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How governments can use the pandemic financial support to change the world

Sayuri Shirai, a professor of economics at Tokyo's Keio University and former member of the Bank of Japan's Policy Board.
Sayuri Shirai, a professor of economics at Tokyo's Keio University and former member of the Bank of Japan's Policy Board.
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28 Jun 2020 03:06:44 GMT9
28 Jun 2020 03:06:44 GMT9

By Anthony Rowley
Special to Arab News Japan

TOKYO:  As the global economy lies afflicted by the COVID-19 pandemic, governments and central banks are applying massive transfusions of financial liquidity in order to keep it alive. But what kind of shape and condition should we hope to see the economy restored to?

Many people probably wish to see things return to "normal" again so that we can resume the habit of consuming our way through life, travelling at will when and where we will enjoy a comfortable, or even sybaritic, existence without regard for the less fortunate or for the environment.

But it won't do and it's not only environmentalists and moralists who are saying so.

Those with an expert grasp of economic and financial reality are saying it too. One such is Sayuri Shirai, a professor of economics at Tokyo's Keio University and former member of the Bank of Japan's Policy Board.

"We have to explore whether the demand we used have before [COVID-19] is sustainable,” she told the Foreign Correspondents Club of Japan in Tokyo.

She said governments "need to have a vision" of where demand will be in the future and to direct money there rather than to traditional areas of the economy.

One of Shirai's key areas of focus nowadays is sustainable investment. While the pre-pandemic global economy might have been growing rapidly, she and many others feel that this growth was not moving in a desirable and sustainable direction.

There are calls, including from Shirai, for a "green" recovery - one that emphasizes the use of renewable energy rather than reliance upon fossil fuels such as oil and gas or on nuclear power. There are also calls for more funds and effort to be devoted to health care from now on.

Reformers also point out the fact that sectors such as transportation and tourism will likely suffer for some time, as will other less essential forms of consumption. So, they argue that there is little point in directing long-term support to such sectors.

Whereas governments were previously limited to the use of financial subsidies in order to influence economic behavior, they now have the carrot and stick weapons of giving or withholding cash transfers to different sectors of business in order to achieve various socio-economic ends.

The size of these inducements is huge. According to the International Monetary Fund (IMF), some US$10 trillion has already been granted or approved for those businesses and households which have been most badly hit by the pandemic.

Central banks like the US Federal Reserve, the European Central Bank and the Bank of Japan have made available trillions of dollars of support by way of cutting interest rates, easing restrictions on commercial bank lending and through direct loans to keep financial markets and firms from collapse.

This support will need to continue, according to Shirai, who is a former IMF economist. In return for such support, it seems reasonable and feasible that monetary authorities will wish to direct funds into economically and socially sustainable areas of activity in the future.

But given the scale of collapse that the global economy in now facing, these authorities are likely to come under strong political pressure to emphasize restoring growth for its own sake rather than to meet wider ends, in order to absorb unemployment and reverse the collapse in corporate profits resulting from the pandemic.

The horror story - and that seems to be the best way to describe it - on the economic front continues to worsen, as the IMF's latest World Economic Outlook Update shows. It suggests that the economic slump may be a lot longer-lived than feared and that the need for propping up measures consequently much greater.

As IMF chief economist Rita Gopinath put it "we are projecting deeper recession in 2020 and slower recovery in 2021. Global growth is projected to decline by 4.9 percent in 2020 [versus the 3 per cent forecast in April] followed by partial recovery in 2021."

But it is individual country forecasts that are most dismaying. The US economy is projected to shrink by a dramatic 8 percent this year and the UK by 10 percent while Japan's economy will contract by nearly 6 percent. German GDP will shrink 7.8 percent and France's by 12.5 percent.

Partial recovery is projected for next year but not back to pre-COVID-19 levels and even that might not materialize in the event of a "second wave" of infections. The picture looks grim too in Asian economies, not least India which is projected to shrink 4.5 percent.

It is what is politely termed a "synchronized slowdown" with only China among major economies showing positive growth of 1 percent in 2020. However, not enough to pull the world out of recession as China did at the time of the 2008 global financial crisis.

The upshot of all this is that that the global economy is going stay on life support in the immediate future and this poses the question of how long official support can keep coming. As Harvard and former S&P Global Chief economist Paul Sheard notes “the blow-out in fiscal deficits triggered by the coronavirus pandemic is leading many to ask ‘how are we going to pay for all this?’”

Sheard believes, however ,that “this is the wrong way to look at things. Government debt issued in a major domestic currency “never needs to repay,” and thus concern about fiscal deficits is largely outdated.

"We need to rethink the macroeconomic policy framework particularly the relationship between monetary and fiscal policy. The size of the budget deficit should be driven by how far from full employment an economy is and how much inflationary or deflationary pressure there is, not by concerns about how much debt a government is accumulating,” he suggests.

Coping with the current recession is a matter of “all hands-on deck” the IMF's Ms Gopinath has suggested. But unless governments seize the current opportunity for a longer rather than shorter-term policy approach it may not come again for a long time.

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