Emerging Pathways Towards A Post-COVID-19 Reset And Recovery

Chief Economists OutlookPost-COVID-19 economicoutlook: Three emergingchallengesThe results of the survey and thedeliberations among the Chief EconomistsCommunity point to three key emergingchallenges faced by governments andbusiness leaders as economies begin toenter the recovery phase.1.2.3.Respondents were in strong agreement thatthe inequality dynamics which the crisis hasaccelerated need to be urgently addressedthrough an adaptation of tax architectures.They should also be more systematicallymonitored by governments along with othertargets, such as evolutions in natural, socialand other types of capital. A slight majorityof respondents also felt that some form ofunconditional basic benefits should remainpart of the social policy toolkit beyond thecrisis, however, there was no consensus.Retooling economic policy to reduceinequality and improve social mobilityIdentifying new sources of economicgrowthAligning on new targets for economicperformanceWhen it comes to identifying new sourcesof growth, views were sharply divided overthe role of governments in the innovationprocess. There were voices both strongly infavour of governments proactively setting adirection for innovation and strongly against.For the process of structural change withineconomies, most respondents felt thatgovernment support in this current phase ofthe crisis should be targeted more towardsthe growth sectors of the future rather thanprotecting all jobs.However, in line with current levels of globaluncertainty, we found limited consensus onthe order of magnitude of reforms needed.Responses to the Chief Economists Surveyrange from agreement that the necessaryeconomic transformation will requirereform and institution building on a postSecond World War scale to more cautiousperspectives (Figure 2). The question of thescale of these challenges and the responsesto them warrants further exploration insubsequent editions of the Outlook.8

Emerging Pathways towards a Post-COVID-19 Reset and RecoveryFigure 2Average Score: 1 strongly disagree, 2 disagree, 3 uncertain, 4 agree, 5 strongly agreeTax architectures will need to be adapted in order toaddress distributional dynamics accelerated by the crisis.A dashboard of internationally agreed income, wealthand inequality metrics is needed to widen policy makers’focus beyond GDP growth as core policy objective.Government direction for innovation will be critical increating the new growth markets of the future.Unconditional basic benefits should remain part of thesocial policy toolkit beyond the crisis.The depth of the economic transformation needed willrequire reform and institution building on a post-WWII scale.Government support should protect all jobs, ratherthan taking sides on structural change.0,00,511. Retooling economic policy toreduce inequality and improvesocial mobility2,533,54Transforming tax architecturesGovernment interventions to keep firms andhouseholds afloat and stimulate demandduring the recovery phase will likely pushdebt-to-GDP ratios to over 120% on averagefor advanced economies, according to theIMF. In the case of the US, the debt-to-GDPratio is on track to surpass that accumulatedby the end of the Second World War.11The hiatus imposed by the pandemic providesa unique moment to introduce far-reachingsystemic change that will stop inequalityfrom spiralling further out of control andfocus on measures that will enhance socialmobility. In the wake of the crisis, which hasfallen squarely on the shoulders of the mostvulnerable, how the future burden is sharedwill be critical. Equally important will be an112upgrade of social protection measures toprovide broader safeguards for future shocksand provide support to developing socioeconomic mobility in the new economy.Inequality has been accelerating in recentyears, in part as technological change hasdriven a wedge between high- and low-skilledworkers and given rise to network effects thathave unleashed winner-take-all dynamicsacross a number of industries.10 In the case ofhigh-income economies, the broad adoptionof digital technologies has compoundedcountry-level inequality patterns shaped bythe forces of global integration.101,5Governments will need to make complexchoices on how these debts will be paidoff and by whom, keeping in mind that theimpact of the crisis has been deeply uneven.A compounding factor of the crisis is that it isaccelerating the inequality dynamics that werealready at work, including the polarization oflabour markets, as the prospect of any futureBrynjolfsson and McAfee, 2014Tooze, 202094,5

