In addition, in the Unit- control, and have proven measures in place to prevent any ed States, as has been the tendency after past crises and recurrence. The quality of local transport, IT infrastructure, downturns, employment recovered rapidly (see Figure 12 in and the healthcare system will undoubtedly influence the deci- Hall and Kudlyak 2020).22 With U.S. unemployment down to sions of travelers (IFC EM Compass Note 2020). Educational 5.9 percent in June 2021, a continuing strong performance of travel could begin reverting to pre-COVID-19 trends by the fall 19 Troster and Kublbock (2020). In 2021, recovery of MENA countries could be slower than the average for EMDEs. 20 How long these rates will persist is uncertain, but for those borrowers who can avail themselves of low, long-term rates, these rates are a means of financing long-lived infrastructure. 21 In the digital space and in other areas as well—for example, auto components (Kaka et al. 2019 and Barathram et al. 2020). 22 Hall and Kudlyak (2020). Experience from 10 post World War II recessions in the United States, which preceded the recession caused by the 2008 Global Financial Crisis (GFC), shows that real GDP fell by 2 percentage points, and the output gap increased to 4 percent. Following the onset of the GFC, real GDP declined by 5.1 percent by the second half of 2009, and the output gap widened to 8.1 percent (Elwell 2013). 23 For example, education could become more personalized (Barsotti 2020; Amitabh 2020). To date, the results from the use of technology in the classroom have been mixed, with student learning showing no improvement, although computer proficiency rose. (Escueta et al. 2017; Abbasi et al. 2020; Hobbs and Hawkins 2020). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 of 2021. However, business travel may be slower to recover,24 global value chains (GVCs) are rebounding.29 There was a dip including meetings, incentives, conferencing, and exhibitions in trade in 2020 due to problems with GVCs, but the disruption (MICE) tourism because the use of videoconferencing grew from the pandemic shock is being contained, despite persist- tremendously over 2020 (Curley et al. 2020; Rosen 2020; ing shortages of some inputs and rising prices.30 Some of the Frost 2020). decline prior to 2020 was the result of technological change, companies taking steps to consolidate suppliers, localization If governments turn their attention to greening infrastruc- in China, and creeping protectionism. But little reshoring has ture during the 2021 United Nations Climate Change Con- actually occurred.31 Adidas’ inability to successfully operate ference (COP26), which is scheduled for November 2021, highly automated shoemaking factories in Germany and the demand for a host of input suppliers could rise (Drescher United States, and the subsequent relocation of production and Mollame 2020; Barbier 2020). Of the major manufactur- to Southeast Asia, is emblematic of the problem (Germano ing industries, only the aircraft and airline industries might lag 2019). Undoubtedly, companies will make token efforts to re- behind the others because of reduced business travel. By duce reliance on a single production location. As Shingal and mid-2021, domestic air travel recovered in the United States Agarwal (2020) have observed, there was disruption of GVCs and was close to pre-pandemic levels, and in China, vaca- following the SARS virus epidemic in 2003. Starting in 2020, tion bookings were up as well. Tourism, for its part, has long companies were again reviewing their China+1 strategies to proven to be highly resilient.25 However, the third virus wave ensure that they have one other source besides China, and affecting the EU, India, and some Latin American countries they were looking for producers in Southeast Asia and Cen- during the second and third quarters of 2021, could continue tral America.32 While companies recognize the advantages of dampening intercontinental travel for a few months; but, as the redundancy in the interests of robustness and resilience, the numbers of the vaccinated increase and a system of vaccine likelihood of massive restructuring of the world’s production certificates/passports is put in place, controls could be relaxed seems remote. (Markovitz 2021). Similar predictions about the restructuring of GVCs were The challenges that EMDEs face due to deglobalization common following the 2008–2009 Global Financial Crisis, (Irwin 2020; Herrero 2019; Altman and Bastian 2019; Ghe- and in 2011 after disastrous floods in Thailand, and the mawat and Altman 2019); shrinking global value chains;26 Fukushima earthquake and tidal