key: cord-0047658-hgsckys9 authors: Song, Ligang; Zhou, Yixiao title: COVID‐19 Pandemic and Its Impact on the Global Economy: What Does It Take to Turn Crisis into Opportunity? date: 2020-07-02 journal: nan DOI: 10.1111/cwe.12349 sha: feabd1005a2df7646fbaa02b50d04e7434adc2e4 doc_id: 47658 cord_uid: hgsckys9 The COVID‐19 pandemic broke out at a time when there were heightened uncertainties in the global economy. Understanding these uncertainties provides an important background for analyzing the impact of the pandemic on the global economy, assessing the effectiveness of those policy measures in combating the pandemic and reviving the global economy, and predicting the trajectory of the economic recovery in post‐pandemic era. We analyze how COVID‐19 would likely deepen some existing malaise in the global economy, and what could be done to redress these problems while managing economic recovery from the crisis and beyond. We argue that three fundamental factors which could lead to a solid recovery in the post pandemic era are structural reform, new technology and re‐integration which could be managed through instituting a new “global social contract.” Supported by strong public policies at all levels especially at national levels, the tripartite could serve as salvation of the global economy recovering or re‐emerging from this pandemic crisis. On 31 December 2019, Wuhan Municipal Health Commission, China, reported a cluster of cases of pneumonia in Wuhan, Hubei Province. A novel coronavirus was eventually identified. On 11 March 2020, the World Health Organization (WHO) made the assessment that COVID-19 could be characterized as a pandemic (WHO, 2020) . Up until recently, the pandemic hit Europe and Americas hardest measured by number of confirmed cases (Figure 1 ). The health crisis not only caused a tragically large number of human lives being lost, but also dealt heavy blows to market confidence and economic activity. The magnitude and speed of contraction in economic activities that have followed is unlike anything experienced in our lifetimes. Rising fears and global economic shutdown caused financial markets to seize up and dive deep. Global stock market crashed from the record highs and reported their largest one-week declines since the 2008 Global Financial Crisis (GFC). US oil prices turned negative for the first time on record after oil producers ran out of space to store the oversupply of crude left by the coronavirus crisis as well as by the failure in negotiations on production curtailment between Saudi Arabia and Russia, triggering an historic market collapse which left oil traders reeling. The price of US crude oil crashed from $18 a barrel to -US$38 in a matter of hours, as rising stockpiles of crude threatened to overwhelm storage facilities and forced oil producers to pay buyers to take the barrels they could not store. The market crash underlined the impact of the coronavirus outbreak on oil demand as the global economy slumps ( Figure 2 ). The International Monetary Fund (IMF) called the economic crisis sparked by COVID-19 the Great Lockdown and projected global growth in 2020 to fall to -3 percent, under the assumption that the pandemic and required containment peaks in the second quarter for most countries in the world and recedes in the second half of this year. This is a downgrade of 6.3 percentage points from January 2020, a major revision over a very short period. This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the GFC in which global growth fell by -0.1 percent year on year. This is a truly global crisis as no country is spared. For the first time since the Great Depression both advanced economies and emerging market and developing economies are in recession. For this year, growth in advanced economies is projected at -6.1 percent; emerging market and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates of -1.0 percent in 2020, and -2.2 percent if China is excluded. Income per capita is projected to shrink for over 170 countries (IMF, 2020) . Emerging market and developing economies face additional challenges with unprecedented reversals in capital flows as global risk appetite wanes, while coping with weaker health systems and more limited fiscal capacity to provide support (IMF, 2020) . Emerging-market capital inflows dramatically declined as risk aversion led to a rapid flight of capital from emerging-market assets. For the seven days ended March 25, redemptions from emerging-market bond funds were more than 3 percent of total assets. The outflow was nearly unprecedented in size, eclipsed only by the 3.7 percent outflow during the last week of the GFC in October 2008. The speed with which the most recent activity occurred was notable-emerging-market bond funds had reported net inflows every week of 2020 until the first week in March ( Figure 3 ) (Davis, 2020) . The COVID-19 pandemic, a once in a century event, broke out at a time when there were heightened uncertainties in the global economy at the turn of the second decade of the 21 century. Understanding these uncertainties provides an important background for analyzing the impact of the pandemic on the global economy, assessing the effectiveness of those policy measures in combating the pandemic and reviving the global economy, and predicting the trajectory of the economic recovery in postpandemic era. First, the Chinese economy, the second largest economy in the world, grew at the slowest pace since reform started four decades ago. Second, there were "synchronized economic slowdown" in all the major economies in the world ten years after the GFC. Third, international trade is no longer a key engine for global economic growth as the force of deglobalization continues to set in. Fourth, the rate of productivity growth especially in all major economies continue to fall. Fifth, deflation becomes