One silver lining of the  COVID-19 crisis  is that it  has raised critical awareness of  the sustainability dimension  of economic development. Policy makers and development institutions, including the World Bank and the IMF, are calling for stronger emphasis on environmental sustainability as countries plan for the recovery period.

In parallel, increased scrutiny from regulatory authorities, consumers, investors, and financial markets could push firms to be more environmentally responsible and identify synergies between sustainability and business rationale.

Rising pressure from governments and markets

In April, leaders of major economies pledged to take aggressive action to combat climate change, including a commitment by the United States to reduce its emissions by 50 percent by 2030 from 2005 levels. The announcement followed the European Union’s green deal, which commits the bloc to climate neutrality by 2050, and comes ahead of the 2021 United Nations Climate Change Conference (COP26) summit taking place in November.

The implications could be felt by countries—and companies—across the world. Both the EU and the U.S. are exploring the possibility of imposing a carbon border adjustment tax, which would apply to imports from countries with less ambitious climate policies. The move could shift the calculus for global companies as they assess their business strategies for these major markets, upending global value chains.

Pressure from financial markets has also been growing. Investment managers such as BlackRock, as well as financial regulators such as the U.S. Federal Reserve, are pushing major companies to disclose emissions across their supply chains and draw up plans to decarbonize their operations. At the same time, the United Nations Conference on Trade and Development (UNCTAD) estimates that the value of sustainability-related investment instruments (such as green bonds) reached between $1.2 trillion and $1.3 trillion in 2019, signaling that there are opportunities for firms to capitalize on the push for sustainable growth.

Global firms are increasing investments in sustainability

New evidence from the World Bank’s Quarterly Pulse Survey of Global Multinational Enterprises(MNEs), as well as data on foreign direct investment (FDI) projects, shows that companies are responding to this pressure with an increased focus on sustainable investment. Results for the fourth quarter of 2020 showed three-quarters of respondents—MNE affiliates operating in developing countries—increasing their focus on sustainability and decarbonization of products since the onset of the pandemic.

Foreign investors are also responding to rapidly declining costs and significant growth potential in renewable energy generation, which will be central to achieving a low-carbon economy. As the pandemic wreaked havoc on oil markets, data suggest that a dramatic shift toward investments in clean energy has taken place.

Greenfield FDI in renewable energy totaled $85.5 billion globally in 2020, hitting new highs and eclipsing FDI in fossil fuels for the first time. This shift wasn’t limited to developed economies: FDI in renewables in developing economies totaled $17.6 billion (across 142 projects), exceeding the $13.6 billion announced in fossil fuels (across 42 projects), based on analysis of fDi Markets data.

A challenge and an opportunity for developing countries

The shift toward sustainability will fundamentally change the way that countries need to think about competitiveness and investment attraction. As multinational enterprises look to decarbonize their supply chains, robust national green policies and local supplier capabilities may become a key selling point to prospective investors, as they in turn look to meet the sustainability standards expected by end consumers.

For developing countries, the rapid growth of green sectors—including renewables, energy storage, electric vehicles, green buildings, and waste recycling—present opportunities for skilled jobs, productivity growth, and economic transformation. But whether countries can access these benefits will depend on their climate goals and strategies, their approach to carbon pricing, access to finance for their companies, and a conducive investment climate.

Christine Zhenwei Qiang is Practice Manager of Investment Climate. Her teams advise client governments in over 100 countries on catalyzing private investment and competition through legal, policy, regulatory and institutional reforms. She oversees the Global Investment Competitiveness Report series. She has published journal articles, book chapters and reports on private sector development, economic growth, FDI, productivity and infrastructure development.

Abhishek Saurav, an Indian national, is a Senior Economist with the Global Investment Climate Unit of the World Bank Group’s Finance, Competitiveness & Innovation Global Practice. He leads policy research on foreign direct investment (FDI) and initiatives to shape the investment climate and competitiveness agenda in developing countries.

Brody Viney is a Consultant in the Finance, Competitiveness, and Innovation Global Practice at the World Bank Group. 

To read the full commentary from World Bank Blogs, please click here.

