The IMF recently updated their – World Economic Outlook database – April 2021 – which allows for quick cross country comparisons. Some of the data series are suspect (like structural deficit estimates) for reasons that I have explained before, but many of the national accounts series are useful. I have been doing work on the relative responses to the pandemic and the impact on economic performance as well as researching the next chapter of one of the current book chapters. So today, I just present some interesting graphs and calculations. Nothing deep but the figures then provoke some deep thinking. The lessons are pretty clear: Covid elimination strategies protect health and the economy better; Austerity is highly damaging; and there is a massive shift in the world order going on and we should be learning from that. And all of the trends I examine are ultimately the result of political choices. That is the important point to keep in mind.
It is both health and economy not either
One of the themes I observe on social media continues to focus on the claims that lockdowns do not work.
The proponents of these ideas should come to Australia or New Zealand where our state governments (Australia) and national government (NZ) adopted successful elimination strategies using lockdowns as a powerful weapon.
They are painful and costly.
But they work and they get us back to more usual life more quickly.
The reality is most governments did not take adopt the elimination strategy and so they are caught in a sequence of virus waves, temporary lockdowns, eased to soon, and so it goes.
Of course lockdowns do not work if you don’t do them within an elimination strategy and shut borders tight.
And the other furphy that it is either economy or elimination has also been exposed by the evidence.
The recent report from the Paris-based Institut Économique Molinari (published April 2021) – The Zero Covid strategy protects people and economies more effectively – authored by Cécile Philippe and Nicolas Marques provides compelling evidence to support that contention.
Their research found that:
1. “Countries pursuing a Zero Covid strategy experienced a less severe economic decline in the second quarter of 2020 than the countries that allowed the virus to spread to such an extent that their health systems were saturated (-4.5% versus -11.7%).”
2. “The Zero Covid strategy is showing lasting positive effects: In the fourth quarter of 2020, the countries applying this strategy had almost returned to normal economic activity. Their GDP was down only slightly (-1.2%) compared to 2019. Meanwhile, the decline in GDP was greater (-3.3%) in countries that had not eradicated the virus.”
3. “Mobility data from Google show that “workplace” traffic in the second quarter of 2020 fell by less in the countries applying the Zero Covid strategy (-14 % compared to -36 %).”
4. “traffic in “cafés, restaurants, hotels, non-food businesses and leisure and cultural activities in general” was down by 14% in January and February 2021, compared to 2020, in the countries applying the Zero Covid strategy. This is a much smaller decline than in the countries applying a mitigation strategy (down 35%).”
5. “In contrast, the course taken by the G10 countries … The mitigation strategy is causing them to seesaw, making it difficult to project into the future and thereby penalising societies and economies. This is especially problematic for businesses that depend on significant social interaction, which have been closed for months, as representatives of the hotel, restaurant, culture and recreation sectors have stated repeatedly.”
They produced this Table based on official OECD data (reproduced) which shows the numbers.
It is hard to spin the numbers in any other way than to reach the conclusion the authors provide.
Lockdown is required to eliminate the virus as well as other measures (contact tracing, social distancing, masks, etc)
Elimination is better for health outcomes.
It is better for economic outcomes.
It is costly but less so than the alternative that most nations have deployed.
The decision to eliminate or mitigate was a political choice.
And the IMF data provides further examples of the costs of poor political choices.
Eurozone has categorically failed
The publication accompanying the latest WEO database –
World Economic Outlook: Managing Divergent Recoveries, April 2021 –
The IMF WEO data allows for some cross-country comparisons.
The first graph shows the growth in real GDP per capita (so the average GDP per person) for a range of nations – currency-issuers and currency-users (Eurozone) from 2009 to 2020.
Obviously, China is an amazing story have increased its per capita real GDP by more than 100 per cent over the 11 year period, notwithstanding the GFC and its aftermath.
Ireland can be disregarded because of the way it has tricked its national accounts data (capital formation expenditure) in recent years.
The UK barely grew (0.24 points) as a result of the austerity inflicted on the nation in the period after 2010. It has created lasting damage.
But the performance of the core Eurozone nations bar Germany stands out also.
The GDP per capita in Greece has slumped by 23.8 per cent over this period.
Italy -7.8 per cent
Spain -2.9 per cent
France +0.97 per cent
If one then considers the income inequality in these nations, the contraction in real GDP per capita at the lower levels of the income distribution would be catastrophic in some of these nations.
Austerity is a political choice and it doesn’t work.
The next graph shows each nation’s real GDP per capita expressed as a percentage of the US real GDP per capita from 1980 to 2020.
The numbers are:
1. Australia 1980 82.7 per cent, 2020 80.1 per cent.
2. France 1980 89.9 per cent, 2020 72.6 per cent.
3. Germany 1980 95 per cent, 2020 85.3 per cent.
4. Greece 1980 75.4 per cent, 2020 45.3 per cent.
5. Italy 1980 93.2 per cent, 2020 64.4 per cent.
6. Spain 1980 65.8 per cent, 2020 60.5 per cent.
The relative declines for the Eurozone nations are rather staggering especially considering that the US has not exactly shone over this time itself.
The shifting world order
But then there is the small matter of the shifting world order in material prosperity.
The next graph shows each nation’s real GDP per capita expressed as a percentage of the Chinese real GDP per capita from 1980 to 2020.
And the subsequent graph just shows the relative performance of the US to make things clearer.
These trends help us clarify prior held views, such as austerity is damaging in the long term.
They also help us frame questions that then inform the research process.
For example, if we are concerned with material prosperity, what can we learn from China?
More later on those matters.
Off to the airport.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.