Financial systems after the 2007–2008 crisis have become sounder but continue to have some sources of fragility, including increased corporate debt risks and liquidity mismatches, and are not sufficiently inclusive.

The 2008-2009 financial crisis have led policy-makers to introduce new regulations and macro-prudential policies. Thanks to these interventions, financial systems strengthened worldwide (Figure 3.1). By pushing banks to deleverage, increase capitalization and reduce non-performing loans, banks have emerged from the financial crisis stronger, and were overall sounder in 2019 than they were in the past 12 years. (Table 3.1, Column A).26

During the same timeframe, banks, supported by accommodative monetary policy, eased credit conditions, granting better access to capital to both large firms and SMEs. For instance, in the United States and large Eurozone countries, an increasing number of loan managers reported having eased standards for granting business loans between 2008 and 2018. By the same token, business leaders answering the World Economic Forum’s Executive Opinion Survey have reported an improvement in access to credit for SMEs in their countries over the past five years (Table 3.1, Column B).

Loose monetary policy and easier access to credit has benefitted the economy on the one hand but introduced new issues on the other. First, low rates have reduced monitoring incentives and lending standards. As a result, corporate debt has risen over the past few years, which may become challenging with the emergence of the COVID-19 crisis. According to the IMF, at-risk corporate debt in 2019 was already high in systemically important countries, including the United States, United Kingdom and China. Although banks have learned to resolve bad loans faster, and most banks remain well capitalized, during the COVID-19 crisis several banks will “approach minimum capital levels”.27 A second issue driven by extra-loose monetary policy is stock market volatility and misalignment between market prices and fundamentals. Prices lose their signalling role and create incentives for diverting funds from investments (e.g. R&D, human capital, new facilities, pollution abatement) towards short-run profits, such as large-scale open-market repurchases.28

Furthermore, millions of households are still excluded from financial services and credit. For instance, according to the IMF’s Financial Access Survey, in most Sub-Saharan African countries there are less than four bank branches per 100,000 people, while in most European and North American countries there are between 20 and 50.29 Even within advanced economies some communities are significantly excluded from financial services: for instance, in the United States, almost half of black American households are un-banked or under-banked, versus about 20% of white American households.30

Market concentration has been on an increasing trend in advanced economies, with large productivity and profitability gaps between the top companies and all others in each sector.

Business leaders in advanced economies assess that, on average, the extent of market dominance has increased significantly since 2008. In developing and emerging economies, market dominance has increased less, but has remained persistently higher than in advanced economies. (Figure 3.2). These trends date back several decades. For instance, there is evidence that US market power started to increase in the 1980s, as mark-ups rose by 40 percentage points (reaching 61%), and profit rates increased from 1% of sales to 8% between 1980 and 2014, driven primarily by reallocation towards already high-mark up firms.31

In this context, the outbreak of the COVID-19 pandemic is likely to exacerbate concentration as it may force smaller and fragile companies to exit the market or lose market share in some sectors and reinforce ‘winner-take-all’ outcomes in other sectors, reducing space for innovation and new entrants as well as potentially reducing consumers’ benefit.

Innovation has also become concentrated. Only a handful of countries generate the bulk of new inventions, supported by a few smaller or regional innovators. Most other countries produce only marginal innovations or local adaptation of existing technologies. Over the past 20 years, large cross-country innovation divides have not diminished. Just five countries today produce together over 70% of global patent activity, and the top 10 countries generate over 85% of global patent shares (Figure 3.3). These levels of concentration have remained in place for the past 20 years, with the exception of China and Korea (Figure 3.4).32

The geographic distribution of innovation, while it may be the result of typical cluster development and the benefits of agglomeration, also highlights large intra-country innovation divides. Thus, innovation activity takes place overwhelmingly in metropolitan areas, leaving rural areas behind.33 This adds to the widening of the productivity divide between top companies and the rest—and leading to economies that are increasingly polarized and unequal.

Trade openness and the international movement of people have been on a declining trend since the financial crisis.

Countries responded to the 2009 global financial crisis by progressively increasing protectionism both in terms of trade and investments as well as on people movement. This tendency has crept in mainly through marginal adjustments to import practices—such as non-tariff barriers—and FDI rules, rather than through direct adjustment to tariffs rates. On average, business leaders in G20 countries evaluate that the prevalence of non-tariff barriers increased by 7.9% over 12 years ago (Figure 3.5) and that restrictiveness of FDI rules and regulations has increased by about 11.6% over the same period (Figure 3.6).

A similar trend is visible in terms of the ease of hiring foreign labour. Since the 2009 financial crisis, most countries have progressively tightened migration policies, limiting companies’ access to the international pool of talent. As a result, business executives in advanced and emerging countries alike have reported that hiring foreign labour became significantly harder in 2009–2010 and has remained at lower levels since then (Figure 3.7). In about 30 countries out of the 141 covered by the GCR, hiring foreign labour has become significantly harder than it was in 2008–including in Austria, Switzerland, Denmark, Italy, Iceland, Singapore, the United Kingdom and Sweden (among advanced economies), and India, South Africa, Botswana, Colombia and Peru (among emerging and developing economies).

The health crisis has further exacerbated the decline in international openness trends. Countries have restricted access to people even more during the pandemic, and the “prevalence of non-tariff barriers” indicator is one of the aspects that declined the most in G20 economies between 2019 and 2020, together with other indicators of international openness (e.g. rules on FDI, collaboration with other companies). As an example of the change in policy-makers’ mindset, the shortage of personal protective equipment (PPE) triggered by the pandemic, has induced governments to issue temporary export bans and consider reshoring production deemed as strategic.34

Although most health-equipment export bans have already been partially removed and health-related restrictions in the movement of people are likely to be lifted as the health crisis is resolved, there is a risk that protectionist policies and mindsets will stick. For instance, policy-makers of different countries have announced support to re-shoring of industries within national borders, and over 30% of business leaders in several G20 economies expect value chains to be less globalized than today (Figure 3.8).

Taken together, recent and longer-run trends in trade and the movement of people point to a lower commitment to international collaboration. As signalled by episodes of disengagement from the international community (e.g. Brexit, withdrawal from international environmental agreements) the space for effective international agreement has shrunk. This will be particularly crucial at a time when political will is needed to find common solutions on a broad set of topics (e.g. environmental targets, international taxation, vaccinations).

As noted in previous editions of the report, globalization and openness will remain important factors for global prosperity, but governments need to ensure better support to those who have been losing out to rapidly advancing globalization and technological change. In the new context, governments will also need to support those small and medium-size businesses that have lost out to the current shock of new restrictions and de-globalization.