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“Global services trade in the third quarter of 2020 fell 24% compared to the same period in 2019, according to statistics released by the WTO on 26 January. This represents only a small uptick from the 30% year-on-year decline registered in the second quarter, in marked contrast to the much stronger rebound in goods trade.

“Preliminary data further suggest that, in November, services trade was still 16% below 2019 levels. Prospects for recovery remain poor since a second wave of COVID-19 infections necessitated new, stricter lockdown measures in many countries, with tightened restrictions on travel and related services extending into the first quarter of 2021.

“The latest statistics confirm earlier expectations that services trade would be harder hit by the pandemic than goods trade, which was only down 5% year-on-year in the third quarter.  Foregone expenditures on tradeable services could be directed elsewhere, with consumers shifting to goods instead.”

Travel services in the third quarter were down 68% from the third quarter of 2019, a slight improvement from the 2nd quarter (down more than 80%). Transport services were down 24% in the third quarter while other services were down 2%.

As prior posts have reviewed, travel and tourism trade has been destroyed during the pandemic with as many as 100 million people’s jobs at risk. 

With new lockdowns and travel restrictions occurring in the first quarter of 2021, the travel and tourism sector (including air, hotel, restaurant, entertainment sectors) is in for a continued difficult 2021 (at least the first half for some developed countries depending on vaccination staging).

The WTO press release is embedded below.

In an earlier post, I had reviewed a World Bank forecast that tied economic recovery to the speed and breadth of COVID-19 vaccinations that occur in 2021. See January 5, 2021, Global economic rebound in 2021 will be affected by rate of vaccinations against COVID-19 – World Bank’s January 5, 2021 release of its World Economic Prospects report. 

In an update to its World Economic Outlook released earlier this week, the IMF noted that while global economic growth in 2021 and 2022 is expected to be somewhat stronger than previously projected, the level of growth is dependent on vaccine availability and vaccinations and whether there is widespread availability to peoples of the world. See IMF, World Economic Outlook Update, January 2021. The header and first three paragraphs of the update are copied below.

“Policy Support and Vaccines Expected to Lift Activity

“Although recent vaccine approvals have raised hopes of a turnaround in the pandemic later this year, renewed waves and new variants of the virus pose concerns for the outlook. Amid exceptional uncertainty, the global economy is projected to grow 5.5 percent in 2021 and 4.2 percent in 2022. The 2021 forecast is revised up 0.3 percentage point relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies.

“The projected growth recovery this year follows a severe collapse in 2020 that has had acute adverse impacts on women, youth, the poor, the informally employed, and those who work in contact-intensive sectors. The global growth contraction for 2020 is estimated at -3.5 percent, 0.9 percentage point higher than projected in the previous forecast (reflecting stronger-than-expected momentum in the second half of 2020).

“The strength of the recovery is projected to vary significantly across countries, depending on access to medical interventions, effectiveness of policy support, exposure to cross-country spillovers, and structural characteristics entering the crisis.”

On the IMF webpage for the update there is a colored chart showing projected growth for certain groupings of countries. The Chart is embedded below.

From press reports it is known that the rollout of vaccines has hit some early snags with both Pfizer/BioNTech and AstraZenaca announcing reduced shipments to some countries. Indeed, the EU is considering steps to monitor and/or restrict exports of vaccines depending on fulfillment of contracts with the EU and member states, raising concerns about vaccine nationalism. 

Similarly, new variants that are apparently more contagious and possibly more deadly are spreading resulting in heightened travel restrictions which will retard any recovery in the travel and tourism sector. There are also concerns about whether initial vaccines will be effective against the new variants. 

At the same time, Africa which had recorded relatively few cases and deaths from COVID-19 for much of 2020 is now experiencing significant increases in both which is overwhelming health systems in some areas.

The COVAX facility designed to help many countries (including many poor countries) access vaccines has a significant funding shortfall at present despite the U.S. rescinding its notice of withdrawal from the WHO and its agreement to participate in COVAX. The Secretary-General of the World Health Organization has expressed concern that the world will fail to make vaccines available to all at affordable prices in a timely manner. The WHO Director-General’s speech is embedded below.