Chief Economists Outlookworkforce disruptions, such as those causedby the pandemic, is making automation evermore attractive.12 At the industry level, the gulfbetween market capitalizations of technologycompanies and the rest of the economy isalso expected to grow.Supporting labour market transitions andsocial protectionThe COVID-19 crisis descended on labourmarkets at a time when conditions forworkers were already under strain fromautomation and the number of jobs withoutpermanent contracts and benefits wasgrowing. The outlook is challenging: withevery recession in the last 30 years, morejobs involving routine tasks have disappearedwithout being replaced when economicactivity returned.15 A pandemic that shines aspotlight on the vulnerability of human labourcan be expected to exacerbate this dynamic.Getting the burden-sharing right is adaunting challenge, yet it also presents atremendous opportunity for governments toregain the trust of citizens, the majority ofwhom have seen their chances of advancingeconomically dwindle for many years.13The Chief Economists Community is instrong agreement that tax architectures willneed to be adapted in order to address thedistributional dynamics accelerated by thecrisis (see Figure 2).As the pandemic made high risk any taskthat requires physical presence, only essentialworkers in such roles and those able to workremotely continued working. The impacton unemployment has varied widely acrosscountries. Many European governments,including Germany, Denmark, Italy and theUnited Kingdom, offered support for reducedhours working schemes with the aim topreserve ties between firms and workers. Asa consequence, unemployment in Europestayed relatively low.16An active debate on international taxarchitectures was ongoing before the crisis,with governments working under the OECD’sBase Erosion and Profit Shifting (BEPS)initiative to find more effective ways to shutdown tax evasion. Debate is also ongoing onhow to fairly tax activity generated in the digitaleconomy. The acceleration in global inequalityhad further brought tax instruments, suchas wealth taxes and higher marginal incometaxes, back into the public discourse.For others without long-term contracts, somegovernments extended coverage of socialsafety nets. In other countries, such as theUS and India, the number of jobless claimsskyrocketed. Yet, even in European countriesthat put in place strong job protectionmeasures, an increase in unemployment isexpected as many of the schemes are dueto run out over the course of the summer.Young people will be particularly at risk sincethey are more frequently employed on shortterm contracts.As pointed out by one expert, “a worldin which coronavirus debts are repaid bya wealth tax or a global crackdown oncorporate tax havens would look verydifferent from one in which benefits areslashed and VAT is raised.” The expert alsocautioned that governments may be temptedto service debts with money that would haveotherwise gone to education or pensions.141213141516Frey, 2020Spence and Brady, 2020Tooze, 2020Jaimovich and Siu, 2012OECD, 202010

Emerging Pathways towards a Post-COVID-19 Reset and RecoveryThe new momentum stemming from freshthinking and determined policy action duringthe emergency response stage must nowbe leveraged for more permanent reform oflabour policy and social protection systems.With a view to longer-term developmentsin labour markets, policy attention needsto shift from jobs alone to consider the fullevolution of working lives today, includingtransitions between employers, continuousretraining, upskilling and life-long learning, aswell as support during periods of inactivity.17and expand opportunity for all. Inclusiveand sustainable growth powered by lowerresource use will be necessary to paydown unprecedented public and privatedebt burdens.The crisis could also result in long-termdamage to trading ties between high- andlow-income countries, as multinationalcompanies repatriate parts of their valuechain and trade finance becomes harder toaccess for countries with weaker institutions.Both threaten international integration, animportant channel of economic convergencebetween high- and low-income countries.A far-sighted upgrade of social protection fit for21st-century structures would also recognizethe extent to which horizontal support systemsin the form of community-based networks canplay an important role for workers.18Co-creating new frontier marketsIf economic recovery defaults to a reboot ofpre-COVID-19 activities, societies will havemissed an important window of opportunityto transition to a more inclusive andgreener growth path. As economic policyinterventions are transitioning from economiclife-support measures to the stimulus phase,governments have a unique opportunityto influence the direction of economicprogress through far-reaching innovation andinvestment strategies.One policy tool that has been pilotedsuccessfully in several contexts is UniversalBasic Income or other forms of unconditionalcash transfers. A slight majority ofrespondents to the Chief Economists Surveyfeels that some form of unconditional basicbenefits should remain part of the socialpolicy toolkit beyond the crisis, but views arefar from consensus.2. Identifying new sources ofeconomic growthThe ambition will have to be a deeptransformation across all sectors of theeconomy, a feat that will only be possibleif public and private actors work in unison.In this endeavour, the role of governmentswill need to go beyond the traditional remitof government intervention – fixing marketfailures – and instead entail an activeinvolvement in reshaping existing sectors andco-creating new markets both as regulatorsand investors.19The COVID-19 crisis is expected to heavilyimpact two important drivers of inclusivelong-term economic progress: innovationand global integration.The economic contraction cannot beexpected to spare resources allocatedto R&D, despite the fact that innovationhas never been more critical than at thiscurrent juncture to manage climate change171819World Economic Forum, 2019Cottam, 2018Mazzucato and McPherson, 201911

