CAMBRIDGE, UK (Project Syndicate): An old joke about deceptive concessions asks you to imagine your worst enemy driving off a cliff in your new car. Would you be happy about the disappearance of your enemy or sad about the destruction of your car? For many, the shape of this year’s long-awaited and much-needed global economic recovery poses a similar dilemma. In the absence of a renewal of both national policies and international coordination, the significant rebound in growth expected in 2021 will be highly uneven, both between and within countries. This carries a number of risks that could make growth in subsequent years less robust than it can and should be.
“The greater the inequality, particularly with respect to opportunities, the more acute the sense of alienation and marginalization, and the more likely that political polarization will impede the formulation of adequate and timely policies. ”
The greater the differences between and within countries, the greater the challenges for the sustainability of this year’s recovery. This reflects a wide range of health, economic, financial and socio-political factors. In a recent comment, I explained why more consistent global progress in vaccination against COVID-19 is important even for countries whose national immunization programs are far ahead of the pack. Without universal progress, major vaccinators are faced with a difficult choice between risking importing new variants from abroad and running an economy fortified with governments, households, and businesses adopting a bunker-like mindset. Uneven economic recoveries deprive individual countries of the tailwind of synchronized expansion, in which simultaneous growth in output and income fuels a virtuous cycle of widespread economic well-being. They also increase the risks of trade and investment protectionism, as well as disruptions in supply chains. Global Risks of Higher Rates Then there’s the financial angle. Strong US growth, coupled with higher inflation expectations, has raised market interest rates, with spillover effects for the rest of the world. And there is more to come. Officials at the European Central Bank have already complained about “undue tightening” of financial conditions in the eurozone. Rising interest rates could also undermine the dominant paradigm in financial markets, namely high investor confidence in broad, predictable and effective injections of liquidity by systemically important central banks, which has encouraged many to venture far beyond their natural habitat, taking considerable, if not excessive and irresponsible risks. In the short term, high liquidity has driven cheap financing to many countries and companies. But sudden reversals in cash flows, as well as the increasing risk of cumulative market crashes and policy errors, could cause serious disruption. Finally, the uneven economic recovery runs the risk of greatly exacerbating income, wealth, and opportunity gaps that the COVID-19 crisis has already vastly widened. The greater the inequality, particularly with respect to opportunities, the more acute the sense of alienation and marginalization, and the more likely that political polarization will impede good and timely policymaking. Furthermore, there is a middle road for the global economy in 2021 and beyond, one that maintains a strong recovery while at the same time lifting up disadvantaged countries, groups and regions. This requires both national and international policy adaptations. National policies must accelerate reforms that combine economic relief with measures to foster much more inclusive growth. It is not just about improving human productivity (through job retraining, educational reforms, and better child care) and capital and technology productivity (through major improvements in infrastructure and coverage). To rebuild better and fairer, policymakers must now also view climate resilience as a critical input for more comprehensive decision-making. Global policy alignment is also vital. The world is fortunate to have initially benefited from correlated (rather than coordinated) national policies in response to the COVID-19 crisis, with the vast majority of countries opting in advance for an all-inclusive, whatever it takes, everything. -governmental approach. But without coordination, policy positions will diverge more and more, as less robust economies face additional external headwinds at a time of declining aid flows, incomplete debt relief and faltering foreign direct investment. With the US and China leading a significant rebound in growth, the global economy has a chance to emerge from a pandemic shock that has hurt many people and, in some cases, erased a decade of progress in reducing growth. poverty and other important socio-economic goals. But without policy adaptations domestically and internationally, this rebound could be so uneven that it prematurely exhausts the prolonged period of faster, much more inclusive and sustainable growth that the global economy so desperately needs. Mohamed A. El-Erian, President of Queens’ College, University of Cambridge, is former Chairman of President Barack Obama‘s Council for Global Development. He is the author, most recently, of “The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.” This comment was posted with permission from Project Syndicate – Ensuring a Stronger and Fairer Global Recovery.