The WHO’s Director-General references a report from the International Chamber of Commerce Research Foundation. The press release from the ICC describes the report as follows.

“A study commissioned by the International Chamber of Commerce (ICC) Research Foundation has found that the global economy stands to lose as much as US$9.2 trillion if governments fail to ensure developing economy access to COVID-19 vaccines

“The COVID-19 pandemic had a devastating effect on both lives and livelihoods in 2020. The arrival of effective vaccines can be a major game changer in mitigating the economic, social and health consequences of the virus in the year ahead.

“However, evidence to date suggests that access to these vaccines is likely to be highly uneven across countries. Advanced economies have in recent months pursued a policy of securing the global supply of frontrunner vaccines – as a result severely limiting their availability in emerging markets. Moreover, the Access to COVID-19 Tools (ACT) Accelerator – the proven global platform to enable equitable access to COVID-19 test, treatments and vaccines – remains underfunded by the world’s largest economies, constraining its ability to procure vaccines at scale for the developing world.

“A new study highlights the major risks to the global economy inherent in this uncoordinated approach to vaccine access. Using a sophisticated model – that builds upon an earlier NBER and IMF Working Paper – to properly the assess the economic toll of a prolonged pandemic, the research shows that no economy can recover fully from the COVID-19 pandemic until vaccines are equally accessible in all countries.

“In short, advanced economies that can vaccinate all of their citizens are shown to remain at risk of a sluggish recovery with a drag on GDP if infection continues to spread unabated in emerging markets. These losses dwarf the donor finance needed to enable vaccines to be procured for everyone, everywhere – making a clear ‘investment case’ for full capitalization of the ACT Accelerator and a coordinated global approach to distribution.”

Conclusion

While the recent releases from the WTO and IMF show somewhat better rebounds from the effects of the pandemic in the third quarter of 2020 (WTO) and into 2021 and 2022 (IMF), the key to global recovery lies in the approval of effective vaccines and the equitable and affordable distribution and vaccinations of populations around the world. Major advanced economies, many suffering from high infection and death rates in 2020, are using their financial muscle to secure contracts to deal with getting the pandemic under control within their borders. While there has been extensive work to create a mechanism to get vaccines to other countries in 2021 and 2022, there remain funding needs and questions about whether vaccines will in fact be available for use for these other countries. A lot depends on the efforts to ensure equitable distribution of vaccines to all those in need. There is a large opportunity for governments, businesses, and private organizations and citizens to help fill the gap. Because the failure to do so carries a likely huge cost, making sure funds are available to get the world vaccinated is in everyone’s interest. The outcome will determine global growth rates and trade flows for the coming years.

Terence Stewart, former Managing Partner, Law Offices of Stewart and Stewart, and author of the blog, Current Thoughts on Trade.

To view the original blog post, please click here. 

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They emphasized the importance of health response, aiding helpless countries, promoting recovery and financial stability, and mobilizing the International Monetary Fund (IMF), World Bank Group, and regional development banks. The only new element was conditional support for a “time-bound” suspension of debt service payments of the poorest countries.

On the financial side, the G20 avoided commitments of new resources for the international financial institutions, instead calling for a rearrangement of existing resources like the proverbial chairs on the Titanic. They missed an opportunity to do something dramatic, such as support for a large allocation of the IMF’s special drawing rights (SDR).

Instead, in a footnote, they acknowledged that “there was no consensus on the issue.” No doubt, representatives of other countries are waiting on the United States. Reportedly the US position for now is no. We can only hope that position will change.

The SDR proposal will not go away. Some are calling for a larger SDR allocation than the $500 billion that Christopher Collins and I endorsed. Former UK prime minister Gordon Brown and former US Treasury secretary Lawrence Summers have called for an SDR allocation of $1 trillion.

The binding constraint on a new allocation of any SDR is US approval because an allocation requires an 85 percent weighted-majority vote of IMF members, and the United States holds 16.51 percent of the votes. The binding constraint on the amount of SDR that can be issued in one five-year “basic period,” in IMF terminology, without US congressional legislation is the size of the US quota in the Fund, SDR 82.99 billion.