a norm in the global macroeconomic setting and macroeconomic policies especially monetary policies in all major economies becomes ineffective in boosting economic growth. Sixth, there are alarmingly high rises of global debt levels resulting from the measures of fiscal expansion and debt financing across different countries, rich or poor. Seventh, as a result, there are growing financial fragilities in global financial system and instability in international commodities markets. Finally, there are rising income inequalities across many countries in the world putting much pressure on government policies for carrying out structural reform including maintenance of an open economy. In this study, we identify four major challenges caused by COVID-19 and explore potential ways to address these challenges. The paper is organized as follows. In Section II, we review how COVID-19 impacts on economies and worsens several pre-existing conditions in the global economy, thus posing major challenges for future growth absent of strategic adjustment and policy reform. In Section III, we examine what type of reforms will be required to boost productivity and lift growth post the COVID-19. We discuss how a crisis like COVID-19 could create an opportunity for policy reform and innovation that can become a foundation for long-term prosperity in the world. Section IV draws conclusion and offers some policy suggestions. While the pandemic impacts on almost every individual, business, government and institutions in unique ways, a crisis such as this tends to expose the weakest parts and links in an economy and a society and wreak great havoc on them. COVID-19 worsens several pre-conditions in the global economy and poses greater challenges to the frail parts of the global economy. These pre-conditions such as the rising debt levels may become chronic and damaging for a long period of time if no major actions were taken to address them. Here we identify and discuss these challenges in detail. In the past two decades, four prominent trends in global economic performance have arisen: (i) Rates of growth in economic activity in advanced economies have declined, most notably during the first decade of the millennium (Lo and Rogoff, 2015) ; (ii) Total factor productivity (TFP) growth has slowed down since before the GFC. TFP growth has been very sluggish across the Organisation for Economic Co-operation and Accepted Article 4 Development (OECD) economies and in major emerging economies since prior to the GFC and there has since been little sign of resurgent growth ( Figure 4) (OECD, 2012; Autor et al., 2017) ; (iii) There has been lack of private investment returns as well as declining rate of private investment growth in the advanced economies since the 2000s. (iv) There is the declining trend in global bond yields at all maturities and low real interest rate ( Figure 5 ); (v) There is a weak inflation or near-deflation despite significant monetary easing. It is worth noticing that these trends are inter-related. Slower rates of growth in private investment demand results in lower real interest rate, as well as slows the uptake of embodied technology and hence the growth of TFP. The decline in TFP growth rate, in turn, slows down economic growth and inflation growth as well. Summers (2013, 2014, 2016) argued that the combination of these trends suggest a revival of "secular stagnation", a long-term economic slump in the global economy. Summers went on to argue that it may have become all but impossible to boost growth by using the conventional tools of lowering interest rates to encourage more investment and consumer spending. The answer, he argued, was for governments to spend more instead. The pandemic may cause the pattern of "secular stagnation" to deepen, and the longer the pandemic lasts, the more severe the pattern may become. During the pandemic, uncertainty rises and both consumer and business confidences drop significantly. Businesses and individuals become more risk-averse and tighten their belt to make more saving during as well as after the pandemic. This could persistently weaken private consumption and dampen private investment, reducing aggregate demand. This could result in a downward spiral that is hard to break out of by using conventional policy instruments such as monetary and fiscal policies. Globally, income inequality between countries has decreased over the past three decades in relative terms as income levels in several developing economies caught up with those in developed economies, whereas income inequality within countries has shown considerable heterogeneity. Most prominently in the advanced economies, there has been a trend toward the capture of what new income and wealth is generated entirely by high level professional and capital-owning households (Piketty, 2014) ( Figure 6 ). Furthermore, current data also suggests that global wealth inequality is substantially wider than income inequality (UNCTAD, 2018) . Due to the shutdown of economic activities by governments to contain the spread of the COVID-19 virus, growth slowdown has hit many economies hard. Governments in developing countries is often more constrained in fiscal capacity because of the weak taxation revenue base and high level of public debt, and therefore may have less ammunition to combat the economic downturn than governments in developed economies. Data from the IMF Policy Tracker (IMF, 2020) suggest that poorer countries will have an urgent need for international help, as most richer countries already have robust efforts in place. Among nations with a fiscal plan in place and GDP per capita of US$10,000 or more, 45 out of 55 of them have fiscal spending plans of 1 percent of GDP or more including grants and loans; among countries with GDP per capita lower than US$1,000, only 29 out of 69 of them have fiscal spending