Looking to 2021: The outlook for the global economy
| By Professor Danny Quah |
If 2020 was the year of Coronavirus, then 2021 is that of aftermath. Today Singapore stands delicately poised on recovery, but the great majority of the world elsewhere continues to see COVID19 flare-up. In any pandemic, no one is safe until everyone is. For both the world and Singapore economies all steps into 2021 will need to be cautious.
Principles, however, can help guide the way ahead. Here I describe two.
Planning for a sustained recovery
The first principle is that balance and care are needed more than ever in this economic recovery. Consideration to public health will factor to be important in ways it never was before. This leads to subtle new pathways for achieving sustained economic prosperity.
This economic downturn from which we now seek recovery is unlike practically all others in recent history. No external shock drove enthusiasm out of investors so they stopped seeking to build out new businesses and enterprises. No exogenous collapse in confidence convinced consumers they no longer wanted to purchase goods and services, There was no dizzying acceleration in asset prices that suddenly burst to make everyone’s pocketbooks that much tighter.
Instead, this downturn was negotiated, by responsible policy-makers, to curtail inter-human contact, so the world could be safe, and reduce infection and death. COVID19 made society-wide illness deadlier than just the sum of individual occurrence, through the danger of incipient runaway transmission and the threat of collapse of a national health system. A negotiated economic downturn was the right thing to do.
But then it folllows that sustained economic recovery will come not from just fiscal or monetary bazooka firepower. After all, simple-mindedly, if these latter turned out to be successful, they would just overturn the earlier judicious and appropriate public health safeguards. A left hand would simply have taken away what the right hand provided in the first place.
But, at the same time, economies cannot languish for too long before a damaging hysteresis sets in, permanently reducing the capacity for future prosperity.
Economic policy for recovery therefore becomes a matter of timing and of keeping our worker and business resources strong in reserve, rather than looking for the economy to come roaring back through pump-priming or unleashed credit.
Economic activity with limited human contact
Beyond getting the timing right, effort needs to go into de-linking economic activity from dangerous inter-human contact. Such decoupling might happen through new work methods such as increased reliance on telepresence using digital infrastructure (through Zoom-derived co-working, digitalisation, telelocation); improved human resilience to the virus (through vaccines); or reconfiguring our understanding of physical proximity (through mask wearing, contact tracing, density reduction, social distancing, and movement controls). All these restore the possibility for employment and wealth creation in their different multi-varied forms, without compromising humanity’s safety due to the Coronavirus.
Given these considerations, we should not now lament the demise of kinder, gentler, human-touch ways of doing business. The tradeoff between economic activity that creates wealth and value, on the one hand, and effective distancing to keep us safe, on the other, is now hard reality; it is not a soft constraint that can be circumvented.
To be clear, however, none of this translates to closing borders between nations or rolling back global integration. Just as economic activity needs to take place in any given nation for all its citizens to become prosperous, so too is everyone’s well-being enhanced through exchange between people of different nations.
That the global economy and Singapore’s economy need careful recalibration is evident from statistics. Economic well-being derives not only from how absolutely well off people are but also from people’s expectations and experience. Between 2010 and 2019 Singapore’s economy grew 4.9 per cent per year. In IMF’s estimation the 2020 COVID-induced downturn shrank Singapore’s GDP by 6 per cent. This means that if, as IMF forecasts, Singapore’s 2021 economic growth is 5 per cent, the economy, looking into 2021, will not be just smaller than what it was in 2019. Indeed, its size will be considerably below what the pre-COVID decadal trend implied (i.e., what Singaporeans have come to expect). For Singapore’s economy to recover its trend path by 2023, GDP will have to grow 17 per cent in 2022! This is not impossible, but will need considerable policy thinking while, at the same time, carefully monitoring the public health situation.
Using IMF’s World Economic Outlook estimates, I have calculated that to recover to each economy’s trend, the world economy will need to grow 11 per cent in 2022; all emerging markets and developing economies, by 13 per cent; ASEAN, by 14 per cent. Even China, the only major economy in 2020 to show positive growth, will need 13 per cent growth in 2022 to fully recover its trend level. Will these be achievable? Much hinges on how successfully technology will allow de-linking of economic activity from national COVID re-infection.
