Lorenzo Petrantoni illustration for Foreign Policy


Emerging Stronger From the Great Lockdown

The managing director and the chief economist of the International Monetary Fund lay out a strategy for sustained recovery.

For more than six months, the world has grappled with the severe health and economic consequences of the COVID-19 pandemic. Global economic activity collapsed in the second quarter of 2020, when about 85 percent of the global economy was in lockdown for several weeks. As the International Monetary Fund (IMF) first stated in its April World Economic Outlook, this is without historical parallel.

In its severity, the Great Lockdown of 2020 has naturally evoked comparisons to the Great Depression, which began in 1929. But today’s crisis is truly like no other. Although it’s too early to make a definitive judgment, we can already say that the severity and speed of the declines in economic output, employment, and consumption during the Great Lockdown were far greater than at the onset of the Great Depression. In just one month, from March to April, the U.S. unemployment rate roughly tripled to 14.7 percent, a level not reached in the Great Depression for nearly two years.

Equally unique has been the sharp rebound of output, consumption, and employment. With more than 80 percent of countries easing lockdown restrictions, the global economy has begun to recover from the depths of the downturn. The speed of this turnaround is also in dramatic contrast to the Great Depression, during which negative growth persisted for four years and the cumulative global contraction far exceeded that which is projected for the Great Lockdown.

The ongoing recovery is the result of the easing of lockdown restrictions as well as the rapid implementation and unprecedented scale of supportive policies by the world’s central banks and governments—a third major distinction from the Great Depression. This crisis, however, is far from over. The recovery remains very fragile and uneven across regions and sectors. To ensure that the recovery continues, it is essential that support not be prematurely withdrawn.

The recovery is the result of the easing of lockdown restrictions as well as the rapid implementation and unprecedented scale of supportive policies by central banks and governments.

Even as people return to work, employment rates in many countries have not returned anywhere close to pre-crisis levels. Job losses have hit younger and lower-skilled workers especially hard. Globally, the International Labor Organization estimates that the equivalent of 400 million full-time jobs were lost in the second quarter of 2020. And we know from recent global surveys that next to the virus itself, unemployment is people’s highest concern. The impact on global poverty is expected to be severe, with the World Bank projecting 71 million additional people falling into extreme poverty.

Securing a sustained recovery and emerging stronger from the Great Lockdown will require action on three fronts: First, the health crisis must be brought to an end—durably and everywhere. Impressive advances in vaccine development raise hopes that this objective can be achieved. Second, people need to be able to find productive jobs. This requires preventing excessive firm bankruptcies and creating an environment for job-rich growth. Finally, our future must be more sustainable and inclusive than our past. This requires policies to arrest global warming and reverse rising inequality.

Many countries will face daunting fiscal challenges in trying to reconcile the spending required to fight the crisis with the constraints imposed by higher debt and declining revenues. Low-income countries will require continued financial support from the international community.

Though the world has learned to live with the virus, a full recovery is unlikely without a permanent medical solution. Lingering uncertainty about the virus and the fear of recurring outbreaks are weighing on mobility and the confidence of consumers and businesses. The availability of a vaccine, or therapies with proven success in treating COVID-19, will materially lift the global outlook.

The speed with which countries have committed resources to developing a vaccine is without historical precedent and can only be commended. As of Sept. 8, at least 128 vaccines are under development, and 37 have reached human trials. Historical evidence suggests that an effort of this scale has a 90 percent chance of developing a successful product.

But concerning the vaccine, we must urgently devise multilateral solutions for three looming challenges: timely production, a globally adequate supply, and an equitable distribution.

The human and financial costs of delaying a vaccine will be substantial. Delaying production until a vaccine has successfully passed all medical trials could add up to 18 months to its distribution in many countries, potentially choking the recovery. Governments can act now to introduce risk-sharing mechanisms—such as purchase guarantees, financing, or collaboration with public research institutions—in order to prompt private firms to commit to production before trials can be successfully completed.

Even once a vaccine is found, not every country will have the capacity to produce enough doses to immunize all its citizens.

Advance purchases have financial risks because vaccines may fail, but those risks are trivial compared with the losses imposed by this health crisis on the global economy, which the IMF projects will reach more than $12 trillion by the end of 2021. A foresighted strategy to provide government support for vaccines will lead to long-run cost savings as economies recover faster than they would otherwise.

