Economic costs of closed minds manifest in pandemic times

This year began amid widespread despondency about the resurgent Covid-19 pandemic and the struggling global economy, as well as premonitions of heightened political conflict in Eastern Europe, the Middle East, and even the United States.

True, there is now some hope that the Omicron variant may be the pandemic’s last hurrah. But troubling questions remain about the economic and political legacy of the crisis.

The World Bank’s latest biannual Global Economic Prospects report, released last week, points to some possible answers. Produced by a team of talented economists, the report is one of the best summaries of the current outlook for the world economy. And while the report uses the diplomatic language of multilateral organizations, it nonetheless packs a powerful cautionary punch.

For starters, the World Bank forecasts that global economic growth will slow to 4.1 per cent in 2022, from 5.5 per cent last year. With debt burdens rising, supply-chain bottlenecks impeding the flow of goods and services, and inflation picking up, governments are losing the capacity to provide further fiscal support. The report warns that the surge in debt caused by countries trying to soften the “pandemic-induced global recession” means that several economies are now “at high risk of debt distress”. Some may need relief.

The report also predicts that energy prices, which surged in the second half of 2021, will increase further – and by more than the World Bank was projecting six months ago.

Finally, the report’s tables of summary statistics contain a lot of interesting information – in particular, data on major economies’ recent GDP growth and forecasts for the next two years.

The fastest-growing economies in 2021 were Argentina, Turkey, and India, which expanded by 10 per cent, 9.5 per cent, and 8.3 per cent, respectively. But growth after a crash needs to be interpreted carefully. Much of last year’s growth merely reflected the depth of the pandemic-induced downturn of 2020, as economies climbed back towards their earlier GDP level. In 2020, Argentina’s economy contracted by 9.9 per cent and India’s by 7.3 per cent – making them, along with Mexico, the worst-performing major economies that year.

Usually, emerging market and developing economies, helped by their lower base, grow faster than advanced economies. But, according to Global Economic Prospects, the prognosis for EMDEs through the end of 2023 is worse than for advanced economies, because EMDEs have limited policy space to provide additional support and face greater risk of hard landings. Moreover, the pace of recovery is likely to vary significantly between countries. Once the dust settles after the current turmoil, therefore, there will most probably be new winners and losers.

One of the main reasons for the uneven recovery has more to do with politics than economics. From advanced economies such as the United States to EMDEs like Brazil, support for aggressive nationalism has grown sharply in recent years. This is bound to play a major role in determining how these economies perform.

Kaushik Basu, a former chief economist of the World Bank and chief economic adviser to the Government of India, is professor of economics at Cornell University and a non-resident senior fellow at the Brookings Institution.