Speech

Remarks by IMF Chief Economist Gita Gopinath at the 3rd APEC Structural Reform Ministerial Meeting

June 16, 2021

Dear Ministers,

I am most thankful and honored for the opportunity to address such a distinguished audience today—I only wish it were in person. Your 3^rd Structural Reform Ministerial Meeting is both timely and important.

It is timely because structural reforms are bound to return in full force at the center of the policy agenda, after having—rightly—taken the back seat since the start of the pandemic.

And it is important because, even though a global recovery is under way, it remains uneven and fragile. In the years ahead, structural reforms will be critical to address what I see as four fault lines of the pre-COVID world economy that the pandemic has aggravated—slow progress in raising average living standards, highly unequal progress across demographic groups, high and rising public debts, and insufficient global public goods:

1.    First, slow progress in average living standards even prior to the pandemic. In advanced economies (AEs), stunning new technologies failed to translate into significant economic growth. Among emerging market and developing economies EMDEs), almost one out of four economies were diverging from advanced economy living standards—success stories across Asia, from China to Indonesia to the Philippines, were the exception more than the rule.

2.    Second, highly uneven progress in living standards. Income inequality was falling worldwide, owing to fast income growth in China and India, which together account for over one-third of the world population. But inequality was rising within economies, including within Asia’s dynamic economies, as labor’s share of income fell, and its decline was concentrated on low- and middle-skilled workers.

3.    Third, high and rising debts—private and, even more so, public. Among EMDEs, public debt-to-GDP ratios had already risen by some 20 percentage points in the decade prior to the pandemic, making it harder for them to weather adverse macroeconomic shocks.  

4.    Fourth, insufficient multilateral cooperation on global public goods—from our failure to act on climate to stalling progress towards a global agreement on international corporate taxation agreement to rising trade and technological tensions.

The pandemic has aggravated all four of these fault lines. It has:
1.    Reduced living standards. Excluding China, we project GDP per capita losses to average around 6% over 2020-24 in EMDEs and around 2% in AEs, relative to our pre-pandemic projections.

2.    Increased poverty and inequality. Compared with pre-pandemic projections, almost 90 million people are estimated to have entered the ranks of the extreme poor in 2020. The pandemic is creating risks of another lost decade of income convergence for many EMDEs that, unlike after the GFC, are being hit harder than AEs this time around. Within economies, youth, the lower-skilled and mothers with young children have borne the brunt of job and income losses. In the US, being the mother of a child under 12 years old reduced the likelihood of being employed by 3 percentage points last year, compared to a man in a similar family situation.

3.    Pushed public debts even higher, as a result of both the recession and the much welcome fiscal policy responses to it. Compared to our pre-pandemic projection, we now project public-debt-to-GDP ratios for 2022 to be some 15 percentage points higher in AEs, and about half as much higher in EMDEs.

4.    Made global cooperation an even more pressing need.

• This holds true for vaccines. Because the pandemic will not be over anywhere until it is over everywhere, we at the IMF have put forward a detailed proposal that, with strong coordinated global action, could bring the pandemic under control everywhere, adding 9 trillion to global GDP by 2025 for an upfront investment of just 50 billion US dollars—possibly the highest-return public investment ever.
• Global coordination is also badly needed to address climate change, through a policy mix combining a steadily rising carbon price with an upfront green investment push.
• We need the same multilateral spirit in other areas—from building upon G7 support to finalize a global agreement on international taxation to supporting vulnerable economies—with more concessional financing and more debt relief, building upon the G20 Debt Service Suspension Initiative and new Common Framework.