Even once a vaccine is found, not every country will have the capacity to produce enough doses to immunize all its citizens. The world’s richer countries have struck agreements to secure doses in advance, potentially squeezing the supply for the rest of the world. That is why several global organizations have developed COVAX, a risk-sharing scheme for the rapid and fair distribution of vaccines to all countries.

As the Bill & Melinda Gates Foundation has stressed, cooperation across countries can decisively lower the risk of an inadequate vaccine supply. The world should act immediately to coordinate manufacturing capacity across regions, significantly increase the resources for production facilities, and commit to subsidizing vaccines for the poorest countries.

Globally synchronized, equitable vaccine distribution is in every country’s interest. An uneven rollout might improve economic conditions in countries that secured the vaccine first but would not shield them from weak demand from trade partners struggling to recover without a vaccine.

Next, we must ensure that workers have quick access to productive work opportunities. Job loss has been shown to be associated with long-lasting damage to productivity, wages, and human capital.

Firms must be supported to preserve jobs. In a standard recession, the goal is to provide liquidity to solvent but illiquid firms and to restructure insolvent firms so that capital and labor can be used more productively. But the unique nature of this crisis warrants a fresh, tailored approach. Firms in virtually all sectors of the economy have been abruptly and simultaneously affected by the crisis, requiring a variety of lifelines to prevent even larger job losses beyond what has already occurred.

Given the severity of the shock, there are likely to be far more insolvent than illiquid firms in the months ahead, with high potential for mass bankruptcies in the absence of widespread support for insolvent firms. These are firms that would otherwise be viable in the absence of the pandemic. If they are pushed into liquidation, the world will suffer large social costs from the loss of organizational and human capital. At the same time, it is increasingly evident that some sectors requiring close contact between people, such as travel, may fall into prolonged decline. Many firms in these sectors may no longer be viable. This will require gradually unwinding the lifelines extended to these firms so that labor and capital may be reallocated away from such shrinking sectors to growing sectors such as online retail and other e-commerce.

Well-designed government interventions during the next stage of the crisis will require a comprehensive differentiation between viable firms, including those that may be currently insolvent, and unviable firms more permanently affected by the crisis. Support should be provided to viable businesses and to the employees of unviable businesses as they are wound down. Where uncertainty about the path of the crisis makes the assessment difficult, policymakers should err on the side of caution.

It is increasingly evident that some sectors requiring close contact between people, such as travel, may fall into prolonged decline.

Where governments have the fiscal resources, there is a strong argument for equity-like interventions in large and small firms alike. This includes direct equity injections or junior debt claims for larger firms and grants in return for a temporarily higher future corporate tax rate for small and medium enterprises.

In all countries, steps should be taken to tailor bankruptcy procedures and resolution mechanisms to the needs of the current crisis. Policymakers in many countries have reacted swiftly by amending insolvency laws. Several countries in the European Union—including the Czech Republic, Germany, and Spain—have suspended firms’ obligations to file for bankruptcy. The U.S. CARES Act, which amended the U.S. bankruptcy code to assist small businesses, is another example.

Policymakers should complement solvency support with hiring subsidies and programs to reskill affected workers. But the reallocation to new sectors will not be seamless. Displaced workers should be supported during the transition, for example by expanding the scope and duration of unemployment insurance. Labor market institutions should act flexibly for the swift reabsorption of displaced workers. The abrupt rise in remote work arrangements is a clear signal to invest in a large and inclusive expansion of broadband internet connectivity and to subsidize enhanced data subscription packages—especially where internet penetration remains low—in order to more effectively prepare the labor force of the future.

In emerging markets and other developing economies where the informal sector is large and labor market institutions are small or nonexistent, policies can be geared toward expanding employment in the formal sector through targeted hiring subsidies. Public works programs present an additional opportunity to maintain income for low-income workers, including through labor-intensive green jobs in soil and water conservation, reforestation and flood protection, and the retrofitting of buildings to make them more energy efficient.