wave, but very little GVC and industrial reshoring have been exaggerated (Fish & restructuring actually occurred (Yang 2011; Escaith et al. Spillane 2020). There is scant evidence that a sharp reversal 2011; Newing 2012; de Treville and Trigeorgis 2010; Baldwin of globalization is imminent. It has leveled out, but unless the and Venables 2010; Cattaneo et al. 2010). Multinationals have politics in leading countries take a turn for the worse, and trade been looking around for alternative suppliers for more than a wars intensify (less likely since the election of U.S. President decade, but they have found few options. For example, many Joe Biden in November 2020, and the appointment of Ngozi of the components that U.S. companies use to manufacture Okonjo-Iweala as head of the World Trade Organization),27 3D printers are sourced from China, and technologically ad- this seems unlikely.28 The signing of the Regional Comprehen- vanced hearing aids are now made in Vietnam. However, ex- sive Economic Partnership (RCEP) by 10 members of the As- panding the production of semiconductors in the United States sociation of Southeast Asian Nations (ASEAN), plus Austra- will take years, and require substantial government incentives. lia, China, Japan, Korea, and New Zealand on November 15, Only in 2019 did a trickle of manufacturing return to the United 2020, indicates that trade liberalization is alive and well, and States, despite the efforts of the Trump administration (Ferry 24 As much as three quarters of airline revenue on international flights accrues from business travel (Hancock and Georgiadis 2021). 25 UNWTO (2020). The revival of tourism is critical for many economies because it accounts for 10 percent of global GDP, and one in ten jobs. 26 Dachs and Pahl (2019). Trade in services is growing faster (Lund et al. 2019; Degain, Meng, and Wang 2017; Kantrup et al. 2020; WTO 2019). 27 Evenett and Baldwin (2021) have suggestions for the new Director General of the WTO, urging Okonjo-Iweala to do her utmost to ensure that the trading system remains open and trade revives. 28 Persistence of the recent rise in protectionism, and efforts by major countries to reduce their dependence on other countries for strategic products cannot be ruled out. But the pandemic has underscored the advantages of trade and cooperation, as well as the limits of self-sufficiency (Dollar 2020 and Evenett; Baldwin 2021). Also see Antràs (2020) and Bloom and Prettner (2020). 29 The need to source personal protective equipment (PPE) from across the world to make up for local shortfalls during the COVID-19 pandemic, has highlighted the role of GVCs (Bamber, Fernandez-Stark, and Taglioni 2020). The demands for supplies generated by the pandemic also drew attention to the disadvantages of localization. Arriola and van Tongeren (2020) note: “More localization means more reliance on fewer [and more expensive] sources of inputs…When disruption occurs somewhere in the supply chain, it is harder and more costly to find ready substitutes, giving rise to greater risk of insecurity of supply.” 30 Espitia et al. (2021) conclude: “While GVC participation increased an exporter’s vulnerability to foreign shocks, it reduced vulnerability to domestic shocks. The disruption of production in input source countries more adversely affected export growth in sectors that relied more strongly on imported inputs from these source countries. Similar- ly, a disruption of production in an exporter’s partner countries more adversely affected its export growth in sectors with high shares of imported inputs. But the negative impact of a disruption in domestic production in exporting countries themselves was mitigated by a sector’s higher reliance on imported inputs in export production.” 31 A study using Spanish data indicated that robotization can lead firms to offshore rather than re-shore production (Stapleton and Webb 2020). 32 Shingal and Agarwal (2020). The COVID-19 pandemic has disrupted container shipping. With trade rebounding, led by consumer demand and the rebuilding of inven- tories, the shipping business is under severe pressure caused workforce illnesses, quarantining, social distancing, and a shortage of truckers. One consequence is congestion at major terminals, with container vessels having to queue for berths (Steer and Wright 2020). