Interventions to recover from the Covid-19 pandemic should be no less powerful, forceful and fast than the crisis itself, says World Bank group president David Malpass in the bank’s 'Global Economic Prospects' report.
Some of the chapters of the report were released on June 2, with the full report due to be released on June 8, containing the group’s latest forecast for the global economy.
The bank, in its baseline forecast, expects the deepest global recession since World War II.
“The scope and speed with which the Covid-19 pandemic and economic shutdowns have devastated the poor around the world are unprecedented in modern times.
“Current estimates show that 60-million people could be pushed into extreme poverty in 2020. These estimates are likely to rise further, with the reopening of advanced economies the primary determinant,” says Malpass.
The World Bank explains that short-term response measures to address the health emergency and secure core public services will need to be accompanied by comprehensive policies to boost long-term growth, including by improving governance and business environments, and expanding and improving the results of investment in education and public health.
To make future economies more resilient, many countries will need systems that can build and retain more human and physical capital during the recovery – using policies that reflect and encourage the post-pandemic need for new types of jobs, businesses and governance systems.
“Policy choices made today – including greater debt transparency to invite new investment, faster advances in digital connectivity and a major expansion of cash safety nets for the poor – will help limit the damage and build a stronger recovery.
“The financing and building of productive infrastructure are among the hardest-to-solve development challenges in the post-pandemic recovery.
"We need to see measures to speed litigation and the resolution of bankruptcies and reform the costly subsidies, monopolies and protected State-owned enterprises that have slowed development,” Malpass points out.
The World Bank states that measures needed to protect public health have undercut an already fragile global economy, causing deep recessions in advanced economies and emerging markets and developing economies (EMDEs) alike.
EMDEs that have weak health systems; those that rely heavily on global trade, tourism, or remittances from abroad; and those that depend on commodity exports will be particularly hard-hit, the report notes.
In the long term, the pandemic will leave lasting damage through multiple channels, including lower investment; the erosion of physical and human capital owing to the closure of businesses and loss of schooling and jobs; and a retreat from global trade and supply linkages.
These effects will lower potential output – the output an economy can sustain at full employment and capacity – and labour productivity well into the future.
Pre-existing vulnerabilities, fading demographic dividends, and structural bottlenecks will amplify the long-term damage of deep recessions associated with the pandemic.
Malpass hopes to see efforts to maintain the private sector and get money directly to people so that countries may see a quicker return to business creation after this pandemic has passed. He recommends that countries focus on sustaining economic activity with targeted support to provide liquidity to households, firms and government essential services.
THE OIL CASE
The outbreak of Covid-19 and the wide-ranging measures needed to slow its advance have precipitated an unprecedented collapse in oil demand, a surge in oil inventories and, in March, the steepest one-month decline in oil prices on record.
As of mid-May, oil prices are at half their end-2019 levels. A precipitous decline in oil consumption in the context of still-robust production has led to a rapid build-up in oil inventories.
By June, inventories are expected to reach close to full storage capacity.
In the short term, while restrictions on transport and travel remain in place, low oil prices are unlikely to provide much support for growth and may, instead, compound the damage wrought by the pandemic by further weakening the finances of producers.
Low oil prices are likely to provide, at best, marginal support to global activity early in the recovery, the World Bank states.
“Oil-exporting emerging and developing economies entered the current crisis with eroded fiscal positions after having drawn on them to weather the 2014 to 2016 oil price drop.
"In addition to the unprecedented public health crisis, these economies are now experiencing sharp economic downturns as their export revenues nosedive,” says World Bank prospects group director Ayhan Kose.
Even if oil prices rise as global oil demand recovers, the recent plunge in prices is another reminder for oil-exporting countries of the urgency to continue with reforms to diversify their economies, the World Bank reports, adding that low oil prices could provide some initial support for reviving global activity.
However, current low oil prices present an opportunity to review energy pricing policies as energy-importing EMDEs need to move away from costly subsidy schemes and allocate their limited fiscal resources for higher-priority expenditures involving improvements in public health and education programmes.
“The speed and strength of recovery globally will depend on the effectiveness of the support programmes governments and the international community put in place now and, critically, on what policymakers do to respond to the new environment,” Malpass concludes.