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Post-Pandemic Economic Leadership Begins in America

Summary:
No matter how big an economy is, it is heavily influenced by US economic growth, financial stability, and policy spillovers. With the COVID-19 crisis, the evolution of the global economic-policy paradigm has become an urgent matter, and the rest of the world must not suffer the consequences of a US that does too little, too late. LAGUNA BEACH – What does the future hold for the global economy? As it stands, the most likely answer, unfortunately, is lower growth, worsening inequality, distorted markets, and rising financial risks. But this outcome is not preordained. With timely changes to the policy paradigm, policymakers can lay the groundwork for a more dynamic, inclusive, and resilient economy.

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No matter how big an economy is, it is heavily influenced by US economic growth, financial stability, and policy spillovers. With the COVID-19 crisis, the evolution of the global economic-policy paradigm has become an urgent matter, and the rest of the world must not suffer the consequences of a US that does too little, too late.

LAGUNA BEACH – What does the future hold for the global economy? As it stands, the most likely answer, unfortunately, is lower growth, worsening inequality, distorted markets, and rising financial risks. But this outcome is not preordained. With timely changes to the policy paradigm, policymakers can lay the groundwork for a more dynamic, inclusive, and resilient economy.

The economic damage wrought by the COVID-19 crisis in the second quarter of 2020 was even worse than expected: economic activity plummeted, inequality rose, and elevated financial markets decoupled even more from economic reality. And with a vaccine yet to be developed, the path out of the pandemic – and the associated economic crisis – remains deeply uncertain.

The world’s leading international economic institutions – the International Monetary Fund, the OECD, and the World Bank – now warn that it may take at least two years for the global economy to regain what has been lost to COVID-19. If the major economies face additional waves of infections, recovery would take even longer.

Timely and well-designed pro-growth policies could speed up this timeline, while making the recovery more broad-based and sustainable. This does not only mean more short-term relief, but also greater emphasis on forward-looking measures that promote productivity, reduce households’ economic insecurity, better align domestic and international growth impulses, and counter the increasingly dangerous disconnect between the financial system and the real economy.

Here, the US, as the world’s largest economy, has an important leadership role. As the supplier of the main global reserve currency, the US plays a major part in mobilizing and allocating the world’s investible funds, especially at a time when the Federal Reserve is intervening heavily in global financial markets. And as a dominant player in the IMF, the World Bank, the G7, and the G20, it can drive – or undermine – global policy coordination.

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Mohamed A. El-Erian
Chief Economic Adviser, Allianz. Author of NYT bestsellers "When Markets Collide" and “The Only Game in Town.”

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