By Kalim Siddiqui

Introduction

The Covid-19 pandemic has triggered the sharpest and deepest contraction of GDP (Gross Domestic Product) in the history of capitalism as globalisation has gone into reverse. International supply chains, which were once the exemplars of organised production and the backbone of trade, have collapsed; an emphasis on the national economy is back. Overseas travel and tourism have almost stopped entirely. Within the last few weeks, tens of millions of workers have become unemployed and millions of small businesses and their suppliers have closed down. In Europe, the banks, railways, airlines, airports, hotels, restaurants, and pubs are on the verge of bankruptcy. The global financial markets have been plunged into turmoil, share prices have collapsed, and foreign capital investment has halted. Oil prices have crashed on international markets as demand for crude evaporates. This fall has been exacerbated by an inopportune price war between Saudi Arabia and Russia.

Although some countries are now beginning to move slowly towards easing lockdown restrictions the effects of the pandemic have already destroyed the livelihoods of many and have damaged the prospects for future growth. Key components of globalisation have either ceased to function properly or have disappeared completely.

The world’s highest official coronavirus death tolls have been seen in two countries, namely the United States and the United Kingdom. This was unexpected because both of these countries had time to prepare after warnings from scientists and cautionary examples from China and Italy. Moreover both countries have a strong research base, access to vast resources, and millions of scientists, engineers, and medical professionals, yet were still unable to deal with the pandemic effectively.

Global Economic Crisis

The question is how bad will the downturn become? And how soon will the economic recovery begin? Will the recession be double dip, also known as W-shaped downturn, i.e., drop twice before it recovers to its previous growth rate, or more like an L-shaped scenario, otherwise known as a ‘depression’ i.e., a deep recession with no recovery for several years, just as Japan witnessed since the early 1990s (Siddiqui, 2015a). All indicators tell us so far that the crisis is going to deepen and will most likely resemble the L-shaped scenario. We should not expect a return to business as usual.

Last week the IMF (International Monetary Fund) warned that the world economy is facing its worst recession since the ‘Great Depression’ of the 1930s with output likely to fall sharply by as much as 6.5% in 2020. Gita Gopinath, the IMF’s chief economist, said the crisis could knock US$ 9 trillion (£7.2 trillion) off global output within the next two years. (See Figure 1 and Figure 3) For all of us who lived through the Asian Financial Crisis of 1997, these warnings will bring back stark memories of currency crashes, property prices tumbling and millions out of work and the wealth that was built up in decades disappearing in a matter of months. The covid-19 pandemic economic crisis will be even worse – our generation’s Great Depression.

The IMF says governments must help these households and firms survive because the impact of the coronavirus will be “severe, across the board and unprecedented”. The IMF also predicts that the annual growth of the emerging economies will fall sharply. (see Figure 3) The Fund said this scenario could trigger a downward spiral in heavily-indebted economies. It said investors might be unwilling to lend to some of these nations, which would push up borrowing costs. In fact, only a few countries in the world have that sort of financial power to deal with this. Many are grappling with huge populations, limited financial resources, and the very real possibility of political instability as their people get sick, hungry or both.

The US economy is expected to contract around 6% by the end of this year (Siddiqui, 2019a), which is its biggest decline since 1929 and an evaporation of 30% of aggregate demand over the next three months is anticipated. However, a quick return to work could lead to an increase of number of deaths in the US, with little or no reversal in these projected economic outcomes.

To understand the adverse impact of the corona pandemic on the economy, we need to analyse its effect on different industries. Consumption makes up 70% of the US GDP, but consumption has dropped as businesses close and as households postpone about major purchases as they worry about their finances and their employments. In the US, investment makes up 20% of GDP, but businesses are postponing future investment as they wait for full picture of the corona. Tourism music, sports, entertainment, and restaurants constitute 4.2% of GDP. With restaurants and film theatres are closed and the manufacturing sector constitute nearly 11% of the GDP, but most of this is now disrupted, because global supply chains industries and companies have shut down in anticipation of reduced demand.

According to the IMF forecast, the US economy will shrink by almost 6% this year, compared with a contraction of about 7% in the EU countries and 5% in Japan, while the other experts estimated an annualised second-quarter decline in the US could be as much as 40%. However, if the government were not spending several trillion US dollars to keep businesses afloat, wages to unemployed and benefits to poor sections of the society, the damage would be worse. Over six weeks has passed since national lockdown was declared in UK to limit the spread of Covid-19, during which time it has become clear that the country is also heading for its deepest recession since the ‘Great Depression’.

