Eliminating the economic scars of the pandemic requires urgent action

Eliminating the economic scars of the pandemic requires urgent action

Photo: IMF Photos

May 23, 2022

The challenges faced by workers and students in various emerging markets can turn into long-term damage.

G20 economies continue to recover from the pandemic, but the unprecedented shock could concentrate long-term scars that weaken the economic outlook relative to its pre-crisis trends.

Losses from the pandemic will be significant in the years to come, both in terms of economic output and employment, as shown in our April World Economic Outlook news. Emerging market economies are likely to suffer greater losses as their access to vaccines has been relatively reduced and pandemic support programs have been scaled back. For many economies, the outbreak of war in Ukraine adds new challenges.

Our new analytical work is coming to an end The expected weak recovery in labor markets in emerging market economies and severe disruptions to the educational process over the past two years in advanced and emerging economies have been among the main causes of the scars caused by the pandemic. Policymakers must take urgent action to repair the damage caused by the crisis and prevent decades of shrinking economic output due to human capital losses.

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Recession often has consequences Permanent workers who lose their jobs due to the deep economic downturn. They may find it difficult to find new employment during the recovery phase and may lose some of their skills due to prolonged unemployment. These losses not only harm workers, but also reduce overall economic output.

This time around, the outlook for these labor market scars looks very different between the advanced and emerging market economies of the G-20. Indeed, labor markets have recovered strongly in advanced economies, thanks to political support and the spread of vaccinations. In addition, initial fears that the pandemic could create a widespread mismatch between worker skills and employer demand – due to continuous shifts in activity between sectors, for example – have not materialized.

However, workers in many emerging market economies within the Group of Twenty face a completely different outlook, with employment rates still below pre-pandemic expectations due to weak economic recovery. We also find a noticeable impact on the extent of engagement in informal work – which is common in many of these economies. In fact, informal work saw a steep decline at the height of the crisis, when social distancing efforts dealt a severe blow to dense contact sectors, which are characterized by higher rates of informal work.

But since then, informal work has seen a much stronger recovery than formal work in many G20 emerging market economies, including Brazil, Indonesia, Mexico and South Africa, the ratio of informal work to total work exceeding pre-pandemic levels in some countries. savings at the end of 2021.

With the continued recovery of contact-intensive sectors, the proportion of informal work could reach higher levels. Moreover, since informal workers often receive lower wages and benefit less from social safety nets, this increase in informality, if it becomes a persistent phenomenon, can negatively affect the incomes of the workers concerned.

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The unprecedented closure of educational institutions during the pandemic has hurt student learning in many G-20 economies, especially students from emerging market economies. In these countries, the impact has been most severe for members of the poorest families.

The effects are already starting to be felt. For example, in the United States, the percentage of students with lower math scores, especially students from lower grades and low-income families, has increased. If these learning losses are not addressed, a reduction in the lifetime income of the affected students may result. Our research indicates that in the coming decades, today’s students will make up about 40% of the working-age population in the combined G-20 economies.

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These profound effects on the workforce will have a significant impact on economies. Although there are still many unknowns about this, our simulations suggest that GDP in the G-20 advanced economies could fall below the baseline forecast scenario by up to 3% in the long run, once all these students will enter the labor market. With the poorest families suffering the worst learning losses, prospects for them in particular could weaken, further widening the income inequality gap.

In addition to labor market challenges and disruptions in the educational process, there are other channels that also cause scarring. For example, rising corporate debt and vulnerabilities in sectors hardest hit by the pandemic could also be a scarring factor, due to the burden it will place on investment and productivity for years to come. come, according to new research. Featured by the IMF in the April World Economic Outlook.

Scar Removal Policies

Several economies are facing challenges due to the interweaving of the war in Ukraine With the ongoing pandemic, as political space tightens due to high debt and rapid inflation, this makes support even more difficult. Even then, policymakers can reduce the scars of a pandemic – if they take decisive action.

And time is short to reduce learning losses because education is a cumulative process, and each year builds on the previous one. To limit lasting damage, countries must act quickly to assess learning setbacks and implement appropriate measures to help students. This could include, for example, the provision of additional auxiliary courses or extending the length of the school year.

Moreover, as the recovery strengthens, the measures taken to support businesses and employment during the pandemic that have helped to reduce its scars, such as credit guarantees and job preservation policies, should be cancelled. This will help not disrupt the reallocation of workers and resources to their most productive uses when the pandemic recedes and help bolster productivity growth.

Alternatively, policies can help individuals adapt to changing labor markets, for example through well-targeted job-search assistance programs and additional training support to acquire new skills. Furthermore, in order to prevent the financial difficulties of the corporate sector from turning into bankruptcies or underinvestment, it is also necessary to ensure that mechanisms are in place to deal effectively with corporate insolvency. and out-of-court restructuring.

Despite the many challenges, G-20 policymakers, by taking appropriate action now, can repair the damage and create the conditions for a strong and inclusive recovery for all major economies around the world.

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Mahdi Bin Attia Al-Andalusi He is an economist in the fund’s research department. Previously, he worked in the Middle East and Central Asia department. His research falls under the category of applied econometrics, focusing on the economics of raw materials and energy. He holds a Ph.D. from Columbia University.

Lonnie Engbo Christiansen She holds the position of Deputy Head of the Multilateral Control Department within the Fund’s Research Department. Before that, she was an economist in the management of strategies, policies, audit and management of the European fund as well. She has worked on a variety of issues, including issues related to IMF lending, inequality, gender and structural reforms. She holds a Ph.D. in economics from the University of California, San Diego..

lover lover He is an economist in the fund’s research department, where he works in the multilateral surveillance department. Previously, he worked for the African Department and the Institute for Capacity Development of the IMF, where he covered macroeconomic, monetary, financial and macro-structural issues. His research interests include financial development, maldistribution and productivity. He holds a Ph.D. in Economics from the University of Toronto.

David Malacrino He is an economist in the fund’s research department. Previously, he worked in European administration focusing on the Eurozone and Iceland. His research in labor economics and family finance focuses on income dynamics, inequality in the distribution of income and wealth, and entrepreneurship. He holds a doctorate in economics from Stanford University..

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