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Resurgence of the State

December 4, 2021 | Expert Insights

As we try to make sense of the varied impacts of COVID-19, the world is in a hurry to recover and move on. Economic recovery is the first order of priority, but there are stark differences in both response mechanisms as well as the speed of recovery across different economies. While macro-economic measures are important, the mitigation of the pandemic impact on vulnerable and marginalised sections of society should not be overlooked.

Background

This is not the first downturn in growth that the global economy has experienced. Lessons from the past are already showing the way forward. For instance, the economic recovery witnessed in the aftermath of World War II offers valuable lessons. Then, backed by the might of a resurgent American economy, a strong foundation for recovery across Europe and parts of Asia was laid by heavy public investment and government support. As commentators review the current economic crisis, they make a case for strong state-supported investment and expenditure once again.

Resurgence of the State

Analysis

The green shoots of economic recovery now appearing have different shades for different regions and economies - the major ones are all set to register strong growth, even as developing countries lag. Global growth is expected to accelerate to 5.6 per cent this year, bolstered largely by major economies such as the United States. The U.S. economy has been supported in the form of massive fiscal support from the government, and as the rate of vaccination increases, growth is expected to reach 6.8 per cent this year, a fast and steady climb.

U.S. Government efforts, post the pandemic, have been unprecedented and have been mainly responsible for propping up economic recovery. This includes the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Consolidated Appropriations Act, and the American Rescue Plan Act. A steady stream of financial support by the government has boosted economic activity since March 2020 and are projected to continue to do so through 2023.

A standard feature of the pandemic has been its unexpectedness! Its resurgence in the form of the Delta (and now the even more virulent Omnicron variant), vaccine hesitancy in some parts, and the slow rate of vaccination have slowed down what was once projected as a resurgence in consumer demand and employment growth.

The economic effects of the downturn have been widely different across sectors and demographic groups. As reported by The Hamilton Project, the pandemic has impacted women, communities of colour, and essential frontline workers more severely. In terms of sectoral effect, service-providing businesses, mainly leisure and hospitality, have been the worst hit. Other industries, such as financial services, experienced shallower dips in employment and have also been the quickest to recover as their workforces were able to easily slide into a remote-working model. These sectoral dynamics have impacted women, non-white workers, lower-wage earners, and those with less education more severely (Stevenson 2020). Since workers in these groups were more likely to be employed in the services sector, such as leisure and hospitality, they were more likely to experience job losses. Shifts in consumption patterns like online shopping and at-home consumption have benefitted businesses such as online retailers, grocery stores, and suppliers of building and garden materials.

While the majority of the data available pertains to the U.S., a similar trend can be extrapolated to other economies, including India. The huge informal or unorganised sector in India, comprising largely of daily wagers, was the most severely affected as businesses and establishments closed, rendering the workers (and their families) jobless. Bereft of an unemployment shield, they were left to fend for themselves, drifting back to their native places. Since the last ten months or so, the migrant workers have returned to their original places of work and thanks to a surge in construction and other industrial activities, they are slowly returning to their pre-pandemic levels.

However, surging inflation impacting food prices and the rising international price of petroleum products have dented their actual income. The government-sponsored socio-economic measures have done a lot to mitigate the dire situation that some segments of the society have reached, but much more needs to be done to assure a better quality of life. It is time for the private sector to step forward with innovative measures of its own.

Assessment

  • After the pandemic, government efforts have been the primary driver for economic recovery. Even the most developed economies such as the U.S. have witnessed an unprecedented investment by the government to bolster recovery. Clearly, this shows that developing economies must do more and will perhaps need more support to achieve the same level of recovery and growth. However, care must be taken not to create large budgetary deficits or get into debt traps.
  • As countries grapple with the problem of economic recovery and long-term relief, equitable vaccine distribution must be maintained. No one is safe from the pandemic until everyone is safe, and as we have seen, pandemics come with a very heavy economic price tag.
  • While fiscal and monetary policies can safeguard financial stability, the pandemic has exposed human frailty, and countries should be wary of withdrawing policy support too soon.