“The brunt of the hit to the global economy is being felt in developing countries with limited fiscal space, tightening balance of payments constraints and inadequate international support,” UNCTAD warned on Thursday. “Without a change of course, the new normal for many will be an unbalanced recovery, vulnerability to further shocks and persistent economic insecurity.”
The report highlights the tremendous damage done to the global economy by the lockdowns implemented in response to the COVID-19 pandemic, which interrupted both production as well as trade as workers stayed home or went to work only intermittently and inter-state travel was frustrated by heavy restrictions.
While a number of factors have led to a recent hike in global economic growth this year from 4.3% to 4.7%, including the $1.9 trillion fiscal stimulus passed by the United States earlier this month, even those new projections will leave a 10 trillion dollar hole in the global economy by the end of the year. That is also still slower than the pre-pandemic annual growth level of 5%, the report notes, impacting projections for the UN’s Sustainable Development Goals, among other programs.
However, a far greater danger lies in the potential early abandonment of public spending initiatives in the developed world sparked by the pandemic, which the report notes have an exacerbated effect on the global economy compared to those in the rest of the world.
“A misguided return to austerity after a deep and destructive recession is the main risk to our global outlook, especially in the context of fractured labour markets and deregulated financial markets,” the report notes. “Together with the erosion of states’ institutional capacity and policy space, these trends undermine the resilience of the global economy to all shocks.”
“Austerity undermines resilience and fiscal space,” it continues. “In the aftermath of the great financial crisis, fiscal measures (especially cash transfers) have assumed a prominent role in relief packages alongside financial measures (loans, guarantees, etc). But the effort has been unevenly distributed among countries, even within the group of developed economies. For heavily indebted developing countries multilateral debt relief was a step in the right direction but was negligible in scale.”
The report faults the European Union for “replicating the imbalances behind the slowdown in growth that was already apparent prior to COVID-19,” particularly commitment to an export-led recovery over sufficiently strong fiscal expansion. It also strongly criticizes the United States for building a post-2008 recovery on an economic bed of sand, including consumption-driven growth dependent on rising household debt.
“Loose monetary policy has certainly helped the recovery in consumption spending, but without a strong push in government spending, including a strong public investment drive, and measures to raise the share of labour in total income, its impact on private investment spending remains uncertain, particularly under the threat of rising corporate bankruptcies which will increase as monetary policy is tempered. The current stimulus package contains large cash transfers but little direct spending on consumption and investment, which would offer the safest route to aggregate demand expansion and a green transition,” UNCTAD wrote.
By contrast, UNCTAD notes that “China’s ongoing efforts to turn to domestic consumer demand and increased public spending on social services will be key to moving from a robust recovery to a more balanced and transformative growth path.”
According to a new study published by Pew Research Center on Thursday, the pandemic has crushed the middle class worldwide, with the hardest-hit areas being South Asia, East Asia and the Pacific. India was hit the hardest of all, with 32 million people sliding from middle to low-income. In China, about 10 million people fell from middle to lower income, although the report notes that because the Chinese government dealt with the COVID-19 pandemic so swiftly and effectively that its society was able to reopen after just a couple of months, the country was spared an economic contraction that would have impoverished tens of millions more.
Earlier this month, China’s National People’s Congress convened its annual legislative session and verified the economic plans for beginning the country’s 14th Five-Year Plan drawn up the previous November. The plans project economic growth “above 6%” this year as well as creating 11 million new urban jobs, keeping consumer price indices at 3% and the urban unemployment rate at 5.5%, and reaching a grain output of more than 650 million metric tons. The plans also includes a number of “targeted support” programs to shore up the economy from the ravages of the previous year, including a 30% increase in bank loans to small businesses, the creation of a $62 billion loan plan to support “emerging technologies” and an Integrated Circuit Industry Investment Fund to support chipmakers targeted by US sanctions.
Another contributing factor is the delayed rollout of COVID-19 vaccines in the Third World. While the United States has bought nearly twice the number of vaccines as it has people, Washington, alongside London and Bern, have also led the charge in opposing a waiver to Trade-Related Aspects of Intellectual Property (TRIPS), the World Trade Organization’s patent cornerstone that blocks production of generic versions of medicines.
“The delay in economic recovery and further damage to overstretched health systems in the developing world will be devastating but prolonging the pandemic anywhere will have consequences everywhere,” UNCTAD said, noting that a recent study has found “this will ultimately have the gravest impacts on advanced economies.”
By contrast, China has negotiated for Egypt to become a “global logistics hub” for distributing its Sinopharm vaccine, building a factory there, as well as potentially another in Morocco. It has also launched a vast distribution campaign across some of the world’s poorest countries, including much of Africa.