The US and UK governments have pumped trillions of dollars into their economies and have reduced interest rates to combat recession. For instance, the UK government has launched a job retention scheme to pay up to 80% of the workers’ wages. Nearly 400,000 companies have applied to pay nearly 3 million people through furlough payments, which have cost the UK government £2 billion until now. There is also a similar scheme to compensate five million self-employed workers. Unfortunately, many millions will not be covered under such plans. For businesses, the government has provided up to £300 billion of loans although few of these have so far been awarded by the banks responsible for processing them.

The Office of Budget Responsibility (OBR) has predicted that the pandemic crisis could cause a 35% fall in GDP. In fact the economic loss depends on the length of lockdown measures. If lockdown lasts for three months, then GDP will shrink by 13% for 2020. The OBR also predicted more than 2 million people could lose their jobs. David Blanchflower, a former Bank of England rate-setter, has predicted 6 million job losses (i.e. 21% of the workforce). The budget deficit will rise to an unprecedented level and could reach £273 billion by the end of 2020, which is nearly 14% GDP.

The impact of the virus and lockdown has been very different across industries and parts of the UK. Tourism, hotels, restaurants, entertainment, and transport are among the long list of sectors which have been hardest hit by this pandemic. Furloughing is also relatively higher in the North East of England and in London, and South-East England. These current economic variations highlight the need for recovery policy which takes account of local socio-economic needs. Corona pandemic has highlighted the importance of skills. Over decades, in the UK the neoliberal policies, including austerity and over-reliance on the market have proved to be ineffective. But currently millions are facing unemployment, the government need to find ways of help people to find jobs.

The South European countries namely Greece, Italy and Spain, could see their economies contract by as much to 9-10 percent by next spring, while unemployment rates could reach as high as to 19-20% (See Figure 2). The Chinese economy is expected to expand only 1.2% by the end of 2020, which is China’s slowest growth since it embarked economic reforms in 1978 (See Figure 3).

Due to the fall in the demand, the factories are stopping to produce and they do not carry out production. As a result, investments decline, there would be another round of reduction in incomes and consumption levels. So, if jobs and incomes collapse, so do consumptions and savings. But, some consumption has to continue, so people withdraw their savings and past deposits from the banks and financial institutions. A vast majority of the workers in the developing countries are working in the unorganised sector and the poor have low incomes and as their incomes stop, their consumption drastically falls. For example, in India at present, the workers who are now migrating from the big cities to their villages where they feel that their families will at least get food. This model of uneven development, which forces people to migrate to big cities to find employment, has to be re-examined after the pandemic.

In India, the world’s second largest population faces coronavirus with too little money and too few resources for the needs of its people and economy (Siddiqui, 2019b). A large number of people are facing hunger, unemployed, and complete loss of income (Siddiqui, 2019e). The government money offered to support businesses and workers is insufficient to the task and nearly half of the package of measures consists of things already included in an existing scheme. The Indian government does have 77 million tons of grain in buffer stocks, which means there is plenty available for distribution without risking inflation, but the government is reluctant to distribute food among the poor households.

Once lockdown is slowly lifted in India, the government must put more money into village-based employment programmes so that immigrant workers who have returned to their villages from mega-cities like Mumbai, Delhi, Bangalore and Chennai can find some means of livelihood. Subsidies should also be extended to SMEs, especially those supplying essential goods and services. There is a need to reorient India’s economic growth strategy on the basis of its strong internal market in agriculture, which provides jobs to nearly half the country’s workforce. Aagricultural growth has the potential to boost demand and thus employment in other sectors too (Siddiqui, 2018a; also see 2017). A great deal of attention paid to economic growth rates in India in recent years, while the on-going agrarian crisis is being ignored (Siddiqui, 2015b).

During the last two decades the agriculture sector in India has witnessed crisis in such as decline in rates of growth, rising numbers of farmers’ suicides, declining prices of several crops, and a widening gap between the agriculture and non-agriculture sectors. The agriculture sector is experiencing unprecedented crisis with stagnation or declining rural employment growth and as a result, food security and employment opportunities for the rural poor have been eroded. The agriculture sector plays an important role in the Indian economy and its better performance is crucial for inclusive growth. This sector at present contributes only 17% of the GDP, while it provides employment to 57% of the Indian work force (Siddiqui, 2019b).

For successful inclusive growth and development, agricultural growth is a pre-requisite. It is important to implement land reforms, improve institutional credits and increase investment in rural infrastructure, to assist small and marginal farmers and also to diversify the rural economy. Until a level playing field is created across the world, otherwise trade liberalisation in agriculture will simply prop-up developed countries farmers at the expense of farmers in the developing countries like India. The neglect of agriculture in India could and must be reversed through a policy of government remuneration procurement prices along with the use of tariffs to insulate domestic food grain prices from world price fluctuations. Furthermore, planting trees on unused lands could improve the quality of air and the overall environment whilst also providing additional employment opportunities in areas where they are now sorely needed.

