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From COVID-19’s impact on the global supply chain to unequal vaccine distribution and overlapping climate events, the economy has been dealt a complicated hand this past year. Nobel laureates examine what’s slowed growth, but also what’s propelled us forward.

Economic growth is easy to define, yet not so simple to measure. Essentially, it’s an increase in the quantity and/or quality of economic goods and services produced and consumed – typically grouped into capital, labor, land, and entrepreneurship. But Gross Domestic Product (GDP) of an economy, inflation, household income, productivity etcetera need to be considered. Economies can be caught off guard by weather events, financial crashes, or pandemics, and COVID-19 certainly caught the economy, and economists, off guard. What happens to economic growth in a pandemic? Is all growth stunted?

Vaccine distribution

As COVID-19 went from isolated virus to a global pandemic, Nobel laureate Michael Spence watched as different countries and their economies ebbed and flowed throughout the different phases and variants. And while it certainly impacted global economic structure, it was vaccines that changed the landscape.

“The vaccines arrived in the developed economies and some of the emerging economies and that started a very rapid recovery pattern,” says Spence. “We started to open sectors up and resumed not a reversion to the previous normal, but something that was more normal than the pandemic economy itself. Since then, I think there's just a few things that have happened that have slowed that recovery process down.”

“On the virus side, we have the arrival of the variants and that's caused some reversion to pandemic-related policies that have slowed things down. Related to that, we have a very effective vaccine rollout in the countries that can afford it and a very ineffective rollout at the other end of the spectrum and that made a huge negative contribution to growth. It's not only slowed down any potential recovery in that part of the world, but in addition, by leaving them out, they're vulnerable; we've created a situation in which we were likely to get more variants that will feed back into the system.”

It doesn't mean we're not in recovery mode, but it means there's more obstacles and headwinds than we anticipated.
Michael Spence

Global weather events

As the weather warmed, the climate itself brought a new set of worries to the global stage. Drought, floods, and forest fires raged all at once.

“We had an extraordinary number of extreme climate events in every category,” says Spence. “If you look at maps of these things, you'll discover that the frequency was great, the severity was great, and the global coverage was great. Germany, China, pick any place.”

The pandemic had deeply impacted the global supply chain and the extreme weather events only worsened the problem, according to Spence.

“So, we have shortages, price increases, backlogs, virtually every sort of index you can create across a very wide range of commodities, so that's clearly going to slow us down,” he continues. “It's also creating at least a discussion around inflation and if the central banks are forced to respond to that, that will slow us down some more. Basically, the good way for this to resolve itself is for the supply chains to clear. It doesn't mean we're not in recovery mode, but it means there's more obstacles and headwinds than we anticipated.”

Big transformations underway

Despite the strain on supply chains, backlogs, and uneven recovery stages, Spence also watched in real time as the global economy introduced new technologies and adopted existing technology at unprecedented speeds. Entire industries accelerated new developments, some borne out of necessity. Regardless of the underlying reasons why, Spence thinks there may be more to celebrate than to be concerned about. Three reasons, specifically.

What the world looks like from a micro point of view in terms of high growth sectors is a little bit different than the macroeconomic overview from several thousand feet up.
Michael Spence

“There are at least three huge transformations underway,” he says. “One is the digital transformation. That is not new, not pandemic related. The second one is the energy transition and dealing with climate change. And the third one is somewhat less talked about, the revolution in healthcare and biomedical science. And all of these are being driven by very powerful forces.”

“The pandemic accelerated the digital transmission and for the obvious reason that we had to keep our economies running to the extent we did, we had to use them,” continues Spence. “That’s going to drive a lot of growth and if we're lucky and if it's handled well, meaning we help people’s skills transitions, we run the economy hot which means not short of demand; then I'm on record as having said that we might have a real productivity boom, which would be a reversal of the downward trend and this would be global, not uniform everywhere, but global.”

“The energy transition is going to be tough. My take on that is that we've sort of rounded a corner and there's a fair amount of commitment, but it doesn't mean it's going to be easy because the big players have to come together,” says Spence. “But in the course of that transition, there'll be sectors that are high growth. There's huge demand for solutions. And similarly, you'll see the same kinds of things in health care. Expanding coverage, telehealth, remote diagnostics and then the high-powered stuff is the biomedical science itself. What the world looks like from a micro point of view in terms of high growth sectors is a little bit different than the macroeconomic overview from several thousand feet up.”

Today we realize that monetary policy has played a very big role in increasing inequality and wealth. And so central banks simply cannot ignore the impact that their policies have on inequality.
Joseph Stiglitz

Inequality’s role

For fellow Nobel laureate and economist Joseph Stiglitz, one of the most pressing problems holding economic growth back has nothing to do with GDP or unemployment. The central issue he sees as a barrier to growth is inequality.

“The reason why inequality has become such a subject of discussion is because inequality has been growing and to levels that we have not seen for a very, very long time,” says Stiglitz. “Inequalities of income and wealth, which are much greater than the equality of income. Inequalities in health status, access to medicine, inequalities of opportunity. There's no single magic silver bullet that can undo the inequalities that have been created over almost a half century now. But there are a wide range of policies that would make a very big difference.”

“The way I think about it, I divide the policies into policies that increase equality of market income and then policies that take the inequalities in market income and increase the quality of the consumption that individuals have,” continues Stiglitz. “Making sure that there is greater equality of endowments, so public education, and good inheriting taxes so that you don't have an inherit plutocracy. The other part of increasing the qualities of market income relates to having laws that give more power to workers, circumscribing monopoly power. A whole host of issues having to do with competition policy, corporate governance laws and so forth. And then finally, how do you make sure that you don't leave large fractions of the population behind and those have to do with policies like progressive income taxes, expenditure programs that ensure that everybody has access to health care, education, secure retirement, decent housing and so forth.”

“Equality is really something that touches every aspect of policy,” says Stiglitz. “And as inequality has become one of the dominant problems in our society, we have to use that lens of how the policy affects inequality, move that more central. It used to be that nobody in a central bank talked about inequality. But today we realize that monetary policy has played a very big role in increasing inequality and wealth. And so central banks, simply cannot ignore the impact that their policies have on inequality.”

The two laureates agree on this issue. And while globalization overall can be seen as a success, particularly for developing countries, the global nature of the pandemic is a good reminder of how interconnected different economies are.

“The evolving multilateralism which was involved essentially in opening the global economy was absolutely crucial in the development of the developing countries,” says Spence. “Now a very significant fraction of the world's population lives in middle income countries. They're going to continue the process of succeeding and growing, but there's a bunch of countries where they got a late start. Some of them have governance challenges. Some of them have demographic challenges. When you take all those things together, they've got challenges by themselves. But then if you get a mucked up global economy and they have trouble accessing it, then you get a world that is truly multi-speed. It’s the pattern of divergence that you just don't want to see.”

“Multilateralism in its good form is creating global public goods and solving problems when they arise,” says Spence. “Pandemics, climate change, there'll be others, and you need institutions with a track record where you can deal with these things. I think the first order of business is to reconstruct those institutions and recommit to them. I don't mean strictly going back to the past. With the center of gravity shifting to Asia in the global economy, you can't do it that way anymore. And so, it's more complicated, but nevertheless important to get done.”

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