Adjusting the global economy a recovery that is more comprehensive for all
The crisis arising from the COVID-19 pandemic is doing the most harm to those who are most vulnerable to it. This disaster could lead to a sharp increase in income inequality. It can also threaten development gains from educational attainment to reduce poverty. New estimates indicate that up to 100 million people worldwide could push circumstances into extreme poverty, erasing all the gains made in poverty reduction over the past three years.
That is why policymakers must do everything they can to encourage a more inclusive recovery that benefits all segments of society without exception, and the new research that we have prepared in partnership with the World Bank for the G20 focuses on how to increase people's ability to access opportunities, whoever and whatever It was the background that they come from. Promoting equal access to opportunity is linked to stronger, more sustainable growth and greater gains in income for the poor. But unleashing the full potential of all individuals is no easy task.
Indeed, low-income families face greater health risks from the virus. They bear the consequences of the sharp rise in unemployment rates, and they are likely to benefit less from distance learning opportunities. Children's nutrition may also be affected by the interruption of school meals. According to United Nations estimates, more than half a billion children worldwide have lost the opportunity to education as a result of the general closure due to the Corona virus. Many of them will not return to their classrooms after the pandemic, with girls being more likely to drop out of education than boys.
These inequalities are truly shocking, but not surprising. We know from our experience and recently released IMF analysis that major epidemics often exacerbate pre-existing income inequalities.
On the debate as to unparalleled policy response, the good news is that governments around the world are taking extraordinary measures through policies to seek to save lives and protect livelihoods. These measures include intensifying efforts to protect the poor, as many countries took the initiative to increase food aid and targeted cash transfers to those who deserve it. Globally, fiscal measures amount to the equivalent of nearly ten trillion dollars.
But given the severity of the crisis, significant additional effort is needed. This includes taking measures to avoid serious harm to the economy, including the damage caused by job losses and increased inequality. It is clear that creating more opportunities is now more important than ever before in order to avoid the continuous increase in inequality.
Against this background, I want to highlight three priorities:
Use fiscal stimulus wisely
Significant fiscal stimulus will be required during the recovery phase to boost growth and employment. We know from the global financial crisis that countries that lost a greater portion of their output compared to its pre-crisis level were often characterized by larger increases in inequality.
But ensuring a return to growth is not enough. Let us remember the post-global financial reforms and investments that made banking systems more resilient. We need a similar surge in reforms and investments during the recovery phase to deliver a tangible improvement in the economic outlook for those most at risk.
Hence, we will need financial stimulus that will benefit individuals. This means increasing public investments in health care to protect the most vulnerable and reduce risks from future pandemics. It also means strengthening social safety nets, expanding access to high-quality education, clean water and sanitation, and investing in infrastructure that is sensitive to climate change. Some countries may also expand access to high-quality childcare services that can enhance women's participation in the labor market and support long-term growth.
These efforts are very important in achieving the sustainable development goals, but how can we achieve a tangible increase in spending if many of these countries are now facing an escalation in public debt? Public debt in emerging markets has risen to levels not seen in the past 50 years.
The IMF and the World Bank led the call for a suspension of debt service payments as a quick-impact measure for countries that lack adequate financial resources to face the crisis. The G20 responded by agreeing to suspend the repayment of official bilateral loans owed by the poorest countries, from the beginning of May until the end of 2020.
In the medium term, there will be an opportunity to improve spending efficiency and mobilize greater public revenues. There will also be an opportunity for tax reform. For example, some advanced and emerging economies can raise their higher rates of personal income taxes without slowing growth. Countries can work to ensure that the corporate tax system captures an appropriate portion of the unusual gains for crisis winners that may include gains from digital activities.
A concerted effort should be made to combat illicit flows and fill tax loopholes, both locally and internationally
On empowering the next generation through education, with the disruption of the educational system as a result of the virus, millions of children have become vulnerable to a state of learning poverty, that is, the inability to read and understand a simple text by the age of ten. Given the limited opportunities for high-quality education, learning poverty is already high, especially in emerging markets and low-income countries.
We are concerned about the effects of the crisis on the long-term income and education gaps. Our research examined the link between education and inequality, and concluded that a 10-point increase in the Gini index in any country "as observed in some economies close to the time of the global financial crisis" is associated with a sharp decline in educational attainment equivalent to about half a year. This can reduce lifetime income and cause income and opportunity gaps to persist for generations. In other words, protecting our future means protecting our children. Therefore, we need to increase investment in education, not only spending more on schools and distance learning capabilities, but also improving the quality of education and increasing opportunities for lifelong learning and acquiring new skills. These efforts can generate significant gains in terms of growth, productivity and living standards. Simulations based on a model embodying an economy such as Brazil show that reducing the educational attainment gap by a quarter, compared to the OECD average, could give a boost to economic output by more than 14 percent.
On harnessing the power of fintech, the Covid-19 pandemic has unleashed a mass migration from analog to digital. However, not everyone has reaped the benefits of this transformation, and the growing digital divide is set to become one of the legacies of the crisis.
What can policymakers do? High priority should be given to expanding access to financial products to low-income households and small businesses, which will allow households to reduce consumption volatility in times of shocks, and for businesses to make productive investments. The inclusiveness revolution is gaining momentum, as governments provide emergency cash transfers in record volumes. In Pakistan and Peru, for example, new support programs cover a third of the total population.
It can be difficult to reach the most vulnerable in developing economies, where the informal sector houses roughly 70 percent of jobs. However, it is this sector that is rife with fintech opportunities. Let's remember that about two-thirds of unbanked adults, 1.1 billion, have cell phones, and a quarter use the Internet. The number of adults without an account could fall by 100 million worldwide. If governments move routine cash payments to bank accounts there are more opportunities in the private sector.
Of course, governments also need to manage fintech risks. And reforms are needed to support competition, strengthen consumer protection, and combat money laundering. Finding the right balance will be essential to reducing inequality and achieving growth.
Our research shows that increased funding and technology opportunities are associated with increased income mobility across generations. We estimated that there is a difference in GDP growth of between two and three percentage points in the long term between countries with financial inclusion and counterpart countries with less financial inclusion.
In all these areas, the Fund is working with the World Bank and many other partners to support countries in the current crisis period. In this context, we are fully committed to assisting vulnerable groups through practical technical assistance, policy advice and lending programs. We strengthened our focus on social spending issues, including spending on social safety nets, health and education.
As governments move down this path, they will need to prepare for a more inclusive recovery. This means taking the right actions, especially with regard to financial stimulation, education, and financial technology. It also means sharing ideas, learning from others, and working to reinforce a sense of solidarity.
If there is a lesson to be learned from this crisis, it is that the strength of our society is equivalent to the strength of the weakest among us. This is the compass we must guide in achieving a more resilient post-pandemic world.