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 2020). The tariff barriers the United States erected have failed China’s currency remains competitively priced against both to significantly shift production back to the country (Krugman the dollar and the euro (Setser 2020), which is another reason 2020; Zumbrun and Davis 2020). Cambodia, Thailand, and why China will likely retain its grip on value chains for some Vietnam are frequently mentioned as alternatives to China, time.33 According to Bermingham and Leng (2020), the surge but, at best, they can absorb only a small slice of the low-tech in Chinese exports, starting in the second half of 2020, and activities carried out in China. Low labor productivity in Viet- extending to mid-2021, is indicative of China’s economic resil- nam also diminishes its attraction for multi-national corpora- ience and its continuing competitiveness. tions (Viet Nam News 2019; Breu 2012). Indonesia, the Philip- pines, and Thailand will attract some foreign direct investment, In this positive scenario, the resumption of growth in but according to the World Development Indicators database, leading economies, and of trade, would “lift most boats the falling share of manufacturing in GDP clearly suggests (countries)”. The launch of a coordinated effort by the G-7 that these countries are unlikely to challenge China’s domi- and G-20 countries to drive recovery of the global economy nance of medium and high-tech product GVCs. The same is in 2021 is comparable to the measures they took following true of the Caribbean, Latin America, and South Asia. Manu- the 2008–2009 Global Financial Crisis, and these measures facturers of semiconductors and telecommunications equip- could powerfully reinforce recovery.34 EMDEs, and especially ment are exploring the possibility of moving some production those that are integrated in GVCs; those that are exporters of to India. For example, at the urging of Apple, the Chinese elec- primary commodities; and some that are dependent on tour- tronics producer, Foxconn, is investing $1 billion to expand its ism, should all see their economic fortunes improve. Exporters capacity to assemble iPhones in India, but the bulk of Apple of commodities have already glimpsed the beginning of a new assembly operations remain in China. It would also be a slow super cycle, with the rise in copper, iron ore, and lithium prices process to shift the processing of cobalt, rare earth minerals, serving as a leading indicator (Bullard 2021). This could be the and polysilicon, as well as the manufacturing of advanced beginning of a virtuous spiral. The economic data from China, magnets from China to other countries. Despite some talk the United States, and the East Asian economies for the fourth about leaving, U.S. and European companies (Chow 2020; quarter 2020, and the first half of 2021, are encouraging, al- Fang 2020; Payne 2020; Liwei and Guo 2020) are in no hurry though these signs of recovery need to be treated with caution to forsake China (Li 2019). In fact, because China’s economy as the spread of the more infectious COVID-19 Delta variant has suffered less from the pandemic, it has recovered faster. has aroused worries. Moreover, although the renminbi has strengthened (Xie 2021), 33 China’s dual circulation plan, and the persistence of trade tensions—if carried on—could further reduce China’s dependence on imports of high-tech items (from the United States, Korea, and Japan), and on exports. 34 See Rooney (2011). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 4. >>> Scenario 2: A Slow, Uneven Recovery The second scenario comprises the following assumptions, and the rest of this section elabo- rates on why such a scenario may arise: • • • • • A severe and widespread third, and more waves of the pandemic caused by mutated vi- ruses that are not sufficiently blunted by vaccination on a global scale (IMF 2021b) lead to: more lockdowns (Gros 2020), tightening of travel restrictions, quarantining, a double-dip recession, and spillover effects from the leading economies, which drag others down (Torry and DeBarros 2020; Lane 2020). The logistical challenges of EMDEs acquiring, distributing, and administering vaccines are more severe than anticipated, and achieving 70–80 percent coverage of populations proves to be beyond the capability of many governments. In part, this is because of insufficient vaccine sup- plies, some people refusing to be vaccinated, and difficulties reaching people in rural areas.35 The scars inflicted by the pandemic, and the uncertainty it generates, depress private in- vestment, potential output,36 FDI, and consumer spending beyond 2021–2022. Over the longer run, the erosion of human capital compounds the losses incurred from 2020 to 2025. Business and household financial distress deepen due to both supply and demand shocks, and debt servicing/write off issues tip financial systems into crisis.37 Debt distress begins