plans of 1 percent of GDP or more. Therefore, this gap between rich countries (along with a few emerging markets) and the rest of the world in their resilience to crises is wide. If developing economies experiences greater contraction in economic activity than their developed counterparts, we may see a reversal of the decline in between-country inequality. We may also likely see a rise in within-country inequality as economic conditions of low-income households tend to be most negatively affected during economic downturn. The two impacts combined may cause inequality to rise both within and between countries. We may see more rapid development in automation and digitization of production tasks due to the need to adapt to new work modes under the pandemic. Social distancing requires production activities to rely less on workers gathering in facilities or offices and more on internet-based remote work. This could cause automation, digital and internet technologies to replace certain types of labor more rapidly. As repetitive and routine works tend to be more easily replaced and are often performed by low-income earners, further replacement of these roles by new technologies could cause income inequality to rise further. The rise in income and wealth inequalities within countries has resulted in discontent and disbelief of the promised benefit of globalization and rise in nationalism in some advanced economies. Furthermore, rising income and wealth inequalities will further increase excess saving, reduce long-term real interest rates and aggregate demand, and therefore further deepen the secular stagnation pattern. The information and communication technology shock of the 1990s led to a rapid expansion of global supply chains, with an increasing number of parts and components being imported, especially by emerging economies for processing and re-export (Baldwin, 2011) . The resulting increases in back-and-forth trade in components led to measured trade racing ahead of national income. This transition to a world where production is increasingly internationally fragmented in the long 1990s is compatible with the higher long-run trade elasticity for that period. Since before the GFC, however, world trade growth has lost momentum relative to world GDP growth. The decline in the long-term responsiveness of trade with respect to income in the 2000s may well be a symptom that the technology shock of the 1990s has been absorbed and that the process of international production fragmentation has slowed down (Constantinescu et al., 2015) . Constantinescu et al. (2015) find that the global trade slowdown is structural rather than cyclical. They estimated the relationship between trade and income in the past four decades and revealed that the long-term trade elasticity rose sharply in the 1990s, but declined significantly in the 2000s, even before the GFC. These results suggest that trade is growing slowly not only because of slow GDP growth, but also because of a structural change in the trade-GDP relationship in recent years. They further find that a key driver of structural change over the 2000s is the slowing pace of international vertical specialization, which accounts for between one-quarter and one-half of the decline in import growth from the 1990s to the 2000s. Another factor that is unfavourable for global trade is the on-going US-China trade conflict since March 2018. This conflict adds to the policy uncertainty in international trade market and further dampens trade activities. In times of heightened economic uncertainty, firms cut foreign orders more strongly than domestic ones since inventory costs are larger for foreign inputs, leading to trade contraction (Novy and Taylor, 2014) , and trade policy uncertainty limits firms' entry into export markets due to sunk export costs associated with firms' entry and trade decisions (Handley and Limão, 2015) . After the outbreak of COVID-19, there has been a reflection on the trade-off between efficiency and resilience of the global value chains (Galston, 2020) . A debate has been started to evaluate whether global value chain (GVC) is the best way to structure global trade in the future (Goldberg, 2020) . For example, Alfaro and Faia (2020) argue that the prevailing economic paradigm behind GVC suggests that firms should outsource to the countries with the lowest overall costs and firms could potentially source particular intermediate inputs from only one country. Outsourcing, the fragmentation of production and lengthening of value chains, has allowed for a finer division of labor and greater gains from specialization across countries. Just-in-time management practices also dictate holding minimal inventories to improve profits. These outcomes are efficient assuming sourcing from a particular country involves minimum risk as compared with sourcing from many countries. There is, however, a growing list of events that are overlooked by risk managers, ranging from natural disasters, to geopolitical, technological, contractual, or demand factors. In these circumstances, a specialized GVC represents a "trade fragility" and that the paradigm behind the GVC needs to be re-assessed. Therefore, it is argued that production networks shall become more diversified, rather than clustered. Also, the network should rely on trusted nodes. In contrast, Goldberg (2020) argues that trade source diversification, while reducing production efficiency, will not help much in reducing risk under events such as a pandemic, because competition for goods is no less at local level (between states, cities and even hospitals) than between countries. Therefore, Goldberg (2020) argues that restructuring the GVC to diversify trade sources is not the solution to security, and instead, building global resilience is the key. Economists have various projections on China's engagement