The US quota in the Fund is 17.45 percent of the total. This means that SDR 475.6 billion can be issued in one basic period, or $650 billion at the US$1.3666 per SDR rate on April 15, 2020, without a change in US law. Members of the IMF, however, could agree to allocate $1 trillion of SDR if the United States changes its legislation.

This approach would be the first best, but it might take time. Alternatively, IMF members could agree now to a second allocation of SDR at the start of the next five-year basic period on January 1, 2022.

It is critical to put in place quickly significant financial assistance for all members of the IMF. The beauty of an SDR allocation is that, unlike most other large, fresh initiatives, it can be implemented quickly and delivered to all 189 members of the Fund, boosting their international reserves instantly.

Half of the Fund’s members reportedly have already applied for IMF assistance. Despite assurances to the contrary from the IMF leadership, echoed by the G20, the Fund does not have $1 trillion in financial resources to commit to its members and cannot come close to committing to lend that amount.

To view the full blog, click here.

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Before you rush to restructure your retirement portfolio, read what the IMF said on April 2009. Keep in mind that the world economy was in full freefall back then, not in the middle of a deliberate downturn.

“Even with determined steps to return the financial sector to health and continued use of macroeconomic policy levers to support aggregate demand, global activity is projected to contract by 1.3 percent in 2009. … Moreover, the downturn is truly global: output per capita is projected to decline in countries representing three-quarters of the global economy. Growth is projected to reemerge in 2010, but at 1.9 percent it would be sluggish relative to past recoveries.”

What actually happened over the next two years? Global GDP did contract in 2009 but by 0.7 percent, half the rate predicted by the IMF. In 2010, it grew by a whopping 5.1 percent.

Take a closer look at what the IMF said in April 2009. At the time, the IMF’s economists already knew what had happened for two quarters of the crisis (October-December 2008 and January-March 2009).

It still got the numbers for China and India wrong. The numbers for 2010 were way off-target: The U.S. economy ended up growing by 3 percent instead of the forecasted zero, Germany’s economy by 3.5 percent instead of shrinking by one, and Japan by 4 percent instead of -0.5 percent. China and India did way better than forecast.

Encouragingly, IMF economists seem to have learned from their mistakes. This time, they project a quick but conditional rebound: “In a baseline scenario—which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound—the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support.” Coincidently, the U.S. economy is expected to grow by about the same rate. The IMF’s economists are likely to be more accurate this time though they may be exaggerating the 2020 contraction.

THE 4 MOST DANGEROUS WORDS IN DEVELOPMENT

But the IMF was not content to let the numbers speak for themselves. Gita Gopinath, the IMF’s chief economist warned that this time is different, and “much worse growth outcomes are possible and even likely.” Her boss, Kristalina Georgieva, the managing director of the IMF, had been a calming voice until last week. This is what she says now (emphases in original):

“Today we are confronted with a crisis like no other. In fact, we anticipate the worst economic fallout since the Great Depression. Just three months ago, we expected positive per capita income growth in over 160 of our member countries in 2020. Today, that number has been turned on its head: we now project that over 170 countries will experience negative per capita income growth this year. The bleak outlook applies to advanced and developing economies alike. This crisis knows no boundaries.”

These warnings are mild compared to those from the Organization for Economic Cooperation and Development (OECD). On March 23, Angel Gurria, the OECD’s secretary-general, warned advanced economies that they should prepare to suffer. If they did everything right the suffering would last years; if not, they’d never recover.

“I do not agree with the idea of a ‘V’ shaped phenomenon. … Right now we know it’s not going to be a ‘V’. It’s going to be more in the best of cases like a ‘U’ with a long trench in the bottom before it gets to the recovery period. We can avoid it looking like an ‘L’, if we take the right decisions today.”

I didn’t think it could get any worse until I read that Professor Nouriel Roubini wasn’t ruling out an “I-shaped” economic trajectory—a forever freefall!