afflicting increasing numbers of EMDEs, giving rise to demands for debt restructuring (Spence and Leipziger 2020), and this is exacerbated by corporate dis- tress, credit downgrades, and the default of corporate bonds (El-Erian 2020). • Bankruptcies of many SMEs lead to increasing industrial concentration and rent-seeking pressures, with negative implications for innovation and productivity over the medium term. • Following a sluggish start in the first half of 2021, the growth of global GDP, trade, FDI, trav- el, tourism, and remittances slows down in the second half; a return to 2019 GDP levels is pushed into 2022, or beyond; key GVCs come under strain (in part because the trade tensions 35 Some African and Asian countries may have difficulty getting access to a sufficient number of doses. There may also be resistance to vaccination in some quarters. Goebel, Mayrhofer, and Schmitz (2020) have found that some people, especially ones with pre-existing conditions, can be reluctant to accept a vaccination: “The decision on getting vaccinated does not depend on how risk-willing or risk-averse someone is but rather on ‘prudence’.” 36 If the pandemic depresses the capital stock by reducing investment or making some capital obsolete as happened in the aftermath of the 2008 Global Financial Crisis, long-term potential output could suffer (Fuentes and Moder 2021). 37 Surveys conducted by the World Bank in the middle of 2020 indicated that the majority of firms in EMDEs could be in arrears by the end of the year if the crisis is not contained, and recovery does not begin (Apedo-Amah et al. 2020 and Crow 2020). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 between the United States and China remain unresolved, trillion in 2019 to $859 billion in 2020 (UNCTAD 2021). A further or worsen); and many suppliers in EMDEs go under. downward slide would be most harmful for countries in Central and South Asia and Sub-Saharan Africa. Over 40 percent of • Having largely exhausted their fiscal and monetary fire- the chief executive officers (CEOs) surveyed by the World Eco- power, most EMDEs are unable to support jobs and busi- nomic Forum in September 2020 thought that recovery would nesses, and this leads to a downward spiral of activity and be U-shaped, especially if countries succumb to financial and/ greater unemployment, poverty, and social tensions. or debt crises.38 Only a small minority (except in China) believed that a V-shaped outcome was possible (Table 4.1). A survey • Social unrest imperils the functioning of states in some by McKinsey in November 2020 indicated that the outlook was of the hardest hit countries. According to Herrera and his improving, but this was before new variants of COVID-19 had co-authors (2020), electorates will vote out governments begun to appear, and when positive memories of recovery from that do not take adequate measures to control the second past crises continued to color perceptions (McKinsey 2020b).39 or third wave of the pandemic and contain the economic A survey of CEOs conducted by PriceWaterhouseCoopers damage. In carrying out their study, Sedik and Xu (2020) (PwC) in March 2021 indicated that the intervening months had found that pandemics and associated hardship can un- strengthened CEOs’ positive sentiments, with 76 percent ex- leash a wave of despair, unrest, and lead to increasing pressing greater optimism regarding their corporate prospects inequality—especially in countries where inequality was in 2021 (PwC 2021). However, since the first quarter of 2021, substantial before the start of the pandemic. worries have grown due to the resurgence of infections caused by the COVID-19 Delta variant. • The inability of G-7 and G-20 countries to agree on a coordinated plan to share vaccines and other pharma- As noted by the World Bank’s January 2021 GEP report, ceutical products to contain the pandemic, or to agree the risk to EMDEs is considerable because of countries’ on how to stimulate recovery, prolongs the pain, and the high and rising levels of indebtedness, which have already achievement of global herd immunity (MacMillan 2021; exceeded sustainable levels. The debt-induced pressures Aschwanden 2020). will be even greater if interest rates rise, as some in the United States fear that they will because of the uptick in inflation.40 Bu- This scenario points to a sluggish, long-drawn-out U- or low and his co-authors (2020) contend that “There are reasons L-shaped recovery, extending through 2022 and possibly, for concern about sustained emerging market access to capital beyond—akin to the low growth scenario described in the markets. The riskiest period