Chief Economists OutlookThese new frontier markets include a rangefrom green energy, ecotourism and thecircular economy, to health, education,training and the care economy. These areall areas where the use of technology andmarket forces could have a transformativeimpact on economies and societies throughmultiplier effects on employment, socialcapital and environmental returns; yet, someof the necessary preconditions for thesemarkets to function are lacking.Finding new paths for economicdevelopment and global convergenceWhile traditional government interventions,such as taxing negative externalities andsubsidizing positive externalities, will alwaysremain part of the policy toolkit, an ecosystemlevel approach would further involve providinga long-term direction for innovation throughthe definition of societal missions, investing inproofs of concept for new technologies, thestrategic use of procurement and innovationprizes, as well as risk-sharing instruments suchas loan guarantees and grants to crowd inprivate investment.20A longer-term structural trend that hasbeen evolving alongside is the dwindlingcomparative advantage of low-wagecountries in global value chains.22 Asroutine tasks could increasingly beautomated, it became cheaper to repatriatethem to headquarter countries.23 Thesedevelopments have been putting severepressure on the growth model that hadproven successful for South-East Asia.Globalization has been among the mostimportant drivers of international incomeconvergence in recent decades. Yet, whenthe COVID-19 crisis hit, international traderelations were already strained due to aseries of policy shocks, including USChina trade disputes and tensions overtechnology standards.Some low- and middle-income countries havemade strides in establishing a digital sectorand have leapfrogged high-income countrieson applications such as mobile payments;yet, these successes are not yet far-reachingenough to serve as the foundation of a newlong-term growth model. In addition, armslength trade with low- and middle-incomecountries has been affected by lower trust incross-border finance since the global financialcrisis, in particular for countries with weakinstitutions. This reduced access to tradefinance, in turn, has tilted the playing fieldin favour of multinational companies at theexpense of smaller, national players.24Governments have de facto played a moreactive role in innovation than they are oftencredited with, for example in laying thefoundations of today’s IT industry;21 yet, theyhave so far mostly stopped short of providingan explicit direction for innovation. Views ofthe Chief Economists Community are sharplydivided on whether governments shouldbe doing so in the post-COVID era, withvotes of both strong agreement and strongdisagreement on this question.2021222324Mazzucato, 2013Mazzucato and McPherson, 2019World Bank, 2017Baldwin, 2019Crozet, Demir and Javorcik, 201912