At present in India, there is a large stock of foodgrains with the government and also bumper autumn crops are being harvested, which means there no danger of inflation. The levels of in­equality are very high in India, and the wealth taxes are non-existence. There is the current low level of India’s tax-to-GDP ratio, then when the recovery begins taxes on the rich has to be raised to mobilise the resources to repay the debts. However, if debt-financed expenditures are not undertaken, then recession will intensify and turns into a depression. Therefore, a large fiscal stimulus is an absolute necessity in the current context and without such a stimulus, the humanitarian crisis would intensify.

In India, as elsewhere, the lockdown has reduced social interaction, leading directly to a fall in output and employment. This measure mitigates the physical impact of disease but exacerbates the economic crisis. Hence, the government must intervene to flatten the recession curve to mitigate the adverse impact of the pandemic.

The coronavirus was detected last December in China and the world had time to prepare for the pandemic in the manner China had shown to be effective in confronting it. Other East Asian governments, such as Singapore, Taiwan, South Korea and Vietnam, adopted highly successful policies to fight the spread of Covid-19 without causing massive economic disruption. However, the West refused to learn from these examples and failed to take any strong measures to prepare for and to act against the spread of the coronavirus. The two countries supposedly best prepared for a pandemic, the US and the UK, ranked first and second in the Global Health Security Index, performed poorly and proved incapable of handling a rapidly-developing emergency situation. Eventually, the clear evidence of success in East Asia and also in Germany forced even the most reluctant governments to impose lockdowns and to increase the number of people tested for coronavirus. Even so, testing and personal protective equipment (PPE) remained restricted owing to the lack of strategic stockpiles and national manufacturing capability and therefore health staff were left to cope with excessive workloads without the health and safety provisions they had a right to expect.

Economic Policy Failure?

The bankruptcy of neoliberalism is clearly exposed by vastly different responses to the covid-19 pandemic of the world’s two most economically powerful countries. The US was reluctant to take immediate measures to tackle the pandemic and has seemed confused about the way forward ever since, while China from the beginning gave state institutions full responsibility to contain the virus and took decisive measures that led to a successful outcome, at least in the interim.

This pandemic has proved once again that the neoliberal attitude toward public policy deprives societies of the resilience they need to withstand large-scale disruption. At present the private sector in the advanced and in the developing economies has become supportive, and even desperately enthusiastic, for government spending. The proponents of the free market and opponents of government intervention in economic policy are now pleading for unlimited public spending to support asset prices and to save businesses and the economy.

When capitalism faced crisis and a falling rate of profit in the 1980s, it opted for globalisation and the transfer of production from North America, Europe and Japan to take advantage of low wage economies, low regulation, and much higher rates of exploitation available in developing countries (Siddiqui, 2016; also see 2019c). During periods of falling interest rates capitalists compete for financial assets leading to an increase in asset values, which are then used to support further borrowing, more investment in financial assets, which further inflates their value, all without generating any productive economic activity. Consequently, since 2008, productivity across the advanced economies has stagnated and GDP growth has been lower than any decade since 1950 (Siddiqui, 2020a; also see 2020b). At the same time debts have grown enormously, particularly in the developing economies. For example, according to IMF, the total debts of the 30 largest developing economies has reached US$ 72.5 trillion, an increase of 168% in the last ten years.

Around the globe desperate measures are being taken by national governments and international agencies to support the financial system with little provision for ordinary citizens in the developed world and often no provision at all in the developing world. At an emergency submit for the G20 – G7 and emerging economies including China, India, Russia, Brazil, Turkey and Indonesia – on 26^th March it was declared that “we are injecting over US$ 5 trillion into the global economy”. As the COVID-19 pandemic continues the rich countries now are planning to pump more money i.e. US$ 9 trillion to help businesses and people to get through the current economic crisis, which is US$ 1 trillion more than announced last month (see Figure 4).

The European Central Bank (ECB) will follow expansionary fiscal policy in the form of deficit spending. Economic expansion is to be backed by Eurobonds. This increased spending will keep business solvent and provide social security measures for workers. The IMF is considering emergency funds for developing countries which could amount to US$ 50 billon. However, these IMF loans are to help with “external financing gaps”, which means they are designed to bail out foreign creditors, not the people of the debtor countries. The harsh terms and conditions that invariably come with these loans will add to the crushing burden on the ordinary people of those countries unlucky enough to receive them.

In early 2020, the world economy was already slowing down, including even the best performing advanced economy, the US. The pandemic hit the economy after nearly four decades of excessive reliance on market forces to achieve greater efficiency. This neoliberalism fostered deindustrialisation and virtual collapse of the manufacturing base, while financial sectors grew to unsustainable proportions (Siddiqui, 2017; also see 2019d). Inevitably, this gross sectoral imbalance left the US and the UK unable to produce enough ventilators and personal safety equipment for their doctors, nurses and care workers.

