Global outlook c h a p t e r 1

A. Government spending on health 
care in advanced economies
B. G7 potential output

---

C H A P T E R 1 
G L O B A L E C O N O M I C P R O S P E C T S | J A N U A R Y 2 0 2 1 
48 
a shift from public investment to consumption as 
its main driver, would help China’s recovery be 
more sustainable. Structural policies should focus 
on encouraging investment in human capital, 
reducing regulatory burdens, addressing market 
distortions, and improving access to social services. 
In addition, the government could work to close 
the gaps in disease surveillance and control, reduce 
public health risks, and strengthen international 
collaboration.
EMDE monetary and financial policies 
As a result of weak demand and subdued energy 
prices, EMDE inflation has fallen below central 
bank targets, on average, since May (figures 
1.21.A and 1.21.B). Nevertheless, the fall in 
inflation in EMDEs has been less broad based 
than in advanced economies, reflecting the effects 
of sharp currency depreciations as well as rising 
domestic food prices in some countries 
(Ebrahimy, Igan, and Martinez Peria 2020). 
Whereas underlying inflationary pressures in most 
EMDEs are likely to remain subdued amid 
persistently soft demand, negative output gaps 
following the collapse in activity may not be as 
sizable as currently envisioned due to the 
pandemic’s damage to potential growth. This 
could eventually fuel a pickup in inflation.
Central bank policy rates have mostly remained 
stable at very accommodative levels (figure 
1.21.C). The prospect of generally contained 
inflationary pressures, along with recent changes 
to the monetary policy framework of the U.S. 
Federal Reserve that is likely to keep U.S. policy 
rates low for an extended period, may enable a 
number of EMDE central banks to maintain their 
accommodative policy stances during the recovery 
(Arteta et al. 2015; Kose, Nagle et al. 2020). 
Lower borrowing costs could also help lessen the 
financing burden on EMDEs with high debt loads 
and associated financial risks. These benefits may, 
however, be elusive for those EMDEs facing 
lingering vulnerabilities, such as large external 
imbalances or dwindling reserve buffers.
Several EMDE central banks have also continued 
their use of asset purchase programs, which appear 
to have helped stabilize financial markets (figures