in GVC post COVID-19. Some argue that China will continue to be an important player in it because the division of labor across borders has already been formed around the world, and the cost to change this division of labor is very large. As this pandemic crisis is global, there would still be risk whichever country a firm places the production facilities in. Since China is the first country to emerge out of the pandemic and China's manufacturing industry is the first to recover and resume work after this outbreak, China's position in the GVC may even strengthen. Others argue that the GVC are going to be transferred out of China on a large scale due to the tariff increase under the US-China trade conflict and the impetus to diversify trade activities away from China post COVID-19. Menon (2020) estimates that, for total manufacturing, domestic value added in China of Chinese exports to the US is 15 percent. Transferring these activities out of China to avoid increased tariff makes sense as long as competitor locations can carry them out at less than 170 percent of the costs. 1 Therefore, the double whammy of US tariff hike and the diversification motive after the COVID-19 may cause production activities to move out of China. May Cause Financial Fragility Prior to the outbreak of COVID-19, there has been a wave of growing global debt since the GFC (Kose et al., 2020) . Waves of debt accumulation have been a recurrent feature of the global economy over the past fifty years. In emerging and developing countries, there have been four major debt waves since 1970. The first three waves ended in financial crises-the Latin American debt crisis of the 1980s, the Asia financial crisis of the late 1990s, and the GFC of 2007-2009. A fourth wave of debt began in 2010 and total debt has reached US$55 trillion in 2018, making it the largest, broadest and fastest growing of the four. Between 2010 and 2018, total debt climbed to an all-time high of roughly 170 percent of GDP, a 54-percentage point of GDP increase since 2010 and the fastest gain since at least 1970. Debt increase has been very rapid in China (equivalent to more than US$20 trillion) and has been particularly acute in emerging and developing countries post the GFC. The rest of the increase was broad basedinvolving government as well as private debt-and observable in almost every region of the world (Figure 7) . While debt financing can help meet urgent development needs such as basic infrastructure, much of the current debt wave is taking riskier forms. There are concerns that governments are not as effective as they need to be in investing the loans in physical and human capital. In fact, in many developing countries, public investment has been falling even as debt burdens rise. In comparison with conditions prior to the 2007-2009 crisis, many emerging and developing economies have been growing more slowly even though debt has been growing faster. Slower growth has meant weaker development outcomes and slower poverty reduction. The simultaneous build-ups in public and private debt have historically been associated with financial crises that resulted in particularly prolonged declines in per capita income and investment. Emerging and developing economies already are more vulnerable on a variety of fronts than they were ahead of the last crisis: 75 percent of them now have budget deficits, their foreign currency denominated corporate debt is significantly higher, and their current account deficits are four times as large as they were in 2007. Under these circumstances, a sudden rise in risk premiums could precipitate a financial crisis, as has happened many times in the past (Mian and Sufi, 2014; Mian et al., 2015; Kose et al., 2020; Wolf, 2020) . 1 Menon (2020) finds that 25 percent tariff hike justify such the costly move of relocation production out of China because, first, whenever there is foreign value added or imported inputs, the nominal tariff has to be adjusted by a factor equal to the reciprocal of the domestic content share. To illustrate using an oft-cited example, the Fung Global Institute (2014) estimated that only about 10 percent of a US$425 "Made in China" jacket sold in the United States actually accrues to China. Therefore, unless the cost of moving production out of China was 250 percent ((1/0.1) x 25 percent) more than paying the 25 percent tariff, the shift would make economic sense, which is ten times the margin implied by the nominal tariff rate. The same principle applies to the location of production by US firms exporting to the Chinese market, where they face retaliatory tariffs. In order to prevent credit crunch and severe unemployment and to maintain livelihood of individuals negatively impacted by the economic shutdown under the COVID-19, governments in various nations have adopted both expansionary fiscal and monetary policies to prevent a slew of job losses and bankruptcies (Table 1) . These policies are aimed at keeping temporarily closed companies in business, workers on the payroll, and vulnerable household solvent. Those economic measures fall into three categories: support for households; support for business and employment; and support for the financial system. Australia has made the largest and fastest injection of economic support the country has ever seen. An AU$70 billion JobKeeper program covers 70 percent of the median wage and is close to a replacement wage for many working in those sectors most affected like hospitality and retail. The unemployment benefits are doubled with the introduction of a temporary coronavirus supplement for jobseekers. This is in addition to temporary cash flow support to help small and medium-sized businesses keep operating, pay their bills and retain staff. The Reserve Bank of Australia and the Australian Office of Financial Management have made US$105 billion