The morning after

By Pablo Ferreri, Public Accountant and former Vice Minister of Economy and Finance of Uruguay

Today, more than a year into the pandemic, we are still witnessing a humanitarian drama on a global scale. Mass vaccination offers a glimmer of hope at the end of the tunnel; however, that light is much further away for developing countries. While we see developed countries moving closer to herd immunity, we also see huge lags in the rest of the world. Moreover, beyond the health drama, the ensuing social and economic crisis will persist for a long time to come. We must focus on “the morning after”, as the health crisis recedes and as vaccination progresses. The morning after the pandemic ends, we will be left with an impoverished and, above all, much more unequal global economy.

Recovery to pre-pandemic levels of global gross domestic product can probably be achieved relatively quickly, but the effects on inequality will be much more long lasting. There will be clear losers in each society, with the poorest being hardest hit. Developing countries will suffer the most severe consequences, as their ability to return to pre-COVID levels of activity and wealth will be severely limited. To get an idea of the magnitude of this crisis, it is enough to recall a recent UN report calling it the worst recession in 90 years, resulting in the loss of 114 million jobs and pushing some 120 million people into extreme poverty. Moreover, by the time the market is in a position to reabsorb many of those who have lost their jobs, their skills will be outdated.

This is why the task ahead is particularly difficult and will require powerful budgetary efforts to revive the economy and reduce emerging inequalities. In this sense, the initiative for a global corporate minimum income comes as good news. But this good news must also apply to developing countries. Indeed public investment is even more instrumental than in times of greater private investment flows to emerging countries. However, private investment and attracting foreign direct investment (FDI) continues to be fundamental for developing countries, especially those with little capacity for domestic savings. A reason being that FDI not only fosters growth, but also brings with it a set of positive outcomes in terms of knowledge, technology and know-how transfer to developing countries by the foreign companies making the investments.

For developing countries, boosting the virtuous circle between investment, productivity and growth is vital to the sustained and sustainable development of their economies.  At the same time, emerging countries must start working now on the day after, engaging in dialogue across a broad social base to achieve a solid consensus, essential to carrying out structural reforms to increase productivity. There are a series of required reforms because of the changes taking place at a global level, in the areas of education, social security, digitalisation of the economy, the future of work, international insertion, governance of public companies, investment promotion schemes, etc.   

Once growth is back and steady, the challenge of building better welfare states that are fiscally efficient and sustainable is gigantic. It would require a shift towards fairer tax systems to finance stronger welfare states; social security systems adapted to the new world of work; investment promotion schemes to attract FDI and generate jobs and technology and know-how transfer; and education systems that prepare youth, especially the most currently vulnerable, to enter the labour market. Thus, tax systems must be rethought so that the benefits can be distributed among all citizens, particularly those who have been most affected by the COVID crisis and who, unless swift and powerful action is taken, run a serious risk of being excluded from the mainstream of society.

Developing countries will have to face a host of challenges as they emerge from the pandemic, and in many cases, they do not currently have the capacity or the means to successfully “pass the test”. This is why multilateralism has a fundamental role to play, and platforms such as the OECD Development Centre are instrumental for the transfer of knowledge and best practices that have been successfully applied in developed countries and for sharing the experiences of developing countries horizontally. With all our attention on the daily drama we currently face, we must plan for the morning after.