The Unfolding of the Economy in the Coronavirus Era
After the financial crisis of 2008, the world is now facing the most difficult economic challenge yet, caused by the of COVID-19 pandemic. Governments all around the world have taken lockdown measures to avoid a humanitarian catastrophe. Many economists argue that this crisis is similar to the Great Depression of 1930s, while others argue that this is an unprecedented crisis, and being unprecedented makes it even more difficult to tackle.
Going through economy’s history we can see that economic crises have always been different from one another. Economic, social and political contexts change over time, and so produce different realities. It is no surprise that the world economy is struggling now that it found itself in a new economic environment in which Gross Domestic Product (GDP) does not play its previous role for the economy, economic growth does not necessarily affect the economy qualitatively, fiscal policies pose serious questions, in which the liquidity trap is present even more and monetary policy could not intervene conventionally…etc
According to the International Monetary Fund’s outlook, the economic contraction was 16% during the 2008 financial crisis, and the current one is 6%. To be clear, the crisis we are currently facing has caused less damage than the financial crisis of 2008. The fact that this crisis is unprecedented does not mean it is more serious. Each economic crisis is different from one another, as it occurs in different conditions and economic contexts, as well as seeks different types of policies and responses for the economy to recover.
The Liquidity trap has been a huge gap for Central Banks over the last years in order to raise their effectiveness while dealing with monetary policies. And if we look carefully, an interest rate of about 0% has practically no effect on the economy, at least in the short turn. The reactions of an economy are obviously based on the factors that influence its trends. Low rates of economic growth have led to low savings, economic uncertainty, unemployment, and therefore, the economy remains contracted. The limits of Central Banks conventional instruments are pretty obvious. There is no guarantee for their effectiveness. The Federal Reserve and the European Central Bank are using unconventional monetary instruments to support the economic growth. Thus, the liquidity trap is currently structural rather than temporary.
The global economy is also experiencing an important shift in the labour market. During and after the emergency, this trend could potentially intensify. Why? Because the digitalization of economy seems to be an alternative choice for businesses and workers in such a difficult time. The economy must be robust in difficult situations, and digital channels have undoubtedly contributed to the way the economy worked during the blockade. The shift towards digitalization of work environments began a few years ago and was obvious to everyone, including those with modest knowledge in the field of economics.
Emerging markets have been hit a lot by the lockdown of the global economy and the disruption of the international supply chain. Especially the South Asian markets, where a significant part of the global volume of retail products is concentrated. According to the World Trade Organization (WTO), trade disruptions will range from 13% to 32%.
National debt crises in emerging markets are not a novel problem. In fact, they have been steadily increasing over the past two years and are indeed resulting in “debt spiral”, as Joseph Stieglitz called it. In addition, some emerging markets, such as Argentina, have to face private debt as well.
An important factor affecting the ability of emerging markets to be resistant to foreign investors is related to the dependence on the US dollar as a borrowing and trading currency in international markets. We have to be honest: the dominance of the dollar in international finance is neither random, nor unknown. The US dollar dominates the international trade and finance since the end of World War II.
After all, what is noticed during the COVID-19 crisis is the lack of cooperation between governments all around the world, or, at least, the collaboration does address urgent matters. Even with such a humanitarian crisis, a national approach prevails, although the problem is common. The emergency response policies to COVID-19 vary from country to country. There is no reason to be surprised of the fact that there is a lack of coordination measures on an international scale, as nationalism and protectionism manifest in earnest.
In fact, the emerging protectionism has a direct impact on growth. The escalation of trade tension has had a significant impact on the global economy and has led to a decrease in the intensity of global supply chains. With the lockdown of the economy, demand, at least in the short term, seems to be problematic. The shock of the global supply chain may raise the question of the future of globalization. Protectionism has always been there, but the emergency situation of COVID-19 just gave it the opportunity to be noticeable.
Another issue of which governments are pretty wary, is a sharp increase of unemployment. Just before the crisis, unemployment rate in U.S. was at its lowest historic level since 1960. It has been at 7% In Europe. Unemployment is likely to exacerbate inequalities between and within countries. The most vulnerable part of society is the working and middle-class. The poor and the middle-class will be the ones to suffer most. According to Nouriel Roubini, in case of U-shape recovery scenario, the time required for the economy to recover will at least be till 2021, as well as in case of the L-shape scenario. In both cases, in a realistic, so as in a pessimistic one, all evidence warns of widening inequality, especially in advanced economies.
The purpose of this article is to emphasize that the global economic crisis we are going through is only one side of the coin. Governments and Central Banks should keep in mind that crucial and deep structural anomalies held the economy back before the COVID-19 did. The lockdown of the economy is temporary; the structural economic crisis is already constant in the global economy.
Edited by Hiba Arrame