Based on a quick review of the forecasts by the OECD, IMF, and the World Bank during previous crises, expect Mr. Gurria and other doomsayers to be wrong. In both booms and busts, people seem to forget John Templeton’s axiom that the most dangerous words in investing might be “this time it’s different.” It almost never is. The voice of reason now seems only to be that of David Malpass, the World Bank Group’s president. Last month, he proposed a sensible way forward:

“[Our] first goal is to provide prompt support during the crisis, based on a country’s needs. It’s also vital to shorten the time to recovery and create confidence that the recovery can be strong. …. [O]fficial bilateral creditors [should] suspend debt payments due from IDA countries, effective immediately. This would allow time to assess the crisis’ impact and financing needs for each IDA country, and to determine what kind of debt relief or restructuring is needed.”

I’m hoping he stays firm. Treating the coronavirus shock as temporary is good economics. But in the world of international development, it is bad politics. Mr. Malpass is spending a lot of time this week with persuasive policy types, and I’m not sure how long he will hold out.

How did the World Bank do back in 2009, and what are its economists saying now? The World Bank publishes its forecasts in January and June, so it’s not possible to compare its global forecasts for 2009 with those of the IMF. I looked instead at the January 2010 Global Economic Prospects report. It had nine more months to guess what was in store in 2010. It still got it wrong.

The World Bank has published its forecasts for Africa and East Asia. The East Asia Update (already revised since it was first published in March) asserts outright what Mr. Gurria implied:

“This time is different. The virus and society’s responses to it are hitting economies across the world almost simultaneously, and all countries are suffering both a demand and a supply shock … In other words, the Great Recession was one shock, albeit to a large country (the US); in contrast, the COVID-19 is a demand-cum-supply shock to all the countries gripped by the virus: China, East Asia, the United States, Western Europe, and the Middle East. …. Even if the containment measures are restricted to say two quarters, it is likely that annual global GDP growth will be negative for perhaps the first time in decades.”

It couldn’t possibly be that global GDP will shrink in 2020 for “the first time in decades” because it shrank—for the first time in decades—in 2009. But what is more worrying is the first sentence, for four reasons:

What matters for governments—and by extension the IMF, World Bank, and the OECD—is whether the policy-related reasons for and responses to this recession are different from previous crises. Actually, they are pretty much the same. Like the 2009 recession, this crisis started because of a flawed government policy. Then, it was the US government’s failure to regulate financial markets; this time it was the Chinese government’s failure to regulate food markets.

Like previous crises, the problem was initially compounded by confused policy responses, which led to uncontained contagion. In 2009, it was an inconsistent response to the failure of big investment banks in the U.S. and muddled communication afterward. This time the Chinese government reacted inconsistently—first by punishing whistleblowers and then praising them—and then providing bad information that worsened contagion.

As in the past, international agencies failed. In 2008, global regulators like the International Monetary Fund failed to warn the world of weaknesses in U.S. mortgage markets; this time it was the World Health Organization. The reason is the same: Big economies have veto powers in international watchdog agencies and they tend to exercise it.

In the most basic economic terms, the effects were not dissimilar: a sudden drop in economic activity as globally interlinked financial markets froze in late 2008, and a sharp drop in output in the first quarter of 2020 as globally linked goods and factor markets froze.

While the cause of this crisis may be different from that in 2008-2009, it is also true that the cause of that crisis was not the same as the crises in 1991, 1982, or 1975. Nevertheless, the policy responses have invariably been—and likely will always be—a mix of fiscal, financial/monetary, social, and real sector measures.

The mix depends on the lessons learned during previous crises—an acknowledgment that these problems have familiar remedies—and the options available to governments: fiscal space, ability to borrow big time during bad times, financial sector development, monetary policy constraints, and reliable social safety nets.

We know now that most governments tend to respond reasonably well, so economic crises tend to have a V shape. That is, policy responses quickly bring many countries back to the economic output and living standards they had before the crisis; this short note written in 2009 by the late Michael Mussa makes this point well.

This is worth reiterating: Just as a good medical response will return a country only to its pre-COVID-19 levels of health, a capable economic response can return it only to its precrisis economic vitality. The U.S. and Chinese economies were doing better than the euro area last year; it will probably be much the same in 2021.

To view the full blog, click here.

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