Debts, trade wars and low productivity: the aftermath of the pandemic

Record levels of public debt, geopolitical tensions that threaten to split the global trading system, and the likely persistence of low productivity growth may saddle the world with a slow-growth future that holds back development in some countries.

This vision of a post-pandemic world economy follows from a study organized by the Kansas City Federal Reserve and discussed at the Fed symposium in Jackson Hole over the weekend.

It explored issues such as the prospects for technological innovation, public debt and the state of international trade at a time when Russia’s invasion of Ukraine and the US-China conflict have eroded a once comprehensive global agreement, while less in theory, to promote the free flow of goods and services.

“Countries are now in a more fragile environment. They have used much of their fiscal resources to deal with a pandemic (…) Then there are the forces driven by politics, geoeconomic fragmentation, trade tensions, the decoupling between the West and ChinaInternational Monetary Fund chief economist Pierre-Olivier Gourinchas said in an interview on the sidelines of an annual Fed conference.

“If we get to a point where one part of the world is stuck with no catch up and has huge amounts of population, that creates tremendous population pressures and migratory pressures.”.

Gourinchas said global growth is likely to settle on a trend of around 3% a year, well below the rates of above 4% seen when rapid growth in the Chinese economy boosted global output, and a level that some economists see the brink of recession in a world where rapid progress should still be possible in large, less-developed countries.

But in the emerging pandemic economy, “the global growth environment has become very challengingsaid Maurice Obstfeld, a former IMF chief economist and now a fellow at the Peterson Institute for International Economics in Washington.

China now suffers from what may be chronic economic problems along with a shrinking population. Emerging industrial policies in the United States and elsewhere are reordering global supply chains in ways that may be more durable or serve national security purposes, but also less efficient.

The symposium is one of the first major attempts to take stock of long-term economic developments after the pandemic and amid renewed geopolitical tensions after years in which officials were initially concerned about the fight against COVID-19 and then they had to focus on a worldwide rise in inflation.

Economists and monetary policymakers seemed to agree that two pre-pandemic trends, both with implications for global growth, had been intensified by the health crisis and other recent events.

After skyrocketing during the global financial crisis 15 years ago, the ratio of government debt to global economic output has jumped from 40% to 60% thanks to pandemic spending, and is now likely to be at a level in which that serious debt reduction is not politically feasible, Serkan Arslanalp, an economist at the International Monetary Fund, and Barry Eichengreen, a professor of economics at the University of California at Berkeley, wrote in a paper.

The implications of a public debt that “has come to stayThey vary by country, they said, with more indebted but higher-income nations like the United States likely to get by over time, while smaller nations could face future debt crises or binding fiscal restrictions.

Globally, the consequences could be dire if government borrowing diverts capital away from countries that still have growing populations and less-developed economies, said Cornell University economics professor Eswar Prasad.

“This puts us in a bleak picture, thinking about the parts of the world that are rich in labor but poor in capital.“, said. While the populations of the major European nations, Japan, China and the United States age, some African nations such as Nigeria continue to grow rapidly.

“A More Naive Time”

The other pre-pandemic trend that has endured and intensified is a growing openness to policies ranging from overtly protectionist tariffs imposed under former US President Donald Trump to efforts by the Joe Biden administration to bring production of things like computer chips back to the United States.

White House Council of Economic Advisers Chairman Jared Bernstein told the symposium that the Biden administration’s industrial policies were not necessarily skewed for or against increased international trade, as many of the necessary intermediate goods to make silicon chips, for example, would be imported.

“In my opinion, the strategies we are following, despite the heated rhetoric, do not involve more or less trade”, Bernstein said during a debate.

Others pointed out that Russia’s invasion of Ukraine, and the rapid divorce of the European power grid from Russian energy, fractured one of the key precepts of expanding globalization: Trade would create lasting partnerships, if not outright allies.

“I remember a time, perhaps more naive (…) in which more trade would create friendssaid Ben Broadbent, Deputy Governor of the Bank of England.

But the Director-General of the World Trade Organization, Ngozi Okonjo-Iweala, said that while the pandemic raised reasonable questions about the resilience of global supplies, especially for sensitive products such as pharmaceuticals, the move to reorder global production patterns risked leaving growth opportunities on the table.

“From a political point of view, you can understand how attractive it is to say that we see the vulnerabilities, so we are going to try to do business with those who have the same values ​​as us.“, he claimed. But whatever the strategy -‘nearshoring’‘friendshoring’‘reshoring‘-, argued that “maybe we have to go a little further (…) If it is going to diversify anyway (…) it must be extended to those who have been on the margins of the global system”.

“The friends”he noted, they can change, a stinging statement at a time when Trump, who targeted tariffs on Europe, is running again and recently floated the idea of ​​a blanket tax on imports.

If there was a potential silver lining, it was the debate about advances in artificial intelligence as a potential driver of increased productivity.

But even that was set against the potential harm the technologies can cause and research findings showing that innovation is becoming exponentially more difficult.

In addition, the benefits may take time to arrive.

“I think of ChatGPT as Pelotonsaid Nela Richardson, chief economist at payroll processor ADP, comparing the AI ​​innovation to the maker of high-end exercise bike systems. “You can put as many as you want in a home office. That doesn’t mean people are going to use it.”.