may still lie ahead. The first wave World Bank’s January 2021 Global Economic Prospects of the pandemic is not over…[another wave has started]. Busi- (GEP) report. GDP growth and trade could remain anemic nesses [in EMDEs] have continued to accumulate foreign cur- through the middle of the decade because of the damage done rency debt…On top of [a] dramatic retreat of private funding… to: consumer confidence and demand, private investment, borrowing needs have skyrocketed…and will only rise further as start-up activity, FDI, factor productivity, and the accumulation the economic damage mounts…Rising budget pressures have of human capital. China was already rethinking its investment in been accompanied by a new wave of sovereign debt down- the Belt and Road Initiative (BRI) prior to the COVID-19 crisis. grades, surpassing peaks during prior crises.” A sudden stop of China’s outward FDI fell by 8 percent in 2019, and slid further in capital flows to EMDEs could make it harder for them to recov- 2020, with lending by the China Development Bank and the Chi- er, according to Ahmed et al. (2020). Economic scarring, over na Ex-Im Bank declining from $75 billion in 2016, to $4 billion in the longer term, that depresses output below its potential, was a 2019 (Wheatley and Kynge 2020a and 2020b; Tanjangco et al. risk identified by Cerra and Saxena (2008 and 2018) when they 2020). The high indebtedness and precarious finances of Chi- used data from 190 countries for the period 1974–2012. These na’s principal low- and lower-middle-income country recipients authors observed output losses from recessions inflicted by all (Ray and Simmons 2020) is likely to reinforce the reluctance of types of crises, both economic and political. “On average, the Chinese lenders to increase their foreign exposure. According magnitude of the persistent loss in output is about 5 percent for to the United Nations Conference on Trade and Development balance of payments crises, 10 percent for banking crises, and (UNCTAD), FDI from all countries fell by 42 percent from $1.5 15 percent for twin crises” (Cerra and Saxena 2018). 38 Reinhart and Rogoff (2014). Banking sector distress is a concern for India, which has one of the highest ratios of bad debts in the world, and an economy that has contracted by over 10 percent of GDP. Non-performing loans are projected to increase from 7.5 percent to between 13.5 percent and 14.8 percent by September 2021 (Parkin 2021). 39 Hall (2014) describes and analyzes the damage that the 2008 Global Financial Crisis inflicted on the U.S. economy, which was caused primarily by the slow recovery of employment/participation rates and the downturn in total factor productivity. Also see Krishnamurthy and Muir (2017) and Hauk (2020). 40 Andrews (2019) and Kose et al. (2020). Memories of the taper tantrum of 2012 have not entirely dissipated. See Basri (2016) on the impact on Indonesia. Hence the discussion is underway about whether the U.S. stimulus packages could lead to inflationary pressures and higher interest rates. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 > > > T A B L E 4 . 1 . - Trajectory of recovery from the pandemic Region L-shape U-shape W-shape V-shape Global (N = 606) 32% 42% 16% 11% U.S. (N = 103) 26% 42% 23% 9% Europe (N = 110) 29% 55% 12% 4% China (N = 122) 25% 43% 11% 21% Japan (N = 95) 49% 26% 23% 1% Gulf Region (N = 16) 57% 26% 17% - Source: Ghosh 2020. In this negative scenario, all EMDEs would suffer to vary- es (Schumpeter 1912). While this is painful, it is ultimately ing degrees, depending on their size, openness, structure positive as capital and labor shift from less to more productive of their economy, level of development, composition of activities, assuming that these factors are fungible. Govern- exports, disruption suffered, the scarring that erodes hu- ment support policies have, in most cases, not discriminated man capital and depresses future investment (Economist among firms and, thus, they support weaker, as well as stron- 2020a), and the effectiveness of EMDEs’ responses to the ger firms. However, there has been less up take by smaller pandemic. High-income and large economies, with greater and informal firms. As previous “credit crunches” reveal, firms absorptive capacity and resilience, and less dependence on with perfectly sound business models and strong profitability trade, will find it easier to absorb the damage and recover if may be forced to close for reasons that are entirely beyond they can extinguish the epidemic through vaccinations and their control. Furthermore, during the COVID-19-induced re- other measures—and India and Brazil are