3 years ago

Coronavirus exposes global economic vulnerability

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As the outbreak of novel COVID-19 virus turns into a global pandemic, major stock markets around the world suffered their worst performance since the 2008 financial crush. It is feared that unless globally coordinated measures are put in place rapidly - both to contain its spread and to offset its economic impacts - there could be dire consequences for people and economies.

GROWTH DISRUPTIONS: The Organisation for Economic Cooperation and Development (OECD) has warned that the coronavirus outbreak could halve the global economic growth this year to 1.5 per cent, the slowest rate since 2009.

The OECD has cut its 2020 growth forecast for China to a 30-year low of 4.9 per cent, down from 5.7 per cent in November. The International Monetary Fund (IMF) downgraded its growth forecast for China to 5.6 per cent in 2020 - its lowest level since 1990. Economists, polled by Reuters between 7-13 February, expected China's economic growth to slump to 4.5 per cent in the first quarter of 2020, down from 6.0 per cent in the previous quarter - the slowest pace since the financial crisis.

Meanwhile recently released data from China's National Bureau of Statistics show that Manufacturing Purchasing Managers Index (PMI), a widely used measure of factory activity, plunged to a record low of 35.7 in February. Such a deep contraction is expected as hundreds of factories were shut down in response to the coronavirus outbreak.

The head of the World Trade Organisation (WTO) expects "substantial" impacts on the global economy, as the world's second largest economy accounting for 19.1 per cent of global GDP (based on PPP) or,17 per cent at current exchange rate, and for about 13 per cent of the global trade slows considerably. Therefore, many economies are likely to witness outright recessions.

IMPACT ON DEVELOPING ECONOMIES: Developing countries, especially those dependent on commodity exports and global supply chains, are particularly vulnerable.

The impact is expected to be more severe for 21 African countries, the IMF defines as 'resource-intensive' where growth have already slowed to about 2.5 per cent. A slowing Chinese economy had hit trade between Africa and China, which grew 2.2 per cent in 2019, compared with a 20 per cent rise a year earlier.

For Latin America which counts China as its largest trade partner, the key source of downside risk is further deterioration of the commodity terms of trade. The most exposed economies are Chile, Peru, and to some extent Brazil.

Asian developing countries linked to China through supply chains, raw-material exports, investment and tourisms will not remain immune, now that Japan and South Korea are also in the grip of the virus. India has restricted the export of 26 pharmaceutical ingredients and the medicines made from them, as the coronavirus outbreak plays havoc with supply chains.

GLOBAL SUPPLY-CHAIN DISRUPTIONS: Accounted for over 28 per cent of global manufacturing output, China has become the 'factory of the world'.  Its virtual shutdown is slowing the flow of products and parts from China, affecting companies around the world. Computer, smart phone, pharmaceutical and car manufacturers are experiencing production delays, and some are forced to temporarily close their factories as they cannot get components from China. Meanwhile, 94 per cent of the Fortune 1000 are seeing coronavirus supply chain disruptions.

But according to the Harvard Business Review, "the worst is yet to come". It predicts that the impact of Covid-19 on global supply chains will peak in mid-March, "forcing thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in the US and Europe".

COMMODITY PRICES DROP: Prices for commodities from natural rubber to coal have plunged in February as Chinese companies are cancelling orders. The new coronavirus outbreak is expected to further drag down prices.

The Wall Street Journal reports one of the worst routs in commodity prices in years, sparked by the coronavirus outbreak. Prices for some natural resources, such as crude oil, iron ore and other commodities have plumbed to new lows.

WORLD LESS PREPARED: Various countries are bracing for economic fall outs of COVID-19 virus. But they have very limited policy space after failing to engineer a robust V-shaped recovery from the global financial crisis (GFC) in 11 years.

China's central bank has already cut the country's benchmark lending rate in February. The US Federal Reserve has recently further loosened monetary policy, with others quickly following or expected to follow. While rate cuts may temporarily boost financial market indicators, they are unlikely to be of much help, with interest rates at historically low levels and central bank balance sheets already grown to outsized proportions.

Despite pursing fiscal austerity for nearly a decade, debt level continued to rise as economic recovery faltered. Tax cuts have further worsened the debt level as they failed to stimulate economic activities. Global debt rose to a historic level - estimated by the Institute of International Finance (IIF) to be around US$253 trillion or 322 per cent of global GDP (gross domestic product) at the end of 2019. Therefore, the scope for a "big boost" fiscal package is also limited.

COVID-19 virus' economic consequences are mixtures of supply side with demand side problems. Its global scale requires global response. But when the need is so acute, multilateralism is at its lowest point.

The G20 seems to have missed an important opportunity at its finance minister meeting in Riyadh, Saudi Arabia on February 22-23 to provide leadership. It promised only to "enhance global risk monitoring, including the recent outbreak of COVID-19" in its communique.

The IMF and the World Bank have recently announced emergency support packages. But one has to bear in mind, money coming from the IMF and the World Bank are loans, often attached with conditions favouring their influential shareholders. At the end, debt burden of developing countries is likely to rise if global growth remains sub-par.

DEEPER MALAISE: The coronavirus exposed vulnerabilities that have been building up for decades. Since the 1970s when finance began its domination with the collapse of the Bretton Woods system, the focus of governments turned away from real economy (e.g. decent jobs) to inflation, debts and deficits. This has seen progressive moves away from public provisioning to reliance on the private sector.

As for the health sector, the shift has rendered national health systems seriously inadequate to deal with health emergencies both in developed and developing countries. For example, health authorities in Australia warned that hospitals - and medical staff within them - were already operating at capacity, and there was no room for any additional surge. Similarly, it is feared that medical facilities in the US would become overwhelmed with an influx of cases.

On the other hand, ordinary citizens, unable to meet ever-rising out-of-pocket health expenditure, have become increasingly indebted. Therefore, the virus outbreak will likely have serious impacts on common people.

Decades of real wage stagnation while executive salaries sky-rocketed, resulted in an unprecedented rise in inequality and wealth concentration, as well as household indebtedness.

The rising debt levels have made national economies and ordinary citizens hostage to the international finance capital, and whims of stock markets.

LESSONS FOR DEVELOPING COUNTRIES: Developing countries advised to open their economies to transnational corporations and finance capital should be concerned about deeper integration. Impacts of a crisis or catastrophe in one corner of the globe can spread rapidly to other parts.

Therefore, the ladder of global supply chains to climb out of poverty or underdevelopment can be slippery or dangerously unreliable. International capital flows can behave unpredictably destabilising domestic economies.

Perhaps it would be pertinent here to reflect on the insights of John Maynard Keynes, one of the designers of the post-War global economic governance architecture that produced the golden age of stability and economic expansion for about three decades.

Keynes had doubted the benefits of unfettered globalisation as claimed by its ardent promoters. His doubts arose from the experiences of globalisation in the early 20th century that ended with the Great Depression and World War II.

Therefore, Keynes did not wish "to be at the mercy of world forces working out, or trying to work out, some uniform equilibrium according to the ideal principles, if they can be called such, of laissez-faire capitalism". He became increasingly doubtful about the magnitude of benefits of international division of labour for a wide range of industrial and agricultural products.

In his essay on 'National Self-sufficiency', Keynes wrote in 1933, "Ideas, knowledge, science, hospitality, travel - these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national".

This does not mean complete autarky, but indicates the need for national development strategies, including industry and agriculture policies and regulation of finance - both domestic and international.

Anis Chowdhury, Adjunct Professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.

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