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We just published a new blog—please find the full text below. Translations coming soon.
Watch today at 1 p.m. EDT: The IMF's Sonali Das and Philippe Wingender will discuss the long-term effects of the pandemic and priorities for policymakers with CNBC's Silvia Amaro.
Slow-Healing Scars: The Pandemic’s Legacy
By Sonali Das and Philippe Wingender
Recessions wreak havoc and the damage is often long-lived. Businesses shut down, investment spending is cut, and people out of work can lose skills and motivation as the months stretch on. But the recession brought on by the COVID-19 pandemic is no ordinary recession. Compared to previous global crises, the contraction was sudden and deep—using quarterly data, global output declined about three times as much as in the global financial crisis, in half the time.
Systemic financial stress—associated with long-lasting economic damage—has been largely avoided so far, owing to the unprecedented policy actions taken. However, the path to recovery remains challenging, especially for countries with limited fiscal space, and is made harder by the differential impact of the pandemic.
Lessons from history
The extent of the recovery will depend on the persistence of the economic damage, or “scarring,” in the medium-term. This will vary across countries, depending on the future path of the pandemic; the share of high-contact sectors; the ability of businesses and workers to adapt; and the effectiveness of policy responses.
These unknowns make it hard to predict the extent of scarring but there are some lessons we can draw from history. Severe recessions in the past, particularly deep ones, have been associated with persistent output losses from reduced productivity. Although the pandemic has spurred increased digitalization and innovation in production and delivery processes—at least in some countries—the resource reallocation needed to adapt to a new normal may be larger than in past recessions, affecting productivity growth going forward. Another risk is the pandemic-driven rise in market power of dominant firms, which are becoming increasingly entrenched as competitors collapse.
Productivity has also been affected by COVID-19 disruptions to production networks. High-contact sectors, such as arts and entertainment, accommodation and restaurants, and wholesale and retail trade are less central to production networks than, say, the energy sector. But historical analysis shows that even shocks to these peripheral sectors can be greatly amplified through spillovers to other sectors. The closure of restaurants and bars, for example, can affect farms and wineries, resulting in lower demand for tractors and other agricultural equipment. So, although the pandemic’s initial impact was concentrated in higher-contact service sectors, given the size of the disruption, it still resulted in a broad downturn.
Medium-term implications
Despite higher-than-anticipated growth as the global economy recovers from the COVID-19 shock, we expect world output in the medium-term to be about 3 percent lower in 2024 than pre-pandemic projections. Because financial stability has largely been preserved, this expected scarring is less than what we saw following the global financial crisis.
However, unlike what happened during the global financial crisis, emerging market and developing economies are expected to have deeper scars than advanced economies, with losses expected to be largest among low-income countries.
This divergence across countries is the consequence of varying economic structures and the size of countries’ fiscal policy responses. Because of how the virus is transmitted, economies that are more reliant on tourism or have a larger share of high-contact sectors, such as the Pacific Islands and the Caribbean, are projected to experience more persistent losses. GDP in the Pacific Islands, for example, is estimated to be 10 percent lower in 2024 than pre-pandemic projections. Many of these countries also have more limited policy space and capacity to mount major health responses or support livelihoods.
Widespread school closures have occurred across countries, but the adverse impacts on learning and skills acquisition have been larger in low-income countries. The resulting long-term individual earnings losses and damages to aggregate productivity could be a key legacy of the COVID-19 crisis.
Policies to limit scarring
Experience from past recessions underscores the importance of avoiding financial distress and ensuring effective policy support until the recovery is firmly underway.
Countries will need to tailor their policies to the different stages of the pandemic with a combination of better-targeted support for affected households and firms, and public investments. As vaccine coverage improves and supply constraints ease, these efforts should focus on three priorities:
First, reversing the setback to human capital accumulation. To address the rise in inequality that is likely to result from the pandemic, social safety nets should be expanded, and adequate resources allocated to healthcare and education.
Second, supporting productivity through policies to facilitate job mobility and promote competition and innovation.
Third, boosting public infrastructure investment, particularly in green infrastructure to help crowd-in private investment.
Finally, strong international cooperation will be needed to address the growing divergence across countries. It is vital that financially constrained economies have adequate access to international liquidity for development spending. On the health front, this also means ensuring adequate production and universal distribution of vaccines—including through sufficient funding for the COVAX facility—to help developing countries beat back the pandemic and prevent even worse scarring.
Sonali Das is a senior economist in the World Economic Studies Division in the IMF’s Research Department.
Philippe Wingender is an economist in the Tax Policy Division of the Fiscal Affairs Department at the IMF.
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Glenn Gottselig
Blog Editor, IMF
GGottselig@IMF.org
Dear maria,
We just published a new blog—please find the full text below. Translations coming soon.
Watch live at 10 a.m. EDT: The IMF's John Bluedorn will discuss the impact of the pandemic on workers with the Washington Post's Heather Long.
Working Out the Differences: Labor Policies for a Fairer Recovery
By John Bluedorn
The COVID-19 pandemic’s destruction of jobs was sure and swift. The lasting effects of the crisis on workers could be just as painful and unequal.