two test cases for cession, the “weaknesses” of many firms, and particularly this. China was the first country to report cases of COVID-19, those in services, result directly from compliance with pub- but it was also the first to rebound because of the decisive lic health and safety rules and obligations. This has been actions the government took to control transmission of the vi- especially the case for services in high- and middle-income rus. Economies such as those of Finland, New Zealand, Viet- countries. Thus, untimely closures of businesses are not only nam, and Taiwan, China, have also limited the damage. The painful, but this can drive out viable, innovative young firms countries with some remaining fiscal headroom and scope for with growth potential. Indeed, there is growing concern that as extending financial support to businesses could use macro- countries scale down financial forbearance measures, along economic policies to revive consumer spending—the main with other forms of support to firms that were instituted at the source of aggregate demand—and also encourage private beginning of the pandemic, bankruptcies of otherwise-viable investment. In this regard, China is the best positioned, and firms will rise (Freund and Pesme 2021). has already taken the lead. China has controlled the pan- demic, and is using fiscal and monetary instruments to restore An increase in market concentration that persists as the economic normalcy. Others such as Brazil, Colombia, India, entry of new firms slows, would have negative implica- Mexico, and South Africa are struggling with fresh virus waves tions for public welfare because this would push prices of considerable ferocity, but when compared to some of the up, and slow recovery. In EMDEs, this issue will require spe- smaller countries in the Caribbean, Latin America, Sub-Saha- cial attention during recovery, as regulatory protection of ex- ran Africa,41 and South Asia, these five countries have more isting enterprises in upper-middle-income and lower-middle- degrees of macro policy freedom (Lath et al. 2020; Chan et al. income countries is more than 40 percent. And in high-income 2020; Sankhe et al. 2020). countries, the level of protection observed is 60 percent. How- ever, in some sectors such as health and education, where In recessions, the expectation (embedded in the Schum- there are private providers of public goods and services, a peterian theory of growth) is that relatively weaker firms moderate degree of market concentration may be necessary exit, and the productivity of the economy usually increas- to achieve standardization and quality. 41 The Latin America and Caribbean (LAC) Region, which was growing sluggishly prior to the pandemic, has been hit hard, and is unlikely to return to its pre-pandemic GDP level before the end of 2023. A quarter of all deaths from COVID-19 in 2020 were in the LAC Region, although it has just 8 percent of the world’s population. Recovery is also likely to be constrained by the world’s highest public debt to GDP ratios (FT 2021b). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 Countries that are integrated in GVCs face mixed out- of the tourism sector. Pre-COVID-19, the insurance market comes. Firms in East and Southeast Asia, as well as those benefitted not only from the preceding decade’s growth in Eastern Europe and Central America that produce semicon- travel, but also from the greater use of online booking plat- ductors, electrical machinery, telecom equipment, vehicles, forms. These exploited the opportunities provided by technol- pharmaceuticals, and healthcare products, could benefit from ogies such as global positioning systems and data analytics. strong demand from China, European countries, and the Unit- ed States. If the recovery of China and the United States con- As visibility on the Internet is vital in the tourism sector, tinues, it will enable countries in Southeast Asia to regain their firms that do not invest in digitalization are unlikely to economic footing. However, countries such as Bangladesh, survive unless they are specialized, niche operators. Pre- Cambodia, Ethiopia, Pakistan, and Sri Lanka, which are inte- COVID-19, the World Bank (2018) highlighted the problem of grated in GVCs for garments and footwear, could face a more EMDE tourism firms lacking the capacity to use digital plat- difficult situation (Becker 2020; Choudhury 2020). This is be- forms for promotion and sales because they knew little about cause demand for these products shrank in 2020, and worse digital platforms, and lacked the knowhow and resources to could occur if the global downturn