available to support lending to businesses from both bank and non-bank lenders. Government has also partnered with the banks in a US$40 billion SME loan guarantee scheme. Denmark announced that it will cover 75 percent of affected companies' payroll with the condition that they maintain their workforce during the closure. The United Kingdom will cover up to 80 percent of the salary of workers if companies kept them on their payroll. South Korea is providing wage and rent support for small merchants. Emerging markets like Thailand, Indonesia and South Africa are providing direct relief to affected industries and small and medium-sized enterprises (SMEs) and increasing cash support for vulnerable households (IMF, 2020). These measures are like war-time emergencies and rely on "war finance" (Dell'Ariccia et al., 2020; James, 2020). Consequently, global debt and the associated risks are heightened further. For developing countries with high share of foreign currency denoted debt, the flight to safety and the apparent riskiness of developing economies could lead to currency depreciation, debt default and even financial crisis in these developing economies. The sudden stop in economic activity will also exacerbate countries' underlying macroeconomic vulnerabilities. As a result, a continuous growth of debt or external shock could trigger a debt crisis. This would in turn force harsh budget cuts to social spending and other programs, without which countries will fail to prosper. The mammoth scale of central government intervention casts a long shadow on the debt burden and how to share the burden of its repayment in the future. One possible scenario is that the burden will be passed disproportionately to future generations, which will spark debate over inter-generational fairness. Another solution will be to monetize the debt, that is to allow central banks to buy up large amounts of new government debt, which may indirectly set off inflationary pressures. In the longer run, additional inflation of this kind can also serve to shrink the debt burden. A third possibility is to address the challenge through increase in taxation. The fourth way is to enhance productivity growth and boost growth to expand the tax base. It is well known that national debt is sustainable when real interest rate is lower than economic growth. Current real interest rate on debt is low (Figure 8 ). Although it is predicted that the global economy will continue to experience low real interest for a long time, one could not rule out the possibility that real interest rate eventually rise in the future, thus increasing repayment burden. Therefore, to make the debt sustainable and affordable, maintaining productivity growth which drives economic growth in the long run would be increasingly important for all economies. In terms of monetary policies, central banks have acted fast and forcefully in responding to the pandemic, and the boundaries between fiscal and monetary policies become blurred as debt may become monetized. The US Federal Reserve was among the first to act, cutting rates to near zero, by 150 basis points in one early-March move, and rapidly escalating purchases of government securities, mortgage paper and other assets, with no upper limit. The European Central Bank (ECB) was initially cautious but added €1 trillion (US$926 billion) in credit facilities. The People's Bank of China (PBOC) expanded re-lending and re-discounting facilities by 1.8 trillion RMB (US$256 billion) and lowered bank reserve requirements to facilitate greater lending to businesses. The Bank of Japan (BOJ) delivered a three-part rescue package that committed to purchase Japanese government bonds (JGB) without limit, triple the amount of corporate bond and commercial paper purchases, and fund commercial bank lending to SMEs (Sheng, 2020) . Unconventional monetary policies (UMP) started from the GFC as a tool to expand central bank balance sheets by direct funding of government, corporate and bank debts. By the end of 2018, global central bank assets were US$30 trillion (Sheng, 2020) ( Figure 9 ). As central banks ramp up buying all types of assets including funding SMEs, they may have implicitly become the largest underwriter of credit risk, which could cause significant moral hazard built into investor expectations. UMP is only temporary aspirins to ease crisis pain and does not address the painful but necessary structural adjustments needed to jolt the economy out of the unstainable pattern of high debt, high underemployment, low productivity growth, low investment returns, and slow income growth. A crisis can create a window for making reforms and can set in motion institutional and policy changes that would have been hard to push through in normal circumstances. There is possibility to make the best of the worst. The global economy has been in weak state and several fundamental problems have persisted after the GFC. The current crisis may be an opportunity to gather society-wide support, political will, and courage to overcome political obstacles and address these problems to drive long-term growth. Here we discuss a few opportunities that arise out of the pandemic and propose three key reforms for future growth. First, we argue that structural reforms that aim at boosting economic dynamism and business environment is fundamentally important. Fiscal and monetary measures have already been deployed to combat the economic downturn even before the pandemic hit; however, with the heavy debt burden and the inability of UMP in boosting investment, structural reforms are required to sustain economic growth in the long run. The backdrop to the COVID-19 shock was a decade-long weakness in business capital expenditure in OECD economies, seemingly due to low expectations of future income growth and over-reliance on unorthodox central bank stimuli