Youth and lower-skilled workers took some of the hardest hits on average. Women, especially in emerging market and developing economies, also suffered. Many of these workers face earnings losses and difficult searches for job opportunities. Even after the pandemic recedes, structural changes to the economy in the wake of the shock may mean that job options in some sectors and occupations may permanently shrink and others grow.
In our latest World Economic Outlook we examine how policies can lessen the pandemic’s harsh and unequal effects. We find that a package of measures to help workers keep their jobs while the pandemic shock is ongoing, combined with measures to encourage job creation and ease the adjustment to new jobs and occupations as the pandemic ebbs, can markedly dampen the negative impact and improve the labor market’s recovery.
Automation picks up
Jobs that are less skill-intensive and more vulnerable to automation tended to suffer more during the pandemic recession. Although the impacts on specific sectors differed from past recessions, the pandemic has accelerated preexisting employment trends, reinforcing a shift away from employment in sectors and occupations more vulnerable to automation.
Among those sectors that have shrunk the most from the crisis are hotels and restaurants (accommodation and food) and wholesale and retail stores (trade). Social distancing and behavioral changes induced by the pandemic intensified the employment drops in these sectors typically seen in past downturns. By contrast, the information technology and communication and finance and insurance sectors have actually seen employment growth last year. Many of the more impacted sectors—often with fewer jobs amenable to remote work—tend to employ higher shares of youth, women, and the lower-skilled, contributing to the unequal effects across worker groups.
A steep climb back
Evidence from past recessions suggests that the pandemic is likely to inflict sizable costs on the unemployed, particularly lower‑skilled workers. After unemployment spells, workers often have to switch occupations to find a new job, which tends to come with a pay cut. On average, unemployed workers finding reemployment in a new occupation experience a large average earnings penalty of about 15 percent compared to their previous earnings.
Lower-skilled workers experience a triple whammy: they are more likely to be employed in sectors more negatively impacted by the pandemic; are more likely to become unemployed in downturns; and, those who are able to find a new job, are more likely to need to switch occupations and suffer an earnings fall.
Finding the right balance
Our analysis shows how the appropriate policies can be extremely powerful at reducing scarring and reducing the unequal impacts across workers. In the absence of measures to bolster the labor market (a no-policy scenario), an economic shock brought on by a pandemic that hits occupations asymmetrically leads to an enormous and rapid rise in unemployment and a grinding adjustment as economic conditions gradually improve.
If job retention and worker reallocation support are used as part of a package, the hit to employment is less severe and workers and firms are able to adjust faster. This mix of policy support also disproportionately benefits lower-skilled workers, who tend to suffer more from the pandemic’s larger impacts on contact-intensive but lower productivity work. Job retention measures (such as short-term work schemes—like Germany’s Kurzarbeit scheme—and wage subsidies—like the new US Paycheck Protection Program) help preserve jobs against the initial shock of the pandemic, when social distancing is high, lowering unemployment about 4 ½ percentage points below what it would have been without such support. As the pandemic subsides, worker reallocation policies—such as incentives to start new businesses and hire workers, assistance to help match workers to new jobs, and (re)training programs—can help ease the adjustment to the more permanent effects of the pandemic on the structure of employment. Targeting some policy measures toward more impacted populations (such as youth) could also hasten the recovery.
Policymakers will need to take careful account of the path of the pandemic (including cases and deaths, the extent of distancing measures, and rollout of vaccines) in deciding whether the economy can withstand a shift from measures that mainly support existing jobs toward policies that aim to expedite workers’ movements to growing sectors and occupations. The right balance of policies can reduce the unequal impacts of the pandemic across workers and encourage a speedier labor market recovery.
Based on Chapter 3 of the World Economic Outlook, “Recessions and Recoveries in Labor Markets: Patterns, Policies, and Responses to the COVID-19 Shock,” by John Bluedorn (lead), Francesca Caselli, Wenjie Chen, Niels-Jakob Hansen, Jorge Mondragon, Ippei Shibata, and Marina M. Tavares, with support from Youyou Huang, Christopher Johns, and Cynthia Nyakeri.
John Bluedorn is a Deputy Division Chief on the World Economic Outlook in the IMF’s Research Department.
*****
Thank you again for your interest in IMF Blog. Read more of our latest content here.
Take good care,
Glenn Gottselig
Blog Editor, IMF
GGottselig@IMF.org
Despite the pandemic, Vietnam’s economy has remained resilient.
Downtown Hanoi, Vietnam: the country has been successful in containing both COVID-19 and its detrimental economic effects. (photo: Minh Luu & AA+Photography by Unsplash)
Vietnam: Successfully Navigating the Pandemic
Despite COVID-19, Vietnam’s economy has remained resilient, expanding by 2.9 percent in 2020—one of the highest growth rates in the world—and growth is projected to be 6.5 percent in 2021, thanks to strong economic fundamentals, decisive containment measures and well-targeted government support, according to the IMF’s latest annual assessment of the country’s economy.