The pandemic has revealed the pitfalls of capitalist globalization and has restored an understanding of the importance of sovereignty, national economy, and domestic markets. Even so, the potential for cross-border movements of finance has led to further pressure on countries in the developing world to restrict fiscal deficits even in the midst of global economic collapse. As a result the crisis will have a more adverse impact on the lives of the majority of people in Africa, South Asia and Latin America, who have no welfare benefits to protect them, and who rely on incomes drawn from unorganised sectors that have not enjoyed any government support. In addition the exodus of money from developing countries into US dollar dominated assets results in a depreciation of their currencies and thus increases the amount of their overseas debts, which are US-dollar denominated (Siddiqui, 2020a). At least 102 countries have approached the IMF for financial support to deal with the covid-19 pandemic.

Conclusion

Capitalism as an economic system is based on individualism, self-interest, greed and competition. It provides optimal conditions for the prosperity of elites on the assumption that the broader population will gain “trickle-down” benefits not otherwise available to them. In the midst of a pandemic in which governments have had to secure employment, incomes, supply chains, and the health system, whilst also supporting the financial system and the wider economy it has become painfully obvious that free trade and markets are incapable of supplying the resilience and core competencies that societies require and their populations demand.

Finally, it seems that Keynesian policies are back after four decades in the wilderness. Key services and utilities must be owned and managed by the government to ensure that basic needs are met and that essential services serve the people rather than profit. Public services must be expanded to create a society based on community, solidarity and respect for nature. Along with such policies, there is also need for progressive taxation so that the putative “wealth creators” who have benefitted from four decades of neoliberalism have the opportunity to contribute fully to the society that has supported them so generously.

About the Author

Dr Kalim Siddiqui is an economist, specialising in International Political Economy, Development Economics, International Trade, and International Economics. His work, which combines elements of international political economy and development economics, economic policy, economic history and international trade, often challenges prevailing orthodoxy about which policies promote overall development in less developed countries. Kalim teaches international economics at the Department of Accounting, Finance and Economics, University of Huddersfield, U.K.. He has taught economics since 1989 at various universities in Norway and U.K.

References:

• Siddiqui, K. 2020a. “The US Dollar and the World Economy: A critical review”, Athens Journal of Economics and Business. 6(1): 21-44. January, https:doi:10.30958/ajbe/v6i1.
• Siddiqui, K. 2020b. “A Perspective on Productivity Growth and Challenges for the UK Economy”,Journal of Economic Policy Researches 7(1): 1-22.
• Siddiqui, K. 2019a. “The US Economy, Global Imbalances under Capitalism: A Critical Review”, Istanbul Journal of Economics 69(2): 175-205, December. ISSN 2602-4151.
• Siddiqui, K. 2019b. “The Economic Performance of Modi’s Government in India: The politics of Hindu right”, World Financial Review, July/August, pp. 12-26.
• Siddiqui, K. 2019c. “Economic Transformation of China and India: A Comparative Political Economy Perspective”, Asian Profile, 47(3): 243-259.
• Siddiqui, K. 2019d. “Government Debts and Fiscal Deficits in the UK: A Critical Review” World Review of Political Economy, 10(1): 40-68, Pluto Journals. DOI: 10.13169/worlrevipoliecon.10.1.0040.
• Siddiqui, K. 2019e. “The Political Economy of Inequality and the issue of ‘Catching-up’” World Financial Review, July/August, pp. 83-94.
• Siddiqui, K. 2018a. “Capitalism, Globalisation and Inequality”, World Financial Review, November/December, pp. 72-77. ISSN 1756-3763.
• Siddiqui, K. 2018b. “U.S. – China Trade War: The Reasons Behind and its Impact on the Global Economy”, The World Financial Review, November/December, pp.62-68. ISSN 1756-3763. http://www.worldfinancialreview.com/?p=36411.
• Siddiqui, K. 2017. “Financialization and Economic Policy: The Issues of Capital Control in the Developing Countries”, World Review of Political Economy 8 (4): 564-589, winter, Pluto Journals. DOI: 10.13169/worlrevipoliecon.8.4.0564.
• Siddiqui, K. 2016. “Will the Growth of the BRICs Cause a Shift in the Global Balance of Economic Power in the 21st Century?” International Journal of Political Economy 45(4): 315-338, Routledge Taylor & Francis.
• Siddiqui, K. “Political Economy of Japan’s Decades Long Economic Stagnation”, Equilibrium Quarterly Journal of Economics and Economic Policy 10(4): 9-39. DOI: http://dx.doi.org/10.12775/ EQUIL.2015.033.
• Siddiqui, K. 2015b. “Agrarian Crisis and Transformation in India”, Journal of Economics and Political Economy 2 (1): 3-22. ISSN: 2148-8347.