such as UMP. This caused a vicious downward cycle exacerbated by the fact that such stimulus measures made those inefficient or even insolvent firms continuing to operate worsening resource allocation problems in the economy. Low business expenditure reduced trend growth, which further lowered investment. Therefore, for countries that have excessive regulations, subsidies, licensing regimes, trade protection or other obstacles, it is important to implement structural reforms to help shorten the time to recovery and create confidence that the recovery can be strong and sustained. After reviewing structural reforms that are under consideration in various economies, we find that they could point to various issues to be addressed and directions for reform (such as taxation; financial and banking system; infrastructure; education and training; federal-state relations; industrial relations and labor market flexibility; energy supply and cost; competition; and regulations and government bureaucracies more generally, i.e. cutting red tape), depending on which are the most severe growth constraints faced by different economies. Despite the differences in different countries, we could see that the structural reforms across economies share one common theme, that is to boost economic dynamism, and to unleash the force of "creative destruction" as an economic and job creation engine. In Australia, after the outbreak of the COVID-19, Prime Minister Scott Morrison has recently made it clear that the government plans to make reforms to support the eventual economic recovery. He was quoted that his team were "looking at all options with fresh eyes" after Reserve Bank of Australia's governor Philip Lowe urged policymakers to seek inspiration on how to boost productivity. In India, Prime Minister Narendra Modi underlined the need for new structural reforms and expedite work on infrastructure projects to revive the economy reeling under the impact of coronavirus-induced lockdown. He stressed the need to strengthen major structural reforms undertaken in the past and new structural reforms in the areas of corporate governance, credit markets and infrastructure sectors (PTI, 2020) The supply-side reform in China is a great example of a structural reform that aims to enhance resource allocation and economic dynamism. The State Council of China explains that supply-side structural reform aims to support economic growth through productivity improvements and tax reduction. In recent years, when trying to revive confidence and boost business activity, Chinese stimulus measures did not rush to inject fresh liquidity into the economy. Instead, structural reform measures such as deleveraging, credit loosening and tax cuts were taken, mainly targeting the private sector. Private business accounts for more than 80 percent of China's urban employment and over 60 percent of the country's GDP. Therefore, good implementation of supplyside reform could release huge pent-up demand in this particularly important sector of the economy (State Council, 2019). In April 2020, after the outbreak of the COVID-19 and its severe blow to the Chinese economy, the Chinese government emphasizes the importance of improving resource allocation through market means for five factors land, labor, capital, technology and data. Guaranteeing equal access to factors of production by different market players and promoting factor allocation in accordance with market rules, market prices, and market competition can help maximize efficiency and enhance economic vitality and innovation (People's Daily, 2020) . In the recently closed National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPCC), the importance and implementation of the above reforms were emphasized. Another major reason why structural reforms are essential is that the huge fiscal rescue packages meant to prevent firms from liquidity and solvency crisis may cause the emergence of more zombie firms if governments failed to retract from the economic support in time. Zombie firms are insolvent firms that continued to receive bank lending with banks hoping that the borrower would get bailed out by the government in the event of severe repayment difficulties, thereby contributing to the softening of budget constraints of enterprises (Berglöf and Roland, 1995) . Zombie firms may divert scare economic resources away from more productive firms. While the rise of zombie firms has been going for a while across major economies (McGowan et al., 2018) , the fiscal expansion in reviving the economy during the COVID-19 is very likely to worsen the situation. Furthermore, it is the largest and strongest firms that are most likely to survive the crisis, and post COVID-19, we may be faced with a market structure that hosts large firms with strong market power. For the fiscal rescue policy to be able to orderly exit and to minimize the moral hazard risk that inefficient firms rely on government subsidy to survive and to prevent large firms from thwarting competition, structural reforms that lower entry and exit barriers and level the playing field for competition are crucial. That is, it is important to improve the mix of taxes and spending along with other market structures in a way that enhances competition and/or productivity. These initiatives will shore up private capital expenditure and help the economy rebound and recover with vigor. Second, we argue that continued investment in research and development (R&D) activities for new technologies will be crucial for raising productivity growth and better meeting future public health or climate change challenges. Innovation and technological breakthrough have the potential to significantly boost productivity through creative destruction and resource reallocation towards more efficient industries and firms. The subsequent productivity growth is the key