On 20 July 2021 an IMF blog discussed how to seize the opportunity to achieve economic growth following the pandemic.
The IMF blog notes that since March 2020 governments throughout the world have spent around USD 16 trillion to support businesses and individuals through the pandemic. Deficits are at their highest level since 1945 but the liquidity provided by the central banks prevented the recession in 2020 becoming much worse. Investment now needs to be channelled to new ideas and businesses, and governments should give more support to the labour market, with monitoring and support for job searches and the provision of retraining to help workers move to jobs in more dynamic economic sectors.
Improved competition policy
The competition authorities should tighten their enforcement of merger control, ensuring that the criteria used to determine deals to review should cover all the relevant cases including those where a small enterprise could grow to compete with dominant firms. The competition authorities should also actively enforce prohibitions on the abuse of their position by dominant firms in the market. A market investigation could reveal harmful business practices even if there is no reported breach of the law.
There should be more effort to ensure competition in input markets, such as the labour markets. Rules to prevent ‘no poaching’ pacts between firms could improve competition. The authorities should note that non-compete clauses in some retail job contracts present difficulties for employees to make a move to better-paid jobs.
Competition authorities also need to keep pace with the digital economy, where the use of big data and artificial intelligence are allowing the dominant firms to increase their advantage in the market. The facilitation of data portability and interoperability of systems could allow new firms to better compete with the more established firms.
Investment may be required to increase sector-specific expertise at a time of fast technological change. An example is the proposed Digital Markets Unit in the UK that is to supervise the behaviour of dominant digital platform.
Building back better
The monetary and fiscal stimulus still being provided in the pandemic can become a springboard to a more sustainable economy rather than just a support helping firms to survive the crisis. Comprehensive growth-enhancing reforms affecting product, labour, and financial markets could increase annual growth in per capital GDP by more than one percentage point in emerging market and developing economies over the next ten years. The developing countries could then greatly increase the speed of their convergence with living standards of advanced economies by comparison to the pre-pandemic period. Reforms to achieve growth could be achieved with the help of recovery spending to achieve greater prosperity.
Higher growth assisted by appropriate reforms could help advanced economies to reduce the amount of debt taken on when providing support in the pandemic. Economic growth would create fiscal space for greater investment and would reduce the need to improve government finances by raising taxes. Reforms to target the supply-side can achieve growth without increasing the inflationary risks from increased demand arising from policies in some countries such as the United States.
Reforms can strengthen the economic position of emerging market countries and increase investor confidence. The low-income countries that find themselves without enough policy space for the required spending, could use the returns from growth-oriented reforms to avoid fiscal austerity, protect social and health spending and increase their capacity to invest in their human capital.
