The COVID-19 pandemic, aside from being a health disaster, was a huge economic shock to the world economy. All G20 countries had negative GDP growth in 2020, except for China, which eked out a 2.3% expansion. All these major economies, and most smaller ones too, carried out Keynesian counter-cyclical fiscal and monetary stimulus policies. There were interesting differences, however, in how authoritarian and democratic countries, especially China and the U.S., shaped their stimulus policies. The U.S. relied primarily on government borrowing, which was then used to support household consumption in various ways. China, on the other hand, directed credit to its corporate sector to support production. These differences in policy naturally gave rise to divergences in their patterns of recovery.
In response to the recession, all the G20 countries had large increases in outstanding credit relative to their GDP, but in democracies this was mostly due to government borrowing that supported consumption, whereas authoritarian countries directed credit to corporates. From 2019-Q3 until 2020-Q3, the increase in government debt to GDP was 23 percentage points for Japan and Canada; 21% for the U.S.; 17% for Italy, France, and the U.K. The resources were used to sustain household consumption in various ways, including subsidizing companies to maintain employment in EU countries and to enhance unemployment benefits and cash transfers in the U.S. These are all wealthy countries with considerable borrowing capacity. However, emerging market democracies such as India (12%) and South Africa (14%) registered large increases as well.
The G20 includes four countries that are rated as “not free” by Freedom House: China, Russia, Saudi Arabia, and Turkey. China experienced nearly as much monetary expansion as the U.S., it was just targeted differently. Credit to the corporate sector accounted for majority of the lending. This pattern was repeated across other authoritarian countries: in those four countries, the average share of new lending was 51% for corporates and 33% for the government. For the G7, instead, the averages were nearly the opposite, with 56% for the government and 30% for corporates. Meanwhile, about 15% went to households, mostly for mortgages, in each group. In China, state-owned banks lent money to state-owned enterprises and local government investment companies to encourage infrastructure investments and the quick resumption of manufacturing production, mostly for exports. Given that democracies were subsidizing consumption while China and other authoritarian governments were supporting production, it is not surprising that trade gaps widened throughout 2020.
China’s current account surplus – the widest measure of the trade balance – doubled from 1.0% of GDP in 2019 to 2.0% in 2020. Conversely, most advanced democracies saw declines in their current accounts over the same period: down to 1.6 percentage points of GDP for France; 0.9% for the U.S.; 0.8% for the U.K.; and 0.4% for Japan. Normally, the severity of recessions in the West would have led to a strengthening of trade balances, as consumption declined (epitomized by the Global Financial Crisis). But this was an unusual recession in that democracies went to great lengths to sustain consumption while China stimulated production back online very quickly.
These changes in current accounts are not that large: the IMF projects pre-COVID balances will be restored by 2024. As such, these differences in policy response are not of lasting importance. Nonetheless, it is also possible that they will affect growth trajectories over the next decade. China has put a lot of productive capacity and additional infrastructure in place. In the process, it has run up a lot of corporate and local government debt, so that the overall debt to GDP ratio is reaching alarming levels. Defaults in the financial system doubled during 2020, with half of them originating from state enterprises. The key question, the answer we will discover in the next few years, is whether most of this is good, growth-enhancing investment – in which case the debt-to-GDP ratio should stabilize – or, instead, are these mostly white elephants which do not pay off, resulting in ongoing financial distress and perhaps even a crisis?
On the U.S. side, President Biden has proposed an additional $4 trillion in spending on a mix of infrastructure and the expansion of the social safety net. At first glance, it seems that much of it supports consumption. The amounts devoted to hard infrastructure amount to less than half of the total, and significant amounts are aimed at elderly care, childcare, family leave, pre-kindergarten, and community college. Biden is betting that the expansion of the safety net will not only immediately benefit a majority of households, but that it will also be good for economic growth in the long run. There is quite a bit of evidence on his side in this debate: pre-K has a very high rate of return, in excess of most physical infrastructure; and European economies with stronger elder- and childcare have higher labor force participation rates, especially for women.
This is just one snapshot of economic policy-making in response to an unprecedented crisis, so we should be careful about generalizing from a small sample. However, it is worth noting that the authoritarian regimes within the G20 have focused on capital in their stimulus policies, while democracies have tended to support their people. The latter are presumably responding to popular demands for support during a crisis, whereas the authoritarians can afford to pay less attention to public demands and channel more resources to investments that leaders control either through state enterprises or cronyism.