Is the economic recovery V, K or W shaped?

| Updated on: Oct 29, 2021
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Given the complex nature of the post pandemic recovery, English alphabets may be inadequate in explaining it

Economists are busy describing the shape of the post-pandemic recovery. While a ‘V-shaped’ recovery suggests a quick return to growth, a recent ‘Investopedia Economy’ article pointed that the Covid recovery in the US has been fractured and uneven — a ‘K-shaped’ one where different areas of the economy recover at varying speeds.

Millions of Americans remain unemployed, while the wealthiest became richer. And this may be the situation in many other parts of the world as well.

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.

In an IMF Working Paper (WP/21/127), Davide Furceri, Prakash Loungani, Jonathan D Ostry, and Pietro Pizzuto used historical data 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.

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.

Growing inequality

The distributional consequences from Covid-19 may be larger. They showed that 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.

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, for example, 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.

The implications of the K-shaped recovery still remain uncertain. Certainly, 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. These may be inevitable and largely beyond control in the backdrop of an unprecedented pandemic that drives the world into the domains of ‘unknown unknowns’.

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. A closer look at the economy may, however, show a K-shape, as explained by experts such as the former RBI Governor Duvvuri Subbarao — rising inequality is poised to hit consumption and growth prospects.

Well, which is the most appropriate letter then? There need not be a conflict between different symbols — both ‘V’ and ‘K’ may be correct depictions up to the level of portrayal they offer. 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 where each growth pattern resembles the diverging slopes of a letter ‘K’ but fails to indicate which slanting arm is dominating the GDP numbers. Again, 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. Thus, to be more specific, 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.

Thus, the real picture of any post-pandemic economic recovery cannot be depicted by any English alphabet. The effect of the pandemic is unprecedented. A study conducted by researchers at Azim Premji University shows that business closures and job losses pushed more than 230 million Indians into poverty in the past year, and “the structure of employment has changed dramatically”.

Some experts 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.

So, which English letter is to use to explain the economy? Well, in 2010, then finance minister Pranab Mukherjee said at the US-India CEO Forum: “I’m beginning to feel that for every (letter) in the English dictionary, there is a theory of economic recovery. What so many competing theories of recovery mean is that we really do not know the answer.” What’s more, the same situation can be explained by different letters as well!

The English alphabets seem insufficient for such a purpose! Can some letters from other scripts be used instead to denote the perplexing nature of the unknown dynamics of the global economic recovery amid Covid pandemic and, of course, in general?

The writer is Professor of Statistics, Indian Statistical Institute, Kolkata

Published on October 29, 2021

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