Debt, deficits, and welfare during the pandemic

ARTICLE: 'The best way to predict your future is to create it' - Abraham Lincoln

The global pandemic has pushed the world, especially the developing countries, in a very uncertain territory with regard to economic recovery, which in most parts depends on finding an appropriately acceptable vaccine that may in itself take a year at least to reach, and another couple of months to administer. This immense uncertainty requires a huge government response, if any sort of meaningful control has to be exerted on the future of global economy. At the same time, it will be a hard juggle to manage, given the heavy burden of a looming debt crisis, ballooning budget deficits, and swaths of helicopter money or cash handouts required for fast growing welfare needs.

The key actor in all of this is the government. No longer can governments allow themselves to be pushed to the margins under the philosophy of Neoliberalism. In a recent article No more free-lunch bailouts, Mariana Mazzucato and Antonio Andreoni have emphasized the need for change of guard of this thinking by pointing out that "The Covid-19 crisis and recession provide a unique opportunity to rethink the role of the state, particularly its relationship with business. The long-held assumption that government is a burden on the market economy has been debunked. Rediscovering the state's traditional role as an "investor of first resort" - rather than just as a lender of last resort - has become a precondition for effective policymaking in the post-Covid-19 era."

The governments will have to lead the effort to secure a more certain future for their respective economies. Above all, this would require not just money, but rather a strong policy that tries to balance a) the rising needs of welfare for the fast growing pool of the unemployed, and in turn the poor below the poverty line, and struggling businesses, and b) very difficult budget deficit and debt numbers.

With regard to the particular impact of pandemic in terms of unemployment, Hernando De Soto pointed out in his article The developing world has an alternative to debt that "Developing and emerging economies are home to most of the two billion people working in the informal economy. According to Guy Ryder of the International Labour Organisation (ILO), these workers suffered a 60% collapse in earnings just in the first month of the crisis. With no savings or access to credit millions of businesses around the world are barely breathing. ... If we don't help them now, [they] will simply perish." Moreover, the ILO indicates that due to the pandemic, the second-quarter decline in work hours globally is virtually equivalent to losing around 300 million full-time jobs.

Yet, strong policy will require a lot more the support of efficient economic institutions - both in terms of evolution of policy, and its proper implementation. More efficient institutions that put in place better governance and incentive structures for improved economic exchange, happening in organisations and markets, would help improve a) the quality of spending so that scarce resources are made best use of; b) the scope for greater revenues; and c) foreign exchange earnings - all important outcomes when fiscal resources are stretched, and debt burden dangerously flirting with unsustainability with lukewarm support from multilateral and private creditors in terms of debt relief/moratorium in the wake of the pandemic, and reduced potential for exports and remittances due to severe global recession.

Here, for instance, with regard to global debt and deficit, IMF recently highlighted the lot more enormity of debt and deficits now, as against the Global Financial Crisis (GFC) 2007/08, whereby firstly, general government debt globally stood at 10.5 percent of global GDP in 2009, while in 2020 it is forecasted to be almost double of that at 18.7 percent. Secondly and similarly, during the time of GFC, overall fiscal deficit stood at 4.9 percent of global GDP, which when compared to the forecasted number for 2020 stood a little more than twice at 10 percent; a number that is being expected to be reached for FY 2019/20 fiscal deficit in Pakistan, which will be the first time that it would have reached double digit in a year for the country. Therefore, unless the government brings in strong policy, the numbers for debt, and deficit are likely to reach quite overwhelming levels.

While countries globally, and in Pakistan in relative terms to its fiscal capacity, have tried to meet significantly greater needs of welfare, and induce growth through stimulus packages, the reality is that it will be too little if strong economic institutions are not reached, both for policy, quantity of revenues, and quality of expenditures. This is emphasized by Mazzucato and Andreoni, in the same article in the following manner:"Fortunately, public investment has picked up. While the United States has adopted a $3 trillion stimulus and rescue package, the European Union has introduced a €750 billion ($850 billion) recovery plan, and Japan has marshaled an additional $1 trillion in assistance for households and businesses. However, in order for investment to lead to a healthier, more resilient, and productive economy, money is not enough. Governments also must restore the capacity to design, implement, and enforce conditionality on recipients, so that the private sector operates in a manner that is more conducive to inclusive, sustainable growth."

If anything, as economic situation is developing in both developed and developing countries, it is quite clear that the initial thought-process of countries to expect a V-shaped recovery at the back of stimulus packages is highly unlikely. Joseph Stiglitz in his recent article Priorities for the Covid-19 economy, for example, points out: "...a V-shaped recovery is probably a fantasy. The post-pandemic economy is likely to be anemic, not just in countries that have failed to manage the pandemic (namely, the United States), but even in those that have acquitted themselves well. The International Monetary Fund projects that by the end of 2021, the global economy will be barely larger than it was at the end of 2019, and that the US and European economies will still be about 4% smaller." This means that the problem of debt, deficits, in the post-pandemic world will be a long haul for countries, if anything, especially the developing ones, given the deep level of recession and uncertainty that the world finds itself in. But any chance of reaching the end of the tunnel, and meeting the light of success and prosperity would require a government leading from the front, and one which gives due attention to improving the status of economic institutions.

(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2020