International cooperation is central, but to raise living standards, reduce inequality and slowly curb public debts within APEC and other economies, structural reforms are also going to be critical. While detailed reform priorities are obviously economy-specific, one overarching theme is the need to tailor them to the three phases of the pandemic—the acute, recovery and post-pandemic phases:

First, the acute phase of the pandemic

For economies that are still, or might fall back, into the acute phase of the pandemic and restrictions on activity, the priority remains to alleviate a destruction of viable jobs and firms that would leave permanent scars on our economies. This means, where fiscal space allows, a continuation of support to existing jobs and firms. For example, in response to the pandemic last year, all ASEAN-6 economies—Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam—provided liquidity support to firms including loan moratoria, subsidized lending and government guarantees, and several of them also implemented wage subsidies. These various policies have helped preserve future living standards, and they also tend to benefit disproportionately lower-skilled workers and SMEs that would be hit harder by the pandemic otherwise—historically, displaced workers who find reemployment in a different occupation experience an average earnings loss as large as 15 percent.

During the acute phase, it is also important to postpone the implementation of reforms that would pay off in normal times but could backfire in such unusual times—for example, labor market or pension reforms that increase labor supply should not be implemented while work restrictions are in place.

Second, the recovery phase from the pandemic

During the recovery phase from the pandemic, as vaccination is rolled out and economies see a clear path toward normalization, priorities should gradually shift away from retention towards reallocation policies:

• Reallocation of support to workers away from jobs that won’t return to new job opportunities opened by the pandemic. That means moving away from broad-based wage subsidies towards temporary hiring subsidies, as well as retraining programs.
• Reallocation of support to firms away from unviable “zombie” firms towards viable but insolvent ones. That means strengthening debt restructuring regimes, and moving away from broad-based liquidity support towards targeted solvency support, where fiscal space and administrative capacity allow. One example of solvency support is quasi-equity injections; if one-off and well-targeted, we estimate that they could bring back into solvency over 80% of insolvent but viable SMEs in advanced economies, for an average cost of less than 1% of GDP.  

Support to reallocation will amplify the recovery and support those disadvantaged workers who need to find new jobs. And more targeted support will ease the burden on public budgets while laying the ground for the eventual exit from all crisis support programs.

Third, the post-COVID phase

Looking beyond the pandemic, we also need structural reforms to build a better post-COVID world—one that addresses the fault lines I have described.

In part, that involves completing the unfinished structural reform agenda of the pre-pandemic world; for example, we estimate that comprehensive reforms in product, labor and financial markets could raise GDP per capita growth by at least one percentage point, and gradually reduce public debt-to-GDP ratios, in the average EMDE over the next decade.

But that agenda won’t be enough; indeed, successful past reformers such as Chile, for example, were not spared by high inequality and rising social discontent before the pandemic. We also need reforms that share the pie more evenly, including:

• Leveling the playing field across firms, and between firms and their workers, through antitrust reforms that address the rise in market power of a small fraction of firms we have seen in many economies and industries—a trend the pandemic is reinforcing by hitting SMEs harder than dominant firms, IMF work finds.
• Equipping workers with the skills required to cope with accelerating automation, through broader access to higher-quality education and health care.
• Protecting workers better against future shocks, through permanent expansion of social safety nets—drawing lessons from the many crisis responses, from Chile to Peru to Malaysia to the Philippines, regarding how to better cover formal workers and reach informal workers.
• Remedy the loss in education that occurred during the pandemic.

Further adding to the challenge, governments will need to fund these priorities while strengthening public finances. To some extent, by strengthening growth, reforms themselves will help. So will credible medium-term fiscal frameworks, underpinned by improvements in the design of fiscal rules, as well as tax and spending reforms—such as broader tax bases, more neutral capital taxation, and greater reliance on taxes on public bads, such as carbon, and less mobile tax bases, such as property and inheritance taxes.  

To conclude, local reforms and global cooperation in key structural policy areas, from health to taxation to climate change, have a critical role to play in putting the world economy on a stronger footing than it was even prior to the pandemic. The challenge may seem daunting, but the stakes are high. I am confident that your discussions today will help lay the ground for a stronger, fairer and greener post-COVID world.