to sustain long term global growth and rise in living standards for the humankind. Sustaining R&D investment and exploring ways to use R&D resources effectively is particularly important because there is evidence to suggest that innovation has become harder in recent time. The flip side of this observation is that to sustain innovation and productivity growth, more R&D investment will be required. Bloom et al. (2020) find that research productivity is falling sharply. Taking the US aggregate number as representative, research productivity falls in half every 13 years: new ideas are getting harder and harder to find. Just to sustain constant growth in GDP per person, the United States must double the amount of research effort every 13 years to offset the increased difficulty of finding new ideas. This pattern is observed in medical research as well. There is evidence that antimicrobial resistance has been rising (Ventola, 2015) . Evidence from the United States suggests that biomedical research spending has been rising in the three decades, and yet major drug and biological product submissions to the US Food and Drug Administration has been falling. The Chinese government is taking the advantage of this crisis to boost its innovative activities. In March 2020, the Standing Committee of the Political Bureau of the Communist Party of China Central Committee called for accelerated "new infrastructure" projects in seven areas. They include 5G, ultra-high-voltage power facilities, inter-city transport, vehicle charging stations, big data centers, artificial intelligence, and industrial internet. The new infrastructure is new public facilities that serve the needs of new industrialization, as opposed to the traditional infrastructure construction such as railways, roads, and airports. In the first quarter of 2020, fixed asset investment dropped -16.1 percent year on year and the decline was 24.5 percent in January/February. In China, government-led investment in conventional infrastructure has declined for years and the investment in new infrastructures has potential to crowd in private investment and boost economic growth in the long term. Third, we argue that global economic cooperation and integration are fundamentally important for fighting the virus and reviving the global economy from this crisis despite the recent setback in globalization. This requires foremost that the world community finds the way of enhancing "trust" which is not just built on good will but on the recognition that we are facing the common threats such as the virus and diseases, and the common challenges such as the environment and climate change, poverty reduction and equality. To do so, the human society globally as a whole should create a new "global social contract" initiated and instituted through the United Nations (UN) framework. This global social contract proposed here can be built upon the recent call for establishing social contract between the rich and the poor, the old and the young, and between today and tomorrow within a nation, in order to address the social tension and adapt the states to new situations (Köhler, 2016; IPSP, 2018; Bussolo et al., 2019) . The global social contract is aimed at building trust between different countries and economies, and so it is different from the focus of Bussolo et al. (2019) and IPSP (2018) which is about social contract within a country. This new global social contract will enhance trust and mutual respect between people and nations and serve as a foundation for future global cooperation to face global challenges to the human society because such a contract transcends differences in ideologies, geopolitical considerations and the narrow definition of "national interests." This new global social contract will enable countries to re-engage in and more effectively reform the multilateral cooperation and frameworks for long-term benefit to the human society including global prosperity and stability, disarmament, climate change and sustainable development. This spirit of global social contract can be seen in China's President Xi Jinping's call for "a Community with Shared Future for Mankind" (Xinhua, 2020). As COVID-19 spreads, the geopolitical tension between China and the US has intensified. Mutual accusations about responsibility for the pandemic and tit-for-tat media expulsions have brought relations to a dangerous low. China is offering its resources and experience in handling the virus to build relationships with other countries. In contrast, the US is as yet absent from any international leadership (Gyngell, 2020) . The tension is continuation from the US-China trade conflict which started in March 2018. The phase-one trade deal was reached on 15 January 2020, but uncertainties remain as to how both countries implement the agreement amid the pandemic crisis. The multilateral institutions have become weak as well. From climate 13 change and pandemics to the world trading system, some of the most important rulesbased systems and technical organizations such as the WHO have become stakes in the China-US geopolitical tension. The G20 has proved itself unable to mount an effective response to the pandemic as well. Another development is that the shock to the global supply chains seem to have led to more calls for greater self-sufficiency and less reliance on global value chains in various countries. It is perhaps fair to say that COVID-19 has done more to close borders, reverse globalisation, decouple supply chains and marginalise multilateral institutions than the most fervent efforts of the world's populist nationalists. As COVID-19 is a global pandemic and requires global action, if all countries including the US and China collaborate in the fight by avoiding duplication of research and sharing research tasks in the effort to find a vaccine, the world community