Rashid A Mughal
WHAT started like a simple virus in China has
now engulfed the entire world in less than
three months, resulting in the death of almost 10,000 people and over 100,000 affected. The dreadful fact is that it is multiplying at geometrical progression in almost every country of the world. The number of dead every day in entire Europe and China has left doctors and paramedics helpless and flabbergasted. Whether it is a man-made virus or it has its origins in animals is still being debated. But the fact is that it has wiped out, to some extent, the gains China made during the past three decades. Nevertheless, the Chinese economy has the ability and the capability to absorb this shock. The response and remedy from Chinese leaders is not only amazing but the way they have managed to control this monster is an example for many. But the economic impact of this virus has now run in to billions of dollars, world wide. Just on one day-10th of March the shares on New York Stock Exchange lost 10% of their value and on 16 March, the trading was halted as the shares were in free fall.
Whether this week’s collapse of stock and oil prices will spiral into a much deeper economic crisis, perhaps even eclipsing that of 2008, depends on how the United States and other governments react. The United States has now, belatedly, taken drastic actions on travel and announced some support for businesses. But these are too late to prevent the Corona Virus from spreading and too little to stave off a deeper economic downturn. Swamping the markets with liquidity, as was done in 2008, is not going to resolve the problem this time. The markets are already awash in cash, and as was again demonstrated in early March, further cuts in interest rates no longer translate into growth. What is needed now is leadership that focuses on the domestic challenges and seeks to build international cooperation — rather than scapegoating other countries. How bad could this get? Breaks in supply chains, factory closings and worker quarantines have disrupted supplies. Restrictions on hospitality and travel, and fear regarding contagion have hit demand. Growth is being dragged down and could turn negative in a range of economies from Germany to China to the United States. The crippling of retail and consumer businesses could quickly escalate into bankruptcies, the downgrading of corporate debt and impairment of the balance sheets of banks. While this crisis is different in its origins from the last one, it is following a similar cycle of collapsing consumer and stock market confidence, leading to a spiraling down of demand, growth, employment and incomes. With central banks impotent and fiscal policy undermined by supply bottlenecks, novel approaches are needed.
According to Ian Goldin, an economist and Professor at Oxford University and author of “The Butterfly Defect” and “ Age of Discovery” , there is much that should be done immediately. Banks, supported by governments, should provide discounted loans and increase their tolerance of late repayments by businesses that risk bankruptcy because of the absence of supplies or customers, or because of late payments by creditors. Gig-economy and hourly contractors, estimated to include 57 million people in the United States, require particular help, and government should help employers to guarantee a basic income and to ensure that workers who are not currently entitled to sick pay — a quarter of the U.S. work force — are covered for the period in which they are unable to work.
These and other wide-ranging targeted interventions, including tax cuts for the lowest-income earners, would restore confidence and help working people and the businesses that could be devastated. The Government Accountability Office estimates that the 2008 crisis cost the U.S. economy over $22 trillion, including a $750 billion bailout for banks. This time, governments should use targeted interventions of a different kind to prevent the fears of a total economic collapse from turning into a prophecy. In Britain, this week’s budget commitment to mitigate the impact of the Corona Virus provides a powerful demonstration of what can be done, even though the $38 billion allocated is too small compared with the $650 billion bailout given to British banks after 2008. However, national policies alone, adopted by government, will not be enough to forestall a global catastrophe. For that, countries around the world must work together. When the markets crashed in September 2008, President George W. Bush called the leaders of China, Germany, France and Britain, securing a collective response and participation in a crisis summit. Actions agreed to by 20 heads of state, including an unprecedented spending boost by China, helped avert an even greater disaster. The concerted collective response calmed markets. The contrast with today could not be greater.
President Trump has responded belatedly and erratically to the pressing domestic needs. Internationally, he has isolated the United States and, by turning his back on the world, has stymied an international response. Since the 2008 crisis, governments around the world have become more nationalist and have adopted a zero-sum approach to international politics and economics. Yet today’s crisis shows isolationism escalates, rather than reduces, foreign threats. The collapse of American leadership could not come at a worse time. After 2008, Britain led the European response to the crisis, but now Brexit has ended Britain’s ability to lead Europe, and squabbling among key countries means that the European Commission cannot speak for its 27 members. China has been turned from an ally of the United States in dealing with common threats like finance and climate change into a perceived enemy. The trade war and the United States’ withdrawal from the Paris Climate Agreement are the most visible expressions of wider tensions that have been eroding not only global growth but also the potential for cooperation.
— The writer is former DG (Emigration) and consultant ILO, IOM.