What is evident, however, is that today ten months after widespread acknowledgement of a global pandemic, genuine recovery - whether on COVID-19 or economic fronts - remains distant. The time remains some way in the future still for pivoting towards other economic policy considerations - national debt overhang; creative destruction of non-viable businesses, over-heating, and inflation. These are all important policy challenges, but only in due course. Given the state of the world and Singapore economies, they are not high-priority problems.
The complexity of inequality
The second principle I propose: Inequality has become a lot more complicated.
It has of course become commonplace to observe how the Coronavirus has sharpened inequality in societies. Rich families find it easier to navigate shutdown when they can afford the space and technology to allow work from home for parents and home-learning for children. Low-paid physical laborers who are told to stay home and are not allowed to go to work suffer yet further falls in their already low incomes.
All this is true. But it’s also true that the richest societies on the planet have been among the worst and most lethally affected by COVID-19. The world has seen 275 COVID19 deaths per million people. The economies who have been considered relatively successful in this include China (3 deaths per million), New Zealand (5), Singapore (5), and Taiwan (0.3). Rich Trans Atlantic economies? The US has seen an astounding 1,300 deaths per million; the UK, 1,500; EU, 1,000; Germany, 630. In contrast, much poorer economies? Vietnam, 0.4; Mauritius, 8; Tajikistan, 9; Thailand, 1. Rich economies in the world have had a very bad time with the Coronavirus.
The correlation between high incomes and high death rates is not strict of course: Many poor societies have suffered terribly too. But the stylisation is simply inaccurate that there is a tight relation between income distribution and COVID suffering, or that income inequality is a sufficient statistic for understanding COVID’s impact on well-being.
The lesson, instead, is this: More important than just the fact of inequality itself, is how people and policy-makers deal with the circumstances in which they find themselves, i.e., how much agency and control they exert over their environment. Some poorer economies and people have managed matters well; some richer economies and people, less so. What matters for agency and control is how much resources a decision-maker can harness, not whether society around that decision-maker is more or less unequal.
If we combine these observations on managing the Coronavirus’s deadly effects with my first principle - that economic recovery will be unusual, not least in its needing to pay close attention to health impacts - prospects are dim for strong growth from the traditional centres and the consumption bulwarks of the world economy. So too reduced will be the respect, admiration, and consent to be governed paid to those centres by the rest of the world.
This flattening of the world’s power hierarchy across nations has the same character as those that have occurred within nations, where relations between rich and poor have been rewired, due to national conversations on inequality and social mobility.
Looking towards a new world order
This leads me to the last implication to draw here. Looking into 2021, the traditional view of both world and social order will see adjustment. This is not a statement about what needs to be done to re-set the world; it is just a statement of fact.
Within societies, the call for greater social mobility and for re-examining social hierarchies is already viewed by many to be compelling. Across nations, there is similar re-scrutiny of why traditional centres of world leadership might no longer remain centres of world leadership. Conventional explanations for international power hierarchies - who is a Great Power, who is not - that draw on differences in incomes and productivity, or reputation for successful policy management, now show obvious failings. What new principles should replace those ideas that have supported the international system of this past half-century, that relied on rich-nation Trans-Atlantic leadership? Performance legitimacy will have to be importantly taken into account, but what else? For other clues on what world order will look like, observers will need to study closely the experiences in 2020, the year of Coronavirus, and in 2021, the year of aftermath.
About the author
Professor Danny Quah is Dean of the Lee Kuan Yew School of Public Policy at NUS, where he is also the Li Ka Shing Professor in Economics. His research interests include income inequality and international relations. On the latter, he takes an economic approach to world order — with focus on global power shifts and the rise of the East. Prof Quah was previously Assistant Professor of Economics at the Massachusetts Institute of Technology, and then Professor of Economics and International Development at the London School of Economics, where he was also Head of Department for Economics.
Looking to 2021 is a series of commentaries on what readers can expect in the new year. This is the second installment of the series.
Click here to read about Professor Tommy Koh's seven wishes for the year.