Economist explores what the world and economy will look like when COVID-19 ends
John Lipsky described the COVID-19 pandemic as an “economic crisis like no other.”
As the COVID-19 pandemic progresses, economists have been tracking the state of the global economy and predicting what the world will look like after the pandemic. Economist John Lipsky spoke to the Brandeis community about his research at a virtual event on Wednesday, Oct. 21. His talk was sponsored by the Brandeis International Business School and hosted by Provost Lisa Lynch and Prof. Steve Cecchetti (IBS). The event, titled “Policy Changes for the Post-pandemic Global Economy,” was a discussion of several key issues through an economic lens, from policy and management of the pandemic to the different progressions of the pandemic in developing versus developed countries.
COVID-19 is “an economic crisis like no other,” Lipsky said, “but we have to remember the source of this problem is the pandemic, and the economic downturn has been a result of a government-decreed shutdown.” Cecchetti added that the current state of the economy can be tracked in real-time with the Opportunity Insights economic tracker.
Lipsky began by explaining what surprised him in how the pandemic is being managed globally. He said that positive surprises include “the speed and scale of the policy response,” “the amount of global cooperation in medicine,” and “the degree of reflow of capital back to these economies,” following an initial outflow. He also noted that from an economic standpoint, the impact of the virus has been limited throughout Africa.
On the other hand, there are several negative surprises that have come with the pandemic as well, such as “the lack of G20 cooperation and coordination.” The G20 is an international economic forum made up of the European Union and 19 other countries. In response to the pandemic, Lipsky said, “everybody was acting big and acting quickly, but not acting together in terms of fiscal policy.” He added that there was initially “disarray” in Europe and especially negative effects throughout Latin America due to poor responses.
Lipsky said that the United States is approaching “the lowest employment rates in 50 years” because so many businesses have had to downsize or close during the pandemic. He did note, however, that the economy recovered after the 2007 to 2008 global financial crisis, so there is the chance that that could happen again with this financial crisis. Lipsky explained that the economy may recover as long as there is flexibility. “It’s a bit hard to think that the real challenge isn’t [economic] scarring,” he said, adding, “The challenges are, are we going to be able to show the economic flexibility to accommodate the changes that seem to be inevitable?”
How countries have responded to the pandemic in terms of policy and international cooperation has led to a lot of uncertainty. Lipsky explained that in the United States, the Centers for Disease Control and Prevention did not provide COVID-19 testing materials fast enough. Political leaders were also reluctant to initiate a lockdown to stop the spread of the virus, affecting both citizens’ health and the economic outcome. “It seems that everywhere there’s been uncertainty about the correct scope and scale of fiscal action,” he said, adding jokingly that this issue is likely to “launch thousands of Ph.D. theses.”
Regarding the uncertainty of the economy, Lipsky said, “It wasn’t impossible to imagine a pandemic occurring, but we just weren’t prepared at almost any level, and we’re left making it up as we go along.”
“A new system has emerged in the wake of the global financial crisis that … I would say, has not been terribly well thought through,” Lipsky said, explaining later that the G20 countries have often overlooked smaller economies in policy decisions, and now those countries are in need of extra support. Although countries with both developed and developing economies are anticipating an economic decline, developing nations are likely to be hit the hardest, particularly if there is a lack of global support, Lipsky said. Cecchetti mentioned that the International Monetary Fund estimates that about 100 million people worldwide could be driven into extreme poverty because of the pandemic. “I worry that [advanced economies] have become so focused on our own problems,” Lipsky said, explaining that he fears these countries will be left without the “bandwidth” to aid developing countries to the extent needed.
These economic dilemmas raise the question of how the global economy must be restructured to avoid a post-pandemic financial crash. Lipsky explained that a lot of change is needed, including “educational reforms, healthcare reforms [and] unemployment insurance that provides incentives for acquiring skills and shortening periods of unemployment.”
He said that there has to be a restructuring of debt as well, particularly in terms of lending financial aid to developing nations. “The IMF and the World Bank have led the call for what they call a ‘debt service suspension initiative.’” This initiative, which is expected to be extended through much of next year, Lipsky said, “says the poorest countries shouldn’t have to make any debt service payments at all.” Lipsky explained that there is also an imbalance in international financial aid, with China being the largest creditor. He said that China has been lending a lot of international aid, but that it has been restructuring debt for the countries it is helping on different terms than other members of the G20.
According to Lipsky, there are essentially four “tiers” of accessibility to the global financial system, which are also highly imbalanced. He explained that “first class” includes central banks that have unlimited access to swap lines (emergency trade between nations), “business class” includes 12 countries that have occasionally been granted access to Federal Reserve funding, “premium economy class” includes a limited number of countries who are eligible to a short-term liquidity line and then the rest of the countries that are unable to access financial aid.
Another concern in terms of restructuring the economy is in relation to climate change. At a 2009 meeting of the G20 finance ministers, leaders did not want to get involved in policy making regarding climate change. He said that now is the time for them to get involved, however, and he believes that a carbon tax is an important step. “The G20 has got to take the lead on this, and for this to happen, the U.S. has to get on board. … We [have] to get moving on this before the insurance becomes way too expensive,” Lipsky said.
Lipsky explained that a cooperative international system is imperative for the global economy post-pandemic. “It’s time to get serious about trying to make progress, and that among other things, requires U.S. leadership,” he said.