The nature of economic recovery varies widely from country to country, and mutiple letters are being used to explain it.
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Nature of global economic recovery - V, K or W shaped?
- The story: Economists try describing the shape of the post-pandemic recovery, using alphabets to denote certain shapes. While a ‘V-shaped’ recovery suggests a quick return to growth, a fractured and uneven recovery looks like a ‘K-shape’ where different areas of the economy recover at varying speeds. The truth is that millions of Americans (and Europeans) have remained unemployed, while the wealthiest have become richer.
- What happens post any pandemic: In the past, economic recoveries from most recessions tended to be V-shaped. The experience of the Great Depression (US, 1929 onwards) suggests that recoveries after such a severe downturn should be shaped more like an L or W. The recovery following the Great Recession of 2008 was widely perceived to be U-shaped. Today, historical data can be used from 177 countries to study the impact of major epidemics from the past two decades on income distribution and whether Covid-19 would have long-lasting effects on inequality.
- Studies show that although SARS in 2003, H1N1 in 2009, MERS in 2012, Ebola in 2014, and Zika in 2016 were much smaller in scale than the ongoing pandemic, they led to increases in the Gini coefficient, raised the income share of higher-income deciles, and lowered the employment-to-population ratio for those with basic education compared to those with higher education by more than 5 per cent in the medium term.
- The distributional consequences from Covid-19 may be muh larger. Pandemics would lead to a persistent increase in inequality with a peak effect of about 0.4, five years after the pandemic. This is in contrast to the Gini increase by about 0.05 following a typical recession.
- Gini: A zero Gini index indicates perfectly even distribution and a higher value indicating more disparity. Overall, the natural consequence of a pandemic is the widening of inequality and a K-shaped recovery.
- Education is inherently K-shaped in many places, and this has become even more skewed due to Covid-19. Higher-income groups with smartphone and broadband coverage had far better access to remote learning during this pandemic, almost everywhere in the world.
- As the shape of the letter ‘K’ denotes, some sectors have lagged or declined, such as travel, entertainment, hospitality, food services, while the opposite is true for tech, retail, software services.
- The social implications of the K-shaped recovery still remain uncertain. It is clear that a K-shaped recovery exhibits wealth inequality, greater corporate monopolies, a continuing racial wealth gap, long-term unemployment for low-income workers, and accelerating technological adoption.
- Indian case: The Economic Survey 2021 predicted a ‘V-shaped’ recovery. If one looks at year-on-year growth, the recovery in FY22 is indeed V-shaped after the first quarter because of 20 per cent expansion – a sharp upturn after a quick decline. But a closer look at the economy shows a K-shape, as former RBI Governor Duvvuri Subbarao explained: rising inequality is poised to hit consumption and growth prospects.
- So which is it: There need not be a conflict between different symbols — both ‘V’ and ‘K’ may be correct depictions at the same time. In fact, a K-shaped recovery occurs when some segments experience a V-shaped recovery while others experience an L-shaped recovery.
- A K-shaped recovery certainly aims at depicting a more analytical picture of the economy but fails to indicate which slanting arm is dominating the GDP numbers.
- Not all the declining sectors have the same declining angle or intensity. Similar is the case with sectors that are rising and for different groups of the population as well. So a symbol similar to ‘K’ but having a few rising and a few declining slanting arms in different angles might be a more appropriate representation of the economy, and the mean direction must also be indicated therein.
- No English alphabet may truly reflect the real nature of recovery. The certain learning is that the effect of the pandemic is unprecedented. Business closures and job losses pushed more than 23 crore Indians into poverty in 2020-21 and “the structure of employment has changed dramatically”. Some even said that a W-shaped recovery might be the most appropriate one, especially when growth is seen in the context of seasonally adjusted quarter-on-quarter.
- Summary: It will be a few more months before the dust settles, and the real structure and shape of economic recovery becomes clear. Till then, the alphabets have a lot of work to do.
- EXAM QUESTIONS: (1) Explain the idea behind using letters of the English alphabet to describe the nature of economic recovery. (2) What kind of divergence in economic fortunes do we see in Indian economy now? Explain.
#economicrecovery #Kshaped #Vshaped
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