Emerging Pathways towards a Post-COVID-19 Reset and Recovery3. Aligning on new targets foreconomic performanceWhile the sharp drops in physical goodstrade due to lockdown measures maybe temporary, the COVID-19 crisis couldaccelerate two structural trends, one ofwhich would hurt international convergencefurther, while the other could support it.The severity of the crisis has forced a pauseto refocus minds on what is truly of value. Aspublic- and private-sector leaders are taskedwith charting a transition to a greener, moreinclusive economic system, a consistentset of targets will be critical to creatingaccountability and assessing progress forboth governments and firms.The first is related to the call for greaterresilience in supply chains as governmentsrealized how geographically concentratedsuppliers for critical parts and inputshave been. A move towards greater selfsufficiency or parallel supply chains wouldimply a reduction in capacity for the countriesthat currently host them. It remains to beseen whether businesses will indeed beready to give up efficiency in favour of greaterresilience.25 The trade-off may eventually tiltin favour of resilience as uncertainty aboutthe pandemic, geopolitical tensions orclimate-change-related events may causemore supply-chain disruptions.Efforts to identify relevant business metricsof environmental, social and governanceperformance (ESG) as well as frameworksto assess multiple dimensions of well-beingbeyond GDP have proliferated in recentyears. There is a need to embed newmeasures of business performance, to alignon new measures of aggregate economicperformance, and to align micro and macroframeworks for greater impact.A silver lining is that firms have now crossedthe psychological threshold of large-scaleremote work. This could turn into anopportunity for emerging markets to offercompetitively priced services based ondifferences in the wages of skilled workersacross countries, offering new opportunitiesfor imagining a new future economicdevelopment model, one that also entailshigher investment in human capital.26Embedding stakeholder capitalism inbusinessThe majority of survey respondents felt thatthe drive for greater resilience in supplychains is indeed likely to lead to a reversal ininternational economic convergence.Recent experience suggests that companiesthat have consistently applied the principlesof stakeholder capitalism during the crisis– paying attention to the well-being of theiremployees, suppliers and customers to thesame degree as considering the immediateinterests of their shareholders – haveweathered the crisis better than others.252627Every company will have to play a role inthe transition, embedding the ambition ofgreener and more inclusive growth in theirbusiness model, governance and everydaydecision-making. This will require the wideadoption of a well-defined, holistic view offirm performance and impact.27Javorcik, 2020Baldwin, 2019World Economic Forum, 202013

Chief Economists OutlookThis is a positive reinforcement of the 2019Business Roundtable Declaration, whichreaffirmed the importance of the principlesof stakeholder capitalism, first formulatedby Klaus Schwab in 1973. Beyond thecrisis horizon, more evidence is emergingthat companies that follow more narrowlydefined ESG standards, on average,outperform the market.28There is strong agreement among the surveyrespondents that a concise set of targets willbe an important signpost to track progressand create accountability as societies buildtowards a new system. In addition to anupdated measure of GDP and differentdimensions of inequality, a new dashboardof economic performance should containtargets across the main components ofnational wealth as proxies for resilienceas well as a target regarding access toeconomic opportunity.Yet, the implementation of ESG standards,which stretches from the implementationof diversity, equity and inclusion strategiesto reduction in carbon emissions, is costlyin the short-run. There is thus a dangerthat the contraction in resources willlead to a side-lining of the ESG agendadespite its urgency. Chief EconomistCommunity views on whether the ESGagenda will emerge strengthened fromthe crisis despite the current contractionin resources are mixed, with views slightlytilting in favour of the continued momentumfor the ESG agenda.In particular, drivers of resilience will needto be better measured in order to givemore weight to future outcomes overimmediate economic gain. Systematicallytracking different dimensions of a broaddefinition of national wealth, includingfinancial, physical, natural and socialcapital, will be important. GDP itself willalso need to be updated to reflect valuecreation in the digital economy, valuecreated through unpaid care work as wellas value destroyed through certain types ofeconomic activity.Building consensus on a new set of nationaleconomic policy targetsRecent years have seen several extensiveand rigorous efforts to identify related metricsand tackle different dimensions of themeasurement question.29 Given the urgencyof the current situation, an acceleratedinternational convergence on a dashboardof core targets building on these metrics tosteer consistent, forward-looking economicand social policy and business decisions willbe critical.Despite extensive efforts to anchor alternativemeasures of

For this Outlook, we asked the World Economic Forum's Community of Chief Economists two sets of questions, one focused on the current economic outlook and another on the policy options available (see Box 1 for questions). Possible answers were on the scale of strongly disagree - disagree - uncertain - agree - strongly agree. 9. Citi, 2020