Giving Compass' Take:

• Homi Kharas and Meagan Dooley explain what is needed for a successful and sustainable global economic recovery from the COVID-19 pandemic. 

• What role can donors play in supporting sustainable recovery? Where can your support do the most good? 

• Read about a COVID recovery framework for international donors. 

The sharp global recession now expected in 2020 (negative 5.9 percent GDP per capita according to the IMF) coupled with devastating actual and potential loss of life and health damage due to COVID-19 has left the global macroeconomic and development playbook in tatters. Countries have announced $11 trillion in new fiscal measures to mitigate the impact and this figure will surely rise as additional stimulus packages get tabled.

Governments in major advanced economies have found they can raise finance on domestic capital markets without adverse impact on inflation or on the cost of capital. In several cases, there appears to be a “free lunch” being served by savers prepared to receive negative real interest rates in exchange for principal security and liquidity. Estimates of the size of sovereign bonds with negative real rates exceed $10 trillion. On average, government spending in rich countries has risen by over 13 percentage points of GDP, and the public sector has provided a similar amount in loans and guarantees, totaling a 26.5 percentage point increase in public debt.

The situation is more nuanced, and unpredictable, for emerging and developing economies, especially those with thin domestic financial markets. For these countries, most additional financing must come from abroad. The question at the heart of this paper is “where will the money come from to respond, restore and reset programs for sustainable development?” The answers lie in an assessment of international financing instruments.

There are three clear phases in the economic response to COVID-19. First, there is an immediate response to save lives. Countries must manage the health crisis by expanding public health services and flattening the curve to avoid overburdening hospital capacity through lockdowns, social distancing, and clear communication to the public of their social responsibilities. Second, there are steps to restore livelihoods and mitigate the socio-economic impact of the crisis and the multiple global economic shocks of falling commodity prices, trade, tourism, remittances, and, in some cases, capital flight, along with major losses in jobs and wages. Third, there is a “build back better” agenda of resetting growth along a path of improved sustainability, inclusion, and resilience.

Read the full article about the global economic response to COVID-19 by Homi Kharas and Meagan Dooley at Brookings.