The Global Economic Outlook 2021: Averting a Great Divergence
Gita Gopinath
Chief Economist
The International Monetary Fund
Dr Gita Gopinath, the Chief Economist of the International Monetary Fund, delivered NCAER’s 9th C. D. Deshmukh Lecture 2021 on The Global Economic Outlook 2021: Averting a Great Divergence. In these challenging pandemic times, Dr Gopinath, the IMF’s first woman Chief Economist, has occupied a central role in communicating her assessment of the global economic outlook and nudging developed and developing countries to participate in the global economy in ways that can accelerate and sustain the recovery in an equitable way. Held virtually, the lecture was joined by a distinguished group of eminent economists, industry leaders, civil servants, industry analysts, media, and a large number of students. The Lecture was also carried live on NCAER’s YouTube Channel and by the IMF on its IMF Live Channel.
NCAER’s Director General Dr Shekhar Shah introduced the Lecture series in honour of Chintaman Dwarakanath Deshmukh, the RBI’s first Indian Governor from 1943 to 1949, a member of the Indian delegation to the 1944 Bretton Woods Conference that created the IMF and the World Bank, Finance Minister from 1950 to 1956, and a founding father of NCAER in 1956. Building on the connection between Deshmukh and the IMF, he then introduced the evening’s distinguished speaker, Dr Gita Gopinath, also noting her close connection to NCAER as a key organizer on the US side of NCAER’s Neemrana Conferences held annually with the National Bureau of Economic Research in the US. Dr Shah noted, “Gita Gopinath has been a highly influential voice during the Coronavirus pandemic that has brought such havoc to the global economy. Her statements and appearances have guided us in how we should think about the pandemic, and how countries should respond to protect and build forward their economies and the livelihoods of their people. As the race between the virus and the vaccine quickens, she will also talk today about the great divergence we are likely to see in how countries will fare in coming out of the pandemic, and what must be done to avert this divergence.”
Dr Gopinath began by thanking NCAER for the opportunity to pay homage to the memory of C. D. Deshmukh. She said, “it is an absolute honour for me to deliver this C D Deshmukh Lecture. The occasion is particularly special for me as I am speaking on behalf of the IMF, and C. D. Deshmukh was one of the founding fathers of the IMF. I am truly grateful to NCAER for inviting me to deliver this Lecture.” In a broad ranging presentation, Dr Gopinath first talked about the race between the virus and the vaccine and how global science had come together in unprecedented ways to produce effective vaccines in unheard of development, testing, and roll-out timelines. She spoke about the how the lifeline to households and firms supported the rebound after the massive shock from the lockdowns around the world. Though merchandise trade is recovering and financial conditions remained surprisingly buoyant, labour market vulnerability remains a serious problem, including in the advanced economies. Similarly, though 2020:Q3 surprised strongly on the upside, there clearly was backsliding in 2020:Q4.
Dr Gopinath then briefly discussed the latest World Economic Outlook Update forecasts released on January 26th. The IMF now projects global growth at 5.5% for 2021, 0.3 percentage points higher than its October forecast, and then moderating to 4.2 percent in 2022. The WEO has projected 11.5% growth for 2021 for India over 2020, making it the only such major economy showing double-digit expansion amidst the Coronavirus pandemic: China is expected to grow at 8.1% over 2020. Dr Gopinath then turned to the major theme of her lecture: the growing divergence between the developed countries and the developing countries and substantial within-country divergence we are already beginning to see. GDP losses relative to pre-COVID forecasts were about three to four times greater in emerging & developing Asia (excluding China) as compared to the advanced economies (AE). She noted similar divergences in unemployment rates in AEs vs emerging market and developing economies. She said that approximately 70% of advanced economies had provided 50% replacement income support, but emerging market and low-income countries had been able to do much less. Low income countries had been particularly badly hit, with large shares of households with falling incomes and low shares of households that had received support, even compared to emerging markets and developing economies (EMDEs).
She noted that the burden of the severe collapse in growth in 2020 has fallen unevenly. Workers with less education, women, youth, those in contact-intensive sectors, and those informally employed have suffered disproportionate livelihood and income losses. Country-specific labour market circumstances have varied, implying different degrees of scarring. Economies that rely heavily on contact-intensive industries such as tourism, commodity exporters, and those where school closures have inflicted large setbacks to human capital accumulation are particularly exposed to persistent damages to their supply and employment potential. She emphasized that none of this will be helped by the divergence we are seeing in global vaccine supply and the widely divergent numbers on vaccine doses administered per 1,000 population. She pointed out that EMDEs are also projected to trace diverging recovery paths. Oil exporters and tourism-based economies faced particularly difficult prospects given the expected slow normalization of cross-border travel and the subdued outlook for oil prices. As noted in the IMF’s October 2020 WEO, the pandemic is expected to reverse the progress made in poverty reduction over the past two decades, and India will be one of the affected nations.
Gopinath said that effective policy support would be needed until a vaccine-powered normalisation of activity was underway and could limit the persistent damage from the deep disruption of 2020. She felt that policies to support the economy in the near term should also advance the medium-term objective of placing economies on the path of resilient and equitable growth. Initiatives that raised potential output, protected the vulnerable, ensured participatory growth that benefited all, and accelerated the needed transition to lower carbon dependence could help in this regard. She felt that the global economy has supportive borrowing conditions that would held. She noted that for India the financial sector continued to be in stress and remained a vulnerability. On vaccine supply, she stressed that there is need for inclusion, ending vaccine hesitancy, and for advanced economies to share surplus vaccines with countries that will have sharp shortfalls in availability. She also stressed the need for overcoming the logistical problems of deploying vaccines within countries.
Dr Gopinath concluded her 2021 Lecture by saying that, “There will be divergent recoveries across nations. But only a global end to the pandemic will bring the global crisis to an end. As long as the virus rages in any part of the world, no full recovery is possible. We must build forward, build better, and build for all. This means accelerating the shift to more inclusive and sustainable growth, focusing on infrastructure, green growth that can create jobs and reducing fiscal vulnerabilities.” In thanking her, Dr Shekhar Shah said, “I am deeply grateful to Gita Gopinath for her comprehensive roundup of the global economic outlook and for focussing on the divergence that the global community must work together to avert. Her presentation has shown us that there are solutions to the economic distress, the health crisis, and divergence, even as we face new uncertainties with the mutating virus. I am very hopeful that following her suggestions we can build forward and build better.”
Over 550 audience registered for this 9th NCAER C.D. Deshmukh Lecture with Zoom while it was also viewed on YouTube Live as well as IMF Live. Dr Gopinath’s presentation is available on this webpage.
NCAER’s Mid-Year Review 2020-21 released on December 21 as part of its quarterly N-QRE (NCAER-Quarterly Review of the Economy) series forecast India’s GDP contracting by about (-) 7.3 percent in FY2020-21, an upgrade from forecasts earlier in the year. Views differ on whether the next fiscal year 2021-22 will see a strong cyclical upsurge and a sustained push to normalization, or whether what we are seeing is the “forced savings” of the better-off during the pandemic temporarily boosting demand, but likely to flatten out as some Q3 data have suggested. The ‘vaccine pivot’ will clearly help in either situation as private sector activity returns to pre-COVID levels and if central government spending continues its recent pick up. Overlaid on this will be the 15th Finance Commission recommendations that will start shaping the Centre-State fiscal space.