may be able to find the vaccine faster, which benefits all people in the world. How could we overcome these tensions and identify a common ground to reach collaboration and agreement that is strongly needed for combating a pandemic which attacks all human being alike? To identify the solution, we should recognize that the established democracies are being destabilized by populism and extremism, because the lower middle class is reeling from relative decline in income when faced with technological change and globalization, and expresses its frustration (Bussolo and Fleurbaey, 2019) . There are socio-economic underpinnings of recent unrest, especially the changing nature of inequality, the ineffectiveness of the current redistribution policies, and the sense of exclusion and marginalization perceived by some. The answer to these struggles does not lie in curbing globalized economic activities or rejecting technological innovation, because these are the sources of long-term growth which ultimately determines people's living standards. Instead, what is needed is an adaptation of key institutions to the new challenges. By focusing on distributional tensions between groups and persistently low social mobility, a clearer view of the deep economic transformations emerges. Bussolo et al. (2019) proposes a set of three principles: (1) move toward equal protection of all workers, no matter their type of employment, while promoting labor markets' flexibility; (2) seek universality in the provision of social assistance, social insurance and basic quality services; and (3) support progressivity in a broad tax base that complements labor income taxation with the taxation of capital. These three suggestions are for creating a social contract within a nation. When we expand the social contract to the global level, the issues and tensions will be more complex and will clearly require more dimensions and considerations to be taken into account. We think this will be an area worth more creative thinking and more in-depth and original work. The global economic contraction starting from the first quarter in 2020 (and beyond) may well be described as history's first deliberate "lockdown recession". The widespread lockdowns in preventing the spread of the virus especially in those major economies in the world halted all the economic activities ranging from transport, trade, manufacturing to services leading to substantial contraction of economic activities and rising unemployment. The policy measures in dealing with the crisis are those commonly used in economic downturn or recessions, including injecting liquidities into the economies through low interest rates and quantitative easing to minimise the risk of financial system breakdown, giving money to people in time of financial distress, and providing tax reduction to business and household, etc. However, different from other economic and financial crisis, this time requires that the spread of the virus be contained first and a key lesson can be learned from the Chinese experience which shows the economic recovery has been based on the successful containment of the virus. 2 We argue in this paper that three other more fundamental factors that need to be considered for leading a solid and strong recovery in the post pandemic era are the role of new technology, structural reform and re-integration. The tripartite of new technology, structural reform and re-globalisation (integration) as salvation of the global economy recovering or re-emerging from this pandemic crisis need to be supported by strong public polices at all levels especially at national levels. This is so not just at the recovering phase from this crisis, but to be persistent throughout the postpandemic era. The rising income inequality and nationalism in many parts of the world recently reflect the fact that despite rapid global economic growth which brought prosperity to many countries in recent decades, public policies especially in areas of addressing income inequality and health care are unquestionably inadequate. Emphasising the role of public policy is not simply the adoption of government actions aimed at giving money away, or taxing the rich and helping with the poor, but as part of implementing a new global social contract which enables all countries involved to recognise the common interests and challenges of the humanity such as development, poverty reduction, climate change and the welfare of the future generations, and follow the principles of fair competition and the respect for the interests of others. The COVID-19 pandemic, the once in a century event, provides us with an opportunity to think more deeply about our future and act more wisely in making choices moving forward. The best hope for the global economy and thereby the welfare of the people in the post-pandemic era is for countries to not falling apart further through the forces of disintegration and isolation, but coming together even more closely through the positive forces of cooperation and integration. 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(2017) and New York Fed. This figure is based on updated estimates of the model described in Holston (2017) . Notes: This table presents the "immediate fiscal response measures" adopted by countries in response to COVID-19 which include additional government expenditures on medical resources, hiring of personnel, subsidies to SMEs, public investment and cancellation of certain taxes and social security tax. These measures will immediately lead to the deterioration of the government budget, and there will be no direct compensation in the future. Table 1 in general does not include other "deferred measures," such as allowing businesses and individuals to postpone tax payment. If other delaying measures are considered, the scale of fiscal policy stimulus will be greater.