Long-term challenges such as climate change, inequality, and sustainable development remain as important as ever. The current phase of low energy prices presents policymakers an opportunity to remove distortionary, environmentally damaging, and often regressive fuel subsidies, freeing up these funds for more productive uses. To boost the recovery, governments can accelerate green investment and implement well-sequenced climate change mitigation strategies.

A two-pronged approach to mitigation can help make faster progress toward our shared goal of lowering greenhouse gas emissions. The first prong is a green investment push that supports a quick recovery. The second element is to embark on a clear path toward higher carbon prices that incentivize firms and households to switch to low-carbon activities and energy sources while also generating some of the revenues required for green investment and reducing public debt. Coordinating carbon pricing across countries, ideally through an agreement that sets a carbon price floor for major emitters, will make it more effective in reducing emissions at minimum cost.

Governments can also reorient policies toward making economies more resilient to the catastrophic effects of climate change. This requires prioritizing investment in smart infrastructure and other adaptation strategies—such as energy-efficient buildings, district cooling systems, floodwater management systems, storm shelters, embankments, and drought-resistant crops. As climate change and weather shocks weigh heavily on agricultural productivity and food security in some regions, well-designed safety nets are also critical. Together with climate change mitigation strategies, these investments in resilience can support green, job-intensive, and innovation-driven growth.

The pandemic has exacerbated inequality by its disproportionate impact on low-skilled workers, women, youths, and those already living on the margins of society.

The pandemic has exacerbated inequality of income and opportunity by its disproportionate impact on low-skilled workers, women, youths, and those who were already living on the margins of society. In addition, young children, especially those from poor households, may suffer permanent losses in building up their human capital from a lack of schooling, adequate nutrition, and medical access. These losses will have lifelong implications, further raising inequality and lowering social mobility. Left unchecked, growing disparities will lead to long-lasting grievances and ultimately to social unrest.

Governments must address rising inequities with comprehensive and wide-ranging actions. They must ensure the provision of essential health services, widen social safety nets, and enable a rapid and fair distribution of a vaccine as soon as it becomes available. They must preserve access to schooling with measures to ensure that all school-age children benefit from distance learning. Reliable access to affordable food for the hardest-hit households is critical and will involve protecting local food supply chains and, at the global level, coordinating food security policies and disavowing food protectionism. Developing countries have made progress in reducing poverty and improving people’s access to basic services. This decades-long work must not be undone. Governments must remain committed to the United Nations’ Sustainable Development Goals and prioritize policies that support inclusive growth.

A sustainable future requires sustainable finances. This crisis has put great demand on fiscal resources, and many countries will be challenged by rising debt levels that could trigger debt distress. To keep debt sustainable, governments may need to make tough choices on spending during the crisis while ensuring their interventions are designed for maximum efficiency. Over the medium term, many countries will have to increase their revenue—including through greater tax compliance, progressive taxes for individuals as well as companies that have made windfall profits during the crisis, and by reducing poorly targeted and wasteful spending.

There has been remarkable adaptation and innovation in medicine and technology, in government policies, and in everyday living.

To ensure that developing countries can finance critical spending, concessional credit must be made available for a prolonged period. The global financial safety net should be strengthened—and in some cases, global coordination will be required to reprofile or restructure debt. In all these areas, vulnerable countries can count on the IMF’s continued support and policy advice. The fund has already provided emergency financing at unprecedented speed and scale to 75 countries, including 47 low-income countries, and we are ready to provide further support to a wider range of middle-income countries. Our lending commitments have now reached about $270 billion, a third of which has been approved since March. We have an additional $730 billion in lending capacity that we can put at the service of our member countries should the need arise.

This crisis has tested people and governments around the world in previously unimaginable ways. The human toll has been tragic, with some 900,000 deaths worldwide as of September.

Yet there has been remarkable adaptation and innovation in medicine and technology, in government policies, and in everyday living—all of which has made it possible to restart the world economy. A major financial crisis has been avoided so far. Vaccines are being developed at historic speed, and remote work in the knowledge economy and telemedicine have made the impossible possible.

The world’s collective reaction to this crisis should give us confidence that we can build a more prosperous, sustainable, and equitable future. And we must aspire to no less.

Kristalina Georgieva is the managing director of the International Monetary Fund. Twitter: @KGeorgieva

Gita Gopinath is the chief economist of the International Monetary Fund. Twitter: @GitaGopinath