Planning for Post Covid -19 economic recovery

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It is well understood that there cannot be a lasting end to the economic crisis without an end to health crisis.  

In the light of continuation of pandemic, Governments and emergency services  are focusing on immediate needs - boosting all around capacity in hospitals, addressing hunger and protecting firms and families from eviction and bankruptcy. The choices that governments make to restart their economic engine, including long term social, economic and environmental benefits they look for to achieve though their stimulus investments will be extraordinarily consequential in insuring that they build back better and stronger.  

A major issue for the Govt. is the extent to which it has fiscal firepower to protect jobs and economic activity. To get a possible sense of where this might be heading taking into account the second wave of COVID 19 in the later part of 2020 and regional lockdowns in the first half of 2021, a budget deficit of 20% of GDP is predicted -equivalent to Second world war levels.  

Economic recoveries comes in four distinct shapes - L shape, U shape, W shape, V shape. Here's what each of these are characterized by, and how long they typically last-

1. K Shape - Recovery occurs when, following a recession, different parts of the economy recover at different rates, times or magnitudes. This is in contrast to an even, uniform recovery across sectors, industries or group of people. It leads to the changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession. Under this head, Budgets for spending heads such as subsidies, rural development, employment generation are likely to remain at large. The vaccination costs adds to the bill. Govt. will have to sharpen its focus on capital spending to contain damage to potential growth.     

2.   L Shape - Exhibits a sharp decline in the economy, followed by a slow recovery period. It is often punctuated by persistent unemployment, taking several years to recoup back to previous levels. 

3.   U Shape - In this scenario, the economy stagnates for a few quarters and up to two years, before experiencing a relatively healthy rise back to its previous peak. 

4.   W Shape - This scenario offers a tempting promise of recovery, dips back into a sharp decline, and then finally enters the full recovery period of up to two years. This is also known as a 'double dip' recession, similar to what was seen in early 1980s.

5.  V Shape - In this best case scenario, sharp decline in the economy is quickly followed by a rapid recovery back to its previous peak in less than a year, bolstered especially by economic measures and strong consumer spending. 

Calibrated lock downs, determined by the states may have restricted the economic damage in this second wave. But, consumer demand for all but essentials is likely to take a hard hit.                   

To support needed spending  in developing countries, bilateral creditors and International finance institutions should provide concessional financing, debt relief and Grants. The activation and establishment of swap lines between major central banks has helped ease shortages in international liquidity which may need to be expanded to more economies. Collaborative effort is needed to ensure that the world does not de-globalize and the recovery is not damaged by further losses to productivity. 

Ending the pandemic is a solvable problem but requires further coordinated global action.        


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