IMF says action needed to repair ‘scarring’ of G20 emerging economies by coronavirus

▶ International lender warns that poorest will suffer the effects of pandemic unless governments act

G20 members face long-term “scarring” from the coronavirus pandemic because of a weak recovery in labour markets in emerging economies and severe school disruptions in the group’s developing and advanced economies, the International Monetary Fund said.

In G20 emerging markets, employment rates remain below pre-pandemic projections because of weaker economic recoveries, the Washington-based lender said in a report released on Tuesday.

Informal work – which is widespread in many of these economies – is rebounding strongly from a sharp drop at the peak of the crisis when contact-intensive sectors were hit hard by social distancing measures.

The share of informal work relative to total employment is now exceeding pre-pandemic levels for some G20 emerging economies.

It could rise further with the recovery of contact-intensive sectors, which means that these informal workers face lower wages and less access to social safety nets, the report said.

“Policymakers must act promptly to repair the damage from the crisis and prevent decades of diminished economic output from lost human capital,” the IMF said in a blog posted on Tuesday.

The fund lowered its growth forecast for the global economy this year, with Russia’s war in Ukraine damaging prospects and inflation stoked by soaring commodities prices threatening to derail momentum.

The IMF now projects global growth at 3.6 per cent in 2022 and 2023, revising it down by 0.8 and 0.2 percentage points from its January forecast respectively.

The school closures during the pandemic have hurt pupils’ learning across many G20 economies, especially those in emerging markets, the IMF said.

Within countries, that impact was more severe for children from poorer families.

“If these learning losses aren’t addressed, affected students could experience a lifetime of depressed earnings,” the IMF said.

School pupils today will account for nearly 40 per cent of the combined working-age populations across G20 economies for decades, it said.

“Such long-lasting impacts on the labour force will significantly affect economies,” said the lender.

Once all these pupils are in the labour market, gross domestic product for advanced G20 economies could be as much as 3 per cent lower in the long run relative to the baseline scenario, the IMF said.

“With poorer households suffering the worst learning losses, their prospects could be particularly diminished, further widening income inequality,” said the fund.

There are also other challenges besides the labour market and schooling disruptions.

The increase in corporate debt and vulnerabilities in the industries hit hardest by the pandemic could also contribute to scarring by weighing on investment and productivity for years to come, IMF research showed.

Economic scarring – defined as diminished longer-term output relative to pre-pandemic projections – may occur because of pandemic-induced damage to capital, labour and productivity.

However, the extent of scarring is likely to vary across and within countries. Advanced economies are likely to face a lower degree of scarring than emerging market economies, while vulnerable groups, such as low-skilled workers and current pupils may face reduced opportunities compared to pre-pandemic expectations, the IMF said.

“Policy action can help heal scars and prevent further wounds. Immediate action is needed to limit and repair learning losses.”

Targeted fiscal measures and structural reforms can help raise productivity-enhancing investments and create jobs, the fund said in its recommendations.

Appropriately adjusting macroeconomic and financial policies can also contain risks of further scarring, it said.

Countries must quickly assess setbacks to learning and put appropriate measures in place to help pupils, the fund said in its blog. This could include, for example, additional tutoring or a longer school year.

Support measures for companies and workers that helped to limit pandemic scarring, such as credit guarantees and job retention policies, will need to be cut as the recovery becomes stronger.

Instead, policies should shift to helping people adjust to changing labour markets, such as through targeted job search programmes and additional support for training to build skills, the IMF said.

To limit elevated pockets of corporate distress turning into significant business failures or investment slumps, it is also crucial to ensure well-functioning mechanisms for corporate insolvency and out-of-court restructuring, the fund said.

The IMF says emerging economies must address setbacks by putting in place measures to improve education