Global Economy

Economic impact of COVID-19: Everybody hurts

Print edition : May 08, 2020

People waiting to file for unemployment benefits at a workforce centre in Fort Smith, Arkansas, U.S., on April 6. Claims for such benefits broke records in the U.S. Photo: Nick Oxford/REUTERS

As the economic shock reverberates around the world, hunger and destitution are staring millions of people in the face. It is imperative for governments to come up with bold measures to re-energise the economy and to increase social protection benefits.

On April 9, Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), said that the world could easily slip into a terrible depression. “The bleak outlook applies to advanced and developing countries alike,” she said. “The crisis knows no boundaries. Everybody hurts.” There will likely be no recovery in 2020 and only a partial recovery in 2021. This assessment for a partial recovery is based on the hope that the global pandemic will begin to taper off by the second half of the year and that economic activity will restart as a consequence. The duration of the global pandemic is what will determine any recovery from the coronashock.

Half of the planet’s population is currently under a lockdown that could stretch out to additional weeks. In the United States, claims for unemployment benefits broke records: three million in one week, six million in the next, and millions more in the queue. Germany’s economists estimate that the country’s economy will shrink by at least 10 per cent; France’s Minister of the Economy and Finance, Bruno Le Maire, compared the situation to the “1929 crisis in terms of its severity, its global nature, and its duration”.

Ports across the world have begun to witness “blank sailings”: ships that begin their journeys and then do not finish them. Cranes are silent, trucks sit in parking lots, goods are moving but not at the rate at which they moved before the global pandemic. Lockdowns have resulted in congestion at ports as goods remain in containers, unmoved. Cruise ships sit in harbours; the likelihood of that industry starting once the all clear sounds is questionable.

The global supply chain has been damaged by the slowdown of production and of consumption. The World Trade Organisation (WTO) estimates that global trade volumes could fall by 32 per cent (for comparison, global trade volumes fell by 12 per cent during the credit crisis of 2008-09). A study by the multinational bank UBS found that China’s exports fell by 17 per cent in January and February; the reason for this, UBS notes, are “fewer working days, production suspension, and strict traffic restrictions imposed after the COVID-19 outbreak”.

The slowdown of trade has led to an increase of the costs of trade—moving goods from a factory or a farm to another country—by at least 25 per cent. The margin for profits for online firms and offline firms is between 0.5 per cent and 3.5 per cent, which means that many firms will not be able to make any profit as the cost of trade rises. Many retailers will try to move this increased cost to consumers, who will, as the WTO notes, not be able to absorb it because “demand is strangled by half the globe’s peoples being locked down, with many unemployed”. This will seriously damage global trade and, therefore, break the supply chain.

The International Labour Organisation (ILO) put out a report that suggested that at least 1.25 billion people were “at risk of drastic pay cuts and layoffs due to the pandemic and related lockdowns”. Worse yet is the ILO number of 2.7 billion workers, or 81 per cent of the global workforce, “currently affected by full or partial workplace closures”. This is a monumental number. Even larger is the ILO’s projection that workers are likely to lose an income of $3.4 trillion. With limited employment protections around the world and meagre disbursements of relief from governments, there is a serious problem before the world of hunger and destitution.

The United Nations released a study on April 8 along with Oxfam that showed that there is the possibility of a 20 per cent income or consumption contraction; this means that the number of those living in poverty will likely increase by between 420 million and 580 million. This will be the first time in 30 years that the numbers of those in poverty will increase, and the first time that the increase will have taken place so rapidly. There is increased pressure on governments to provide relief packages for those who have lost their jobs and slipped into poverty. But thus far what has been provided has been insufficient.

It is important to point out that the U.N.’s Food and Agriculture Organisation has said that there is no global shortage of food. Cereal production will break records; this is the third highest cereal crop since records have been kept. Stocks of major grains are almost 100 per cent higher than they were during the credit crisis. The break in the supply chain has certainly impacted processed food and meat products, but local food chains have been re-energised to satisfy demand (pressure to revitalise these local food chains will now increase). Anxiety about the crisis and a lack of money has meant that food prices have been dropping; sugar prices have fallen by almost 20 per cent, while those of vegetable oils have dropped by almost 15 per cent. It is not availability of food as much as it is the lack of money and confidence in the future that has slowed purchases of food, which can lead to an increase in hunger in some countries.

Economic Rescue Plan

Oxfam has produced a six-point Economic Rescue Plan that deserves wide reading. These points come in two parts.

The first part of the plan urges governments to give cash grants to people and to increase social protection benefits. The problem with this cash disbursement effort is that it can lead to price inflation; far better is the approach taken by States such as Kerala and countries such as Venezuela and China where the governments and civic organisations have distributed food directly to anyone who needs it. The second point in the plan is for governments to “bail out businesses responsibly”. This is a sensible proposition because once more governments have opened the spigot of cash for corporations and banks who have little intention to start spending immediately. Oxfam asks for priority to be given to small businesses. There needs to be a serious discussion about the nationalisation of sectors of the economy that have once more been seen as essential, such as medical care, and that are now asking for bailouts. If a government is going to pump money into a large corporation, it should certainly demand equity shares in the corporation.

To pay for this vast support, Oxfam asks for the suspension and cancellation of debt for developing countries. To supplement loss of foreign direct investment, Oxfam suggests that aid must increase to the level of 0.7 per cent of the gross domestic product of rich nations although they are now wary of spending in this direction because of their own contraction. Rather than talk about capital controls to firm up control over tax jurisdictions and then wealth taxes on the very rich, Oxfam asks for “solidarity taxes”. Such a tepid approach will not raise the kinds of funds necessary to deal with this crisis. What is needed is a much firmer hand that seeks to extract at the least $32 trillion from tax havens towards financing the social problems associated with this crisis.

Finally, Oxfam calls on the IMF to issue $1 trillion in Special Drawing Rights (SDRs) as “a one-off global economic stimulus”. This is a very good idea since SDRs are not a form of debt nor would they be absorbed only by the rich nations. When the U.S. and the world’s large central banks send cash into the world, it only goes to countries that account for 17 per cent of the world’s population. Even SDRs are not necessarily equitable; when the IMF issued 183 billion SDRs in 2009, almost 60 per cent went to the richest countries, while only 8.8 per cent went to low-income countries. Any SDR offering will have to be designed to reach the poorest states and not just the richest. The Centre for Economic and Policy Research (CEPR) in Washington, D.C., has gone ahead of Oxfam and called upon the IMF to issue $3 trillion in SDRs. “We’re calling on the G20, and specifically the United States, to support the issuance and allocation of 3 trillion SDRs by the IMF,” CEPR co-director Mark Weisbrot said. “This would be a quick and direct way to contribute to all countries’ capacity to contain the COVID-19 virus and avoid subsequent waves of contagion. SDRs would be a stabilising force and an economic cushion for the global health emergency.”

Boldness is necessary in these times. All eyes should turn to China, which has been able to manage the infection and to put a vast amount of resources towards people’s needs in the short term. How China has been able to fund the social programmes necessary during the long lockdowns should be a model for the world, but, of course, the socialist orientation of the Chinese government is far removed from the bourgeois order’s callous disregard for its population. Rather than learn from China, the attitude is now to malign China and blame it for the virus in the first place. This attitude is best described as “cutting off one’s nose to spite one’s face”.

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