Overwhelmed by COVID by Barry Eichengreen


Leading economic forecasters like JP Morgan and S&P Global Ratings paint a rosy picture of emerging market growth prospects this year. But there are several reasons to believe that consensus opinion will soon prove to be untenable.

BERKELEY – The spread of Omicron variant wildfires add a new element of uncertainty to the global economy. But when it comes to emerging markets, the consensus is that the outlook for these countries remains good. JP Morgan Global Research expects their collective GDP to grow 4.6% this year, faster than its 2015-19 trend. S&P Global Ratings is even more optimistic, forecasting emerging economies growth of 4.8%.

Surprisingly, these growth figures are virtually identical to the 2022 forecast released by the International Monetary Fund in October 2019, that is, before the pandemic. It has become a popular trope that COVID is changing everything – or, rather, everything except the outlook for emerging markets.

In fact, there are multiple reasons to be concerned that this consensus is too rosy.

First, emerging economies are now more heavily indebted. Public debt-to-GDP ratios were already on the rise before the start of the pandemic. But now they have reached alarming highs, at over 60% of GDP.

While no one doubts the wisdom of borrowing to respond to a public health emergency and economic crisis, these heavy debts pose management challenges. The meager tax resources that might otherwise be spent on health care, education and infrastructure will have to be diverted to debt service. And the burden will increase as the tightening of monetary policy by the US Federal Reserve and the scarcity of capital around the world put upward pressure on interest rates.

Moreover, public debt is only part of the problem. Since the start of the pandemic, the debts of households and non-financial corporations have grown almost as rapidly as the debts of the public sectors. It is likely that when some of these private debts go badly, the losses will be socialized and end up on government balance sheets.

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The second reason to be skeptical of consensus in emerging markets is that the risk of working closely together has spurred accelerated automation in advanced economies. Since the need for close hand-eye coordination had previously thwarted such efforts, the traditional route to higher incomes for emerging markets and developing countries was through the export of hand-intensive manufactures. -work. Although these industries do not require heavy investments or a highly skilled workforce, they familiarize workers with the discipline of the factory, enable learning by doing, accustom companies to compete in global markets. and generate currencies.

The fear is that these manufactured goods will soon be produced by robots and 3D printers in the same high-wage countries where they are sold. This prospect reinforces established concerns about the “premature deindustrialisation” of emerging markets.

At the same time, the global supply chains so important to emerging economies have experienced major disruption due to the pandemic, leading companies to source inputs closer to home. Governments of developed countries, for their part, have cited shortages and problems of economic security as the justification for creating incentives for companies to further outsource manufacturing production.

For emerging markets, the negative effects are not unlike those of accelerated automation. Many low- and middle-income countries start with simpler assembly tasks before moving on to more sophisticated manufacturing operations. These opportunities will be fewer as advanced economies gather more at home.

Mexico could benefit from the efforts of American companies to shorten their supply chains. Eastern European economies may benefit from a similar desire on the part of EU countries. But South Asia, Africa and Latin America could find themselves isolated.

Most importantly, there is the impact of COVID-19 on human capital formation. Although negative everywhere, the effects are expected to be particularly severe in emerging markets. Few emerging markets have the broadband necessary for effective distance learning. A slower vaccination rate will lead to continued school closings and absenteeism. According to a World Bank estimate, the share of children in emerging markets and developing countries unable to read and understand simple text before the age of 10 will rise from 53% to 63% due to the pandemic.

The most powerful counter-argument is that emerging markets will benefit from a supercharged global economy. Productivity growth in advanced economies, which had been declining for several decades, was strong during the pandemic, especially in the United States. The technological and organizational changes brought about by the pandemic could now support this acceleration. Faster growth in developed countries would then create additional demand for emerging market exports.

At this point, this argument is purely hypothetical. The recent upturn in productivity growth in advanced economies can be attributed entirely to factors related to the business cycle – most recently, companies using their resources more intensively as economies rebound from their 2020 lows. In fact, the productivity trend looks a lot like it was in previous cyclical recoveries, meaning there is no evidence of a sustained acceleration.

But all is not pessimistic. Unlike previous downturns, central banks and governments in emerging markets have been able to respond in a stabilizing manner, reflecting their success in strengthening their credibility. Until now, the bank failures and financial accidents that have historically punctuated such episodes have been rare. The production and administration of vaccines is increasing. That said, downward revisions to growth forecasts are almost certainly coming.


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