persists. For the same use digital media. Thus, supporting EMDE tourism business- reason, if the recovery is U shaped, suppliers of agricultural es’ use of digital tools will be vital if the global economy con- commodities and minerals could suffer from lower prices and tinues to languish; and conversely, if the global recovery is V demand for their products. According to Osterhuber (2020), shaped, this will also spur the growth of tourism businesses examples of this include Central American countries (export- and the sector. ers of coffee and bananas); Chile (an exporter of copper); and Cote d’Ivoire (an exporter of cocoa, cashews, and palm oil). Peoples’ unwillingness to undertake long-haul flights and substituting these with domestic and short-haul travel Another group of small economies are dependent on tour- is expected to persist for some time after the pandemic ism and, arguably, they are among the most vulnerable in ends. This is due to the complexities and perceived risks a low growth scenario. These comprise countries in Africa, of travel that requires stopovers. Also, peoples’ reluctance the Caribbean, and South Asia. Several European countries, to travel to geographic regions that are perceived to have poor and others such as Cambodia, Peru, Sri Lanka, and Thailand healthcare facilities and/or where the pandemic is not under derive a substantial share of their foreign exchange earnings control, will continue. Travelers’ concerns about catching the from tourism. All have taken a severe hit, especially because virus from others suggests a greater market share for home- travel and tourism are among the industries most damaged by sharing business models, and contactless interactions in ho- the pandemic.42 In 2020, real GDP in tourism-dependent Afri- tels and restaurants. As noted above, business and scientific can and Caribbean countries was estimated to have fallen by conferences and exhibitions may not revert to pre-COVID-19 12 percent, and by as much as 21 percent in Pacific Island na- levels because, like influenza, the virus is likely to become en- tions such as Fiji. The degree of disruption, together with con- demic, and technology offers alternatives that avoid the risk of siderable restructuring and consolidation in the tourism sector, meeting in person (Baldanza 2020). In 2020, the substitution means that in EMDEs there will be fundamental and perma- of business and scientific exchanges with digital or virtual con- nent changes that give rise to risks, as well as opportunities. ferencing proved remarkably successful, and this is expected to continue. Meetings, incentives, conferencing, and exhibi- For the decade before the crisis, the tourism industry was tions (MICE) tourism is likely to evolve into a hybrid form of characterized by profound changes: an increase in ultra- conferences that integrate online services with smaller, safer, long-haul flights; pressure to demonstrate sustainable and re- in-person gatherings. There is some expectation in the tour- sponsible business practices; an increase in wellness tourism; ism market that because some professionals will continue to a trend toward peer-to-peer accommodation and transporta- work remotely, there is a market for “long stay” tourism. Barba- tion providers such as Airbnb and Uber (Bakker et al. 2018); dos, Bermuda, Estonia, and Georgia are among the countries and growing use of digital platforms for booking transporta- with fragile tourist industries that have created a new visa cat- tion and accommodation. These digital platforms, which allow egory for telecommuting foreigners (Mottley 2021). New facili- consumers to search for and book flights and accommodation: ties such as co-living/co-working spaces, camps, and cruises facilitate consumers’ decision-making (Lopez-Cordova 2020), are expected to emerge to cater to these “digital nomads” who improve sector competitiveness, and contribute to the growth are seeking a setting with a safe environment where social 42 The travel industry incurred revenue losses equaling $710 billion (FT 2021a). Bookings Holdings worries that it could take years for travel to return to Pre-COVID-19 levels; Expedia, the travel booking company, noted that international air travel remains “very injured”; and in September 2020, Marriott Hotels announced that global occupancy was running at 37 percent (Forman 2020). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 interaction can take place (Thompson 2019). However, this insurers under pressure from the perspective of lower earn- is likely to be a temporary market, and one which is small ings, and the risk of insolvency. In order to increase consumer scale. As the airline industry adjusts to serve relatively more confidence in leisure travel, it may be necessary for the in- leisure than business travelers (Mason 2020), this will have surance industry to explicitly assess and improve its ability to implications for both the pricing structure and margins of air- absorb ongoing risk. line companies. Many developing countries are exporters of labor, and The absence of standardized rules for the movement of the remittances of migrant workers significantly augment people is a barrier not only for the consumption of tourist earnings from other sources. Central Asian countries (for services, but also for attracting investment. Although the example, Kyrgyzstan) and others such as Cambodia, Egypt, COVID-19 crisis has elevated awareness about the risks as- Nepal, Pakistan, and the Philippines43 are in the same league, sociated with travel, most travel insurance policies have been and all could experience a dwindling of remittances.44 With- slow to take account of the effects of a pandemic, government out a V-shaped recovery, the remittances of migrant workers, shutdowns, travel bans, or pandemic-related medical costs. which have enabled millions to remain above the poverty line, It is not clear yet if private insurers will be willing or able to will not be sustained. address this gap, especially as low interest rates put general 43 One in five people in Africa receives remittances from abroad. In 2019 a total of $81 billion were received. A decline of $18 billion is projected for 2020 (Aidi, Fatai, and Karingi 2020). 44 World Bank (2020a) and World Bank (2020d). In 2020, remittances to countries in LAC, South Asia, and MENA rose, but those to countries in East Asia and the Pacif- ic, Central Asia, and Eastern Europe declined. Overall, the decline globally was small (only 1.6 percent below 2019 – $540 billion versus $548 billion). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 5. >>> Post-Pandemic Challenges, Old and New The COVID-19 pandemic has inflicted harm. However, developments during the last quar- ter of 2020 and the first half of 2021 suggest that the building blocks of recovery are com- ing together. The increasing availability of vaccines, and the apparent effectiveness of some against new variants of the virus; the revival of global trade; the quickening of activity in the East and Southeast Asian economies; the upswing in commodity prices; the positive response of global markets to sovereign and corporate bond issuance by EMDEs; the narrowing credit spreads; and the recovery of the U.S. economy (Torry and DeBarros 2021; Tankersley 2021), are all good omens for 2021–2022. Nevertheless, questions remain regarding the speed of recovery in many EMDEs because of the structural constraints predating the crisis that constrain growth and jobs, and that have worsened with the pandemic. The economic challenges confronting EMDEs have been exacerbated by: the failure of numerous SMEs; inefficient insolvency regimes; the further weakening of bank balance sheets in cases where banks have been lending to unprofitable firms for some time; the inability of banks in these predicaments to help drive recovery; firms’ and governments’ heavier debt burdens; pressure on global value chains, and especially on the GVCs for semiconductors and plastics; shortages plaguing the shipping industry and backlogs at ports; and households’ greater precautionary savings, which could depress spending over the near term. The crisis has exposed the downside of hyper globalization, and there is urgent need to reverse intra-country inequality, and build resilience against the “known unknowns” and the “unknown unknowns”. Looking forward, the choice that we confront is whether to be pro-active in launching a private sector development agenda that not only reignites sustainable growth, but one that also builds resilience against “black swans”45 and aspires to be equitable. A recovery strategy that lacks the commitment to tackle pre-crisis challenges head-on will, eventually, fizzle out as inequality and environmental degradation continue to grow. 45 That is, a low-probability event with potentially severe consequences. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 >>> References Abanmai, Othman. 2020. “The Importance of Going Digital for SMEs.” SME Finance Fo- rum, July 21. Abbasi, Sahar, Tahera Ayoob, Abdul Malik, and Shabnam Iqbal Memon. 2020. “Perceptions of students regarding E-learning during Covid-19 at a private medical college.” Pakistan Journal of Medical Sciences 36(COVID19-S4): S57–S61. 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