The rhythms of the economy in 2021

Image: Stela Maris Grespan
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By LAURA CARVALHO*

Global inequalities and the challenges of 2021 in the recovery of the economy

Market expectations gathered in the latest Central Bank Focus Bulletin revolve around a 4,4% drop in GDP (Gross Domestic Product) in 2020 – a high drop, but much lower than the 6,5% forecast in the middle of the year. If compared to the projections made by the IMF (International Monetary Fund) in the World Economic Outlook published in October, a drop of 4,4% would put 105 countries (out of a total of 176) in a worse position than Brazil. What explains this above-average result despite our total inability to control the health crisis caused by the pandemic? Can we, therefore, have better expectations for the pace of recovery of the Brazilian economy in 2021?

Roughly speaking, three ranges of factors explain the different magnitudes of GDP drop observed around the world in 2020: structural characteristics; the depth of the health crisis and, finally, the size of the fiscal packages aimed at combating the crisis. The three elements work towards exacerbating global inequalities.

Starting with the more structural factors, Latin American economies are among the most vulnerable to the type of shock caused by the pandemic. In addition to the high inequalities, this is a region with a high degree of informality in the labor market (which concentrates between 30% and 80% of workers) and with a high relative share of services in GDP, with emphasis on tourism and personal services. As these sectors concentrate a less educated workforce, the impact of the pandemic in Latin America tended to harm the bottom of the distribution pyramid in a deeper and even more disproportionate way. These factors help to explain, therefore, why the fall projected by the IMF for GDP in South America is 8,1%, compared to 4,9% in North America.

Second, the ability to control the rate at which the virus spreads matters. An analysis that linked the drop in GDP in the second quarter of 2020 with the number of deaths per million inhabitants in 38 countries did not find any trade-off (conflict situation) between protecting health and the economy: on the contrary, countries with The highest mortality rates also suffered the deepest declines in GDP (such as Peru, Spain and the United Kingdom). On the other hand, countries that better controlled the health crisis appear with smaller drops in GDP (such as Taiwan, South Korea, Lithuania). In other words, neither does the Brazilian government's disregard for the containment of the pandemic seem to make a positive contribution to this year's GDP.

Only the third factor remains as a possible explanation for the attenuation of the fall in the Brazilian GDP: the approval of measures of a fiscal nature to combat the crisis. In fact, when we rank the same 176 countries analyzed by the IMF's Fiscal Monitor by the amount of additional expenses and revenue foregone, Brazil appears as 16th in the allocation of resources to the response to the pandemic (until then with 8,4% of GDP compared to an average of 3,9%). In particular, emergency aid allocated in 2020 more than six times the annual value of the Bolsa Família program, reducing poverty and inequality levels to historically low levels and injecting courage into family consumption.

The combination of the three factors helps us to understand, for example, the differences between the magnitude of the drop in GDP in Brazil and in neighboring countries. Peru and Chile also had substantial fiscal responses (6,6% and 8,4% of GDP, respectively), but even so, Peru, due to its high dependence on the tourism sector and other structural weaknesses of its economy, in addition to the its disastrous performance in containing the virus, has projected GDP drop of 14%. Argentina, which was constrained by its lower financing capacity due to high external debt, spent only 3,9% of GDP on the response to the crisis and has a projected contraction of its economy of 12%.

But what will determine the different recovery rates of economies in 2021? In the same way that the control of the rhythms of contagion by the virus affected the drop in GDP in 2020, this control and, in particular, the speed in the application of vaccines will be fundamental to dictate the resumption. In addition, the fiscal stimuli implemented will once again play their role.

In this context, even if it once again presents positive rates of economic growth as expected, Brazil may end up in a worse relative position in 2021 than in 2020, if compared to the rest of the world. This is because, if in 2020 we were able to partially neutralize the cost of our structural weaknesses and disastrous performance in the health area with a high-magnitude fiscal stimulus, in 2021, it seems, the government will contribute negatively on all fronts: not yet guaranteed the purchase of the necessary vaccines to immunize the population and also allocated space in the budget to meet the demands for additional spending on health and social assistance.

Meanwhile, rich countries ended the year forwarding the approval of new fiscal stimulus packages and the purchase of the necessary doses to vaccinate most of their population by the end of the first semester. In 2020, the pandemic has already exacerbated global inequalities, as the countries that would need to spend the most to counteract its effects were the least endowed with resources. In 2021, the increase in disparities between the global North and South may be even greater: the purchase of vaccines in sufficient quantity and the option or ability to expand public spending again seems so far concentrated in rich countries.

As if the difficulties inherent in an economic and political system that has not given respite to the most vulnerable around the world were not enough, we will still have to face in Brazil the consequences of the actions of a government that remains averse to the evidence and impositions of reality . If the hopes for a fairer and more sustainable post-pandemic world seem to have become more remote amid the geopolitics of vaccines, the desire remains that we at least get rid of the part that concerns us: the burden of an inept government to deal with the 2021 challenges.

*Laura Carvalho is a professor at the Faculty of Economics and Administration at the University of São Paulo (FEA-USP). Author, among other books, of Brazilian Waltz: From Boom to Economic Chaos (However).

Originally published in the newspaper Nexus.

 

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