Understanding the Impact of COVID-19 on the Global Economy

By Pratyush Chaturvedi

INTRODUCTION

The calamity that comes is never the one we had prepared ourselves for.[1]

This is a calamity. A calamity not witnessed previously in generations. The Covid-19 pandemic is certainly unprecedented in terms of scale, consequences, and infectivity. A leading cause for this is the increased internationalization of the world community. SARS-CoV-2 is a virulent strain of the coronavirus that causes Covid-19, an illness that may lead to mild symptoms varying from fever, cough, cold to severe ones like respiratory failure, diarrhoea, etc., and can lead to death.

The bubonic plague of 1347, famously known as the Black Death, can easily be characterized as one of the deadliest epidemics to have hit mankind, taking a toll on over 75 million lives.[2] However, the extent of the plague remained mostly within the boundaries of Europe. The influenza virus of 1918, which was more widespread than its predecessors, affected around one-third of the total global population as the virus spread from France to other parts of Europe, North America and China.[3]

However, the scale and infectivity rate of the novel coronavirus is unparalleled, for a disease which originated in Wuhan, China has now affected around 188 countries and territories.[4] With no respite evident in the infection numbers, Covid-19 continues to wreak havoc on multiple nations and has crippled various economies as well. This article will throw some light upon how the Covid-19 pandemic has and shall continue to trouble the global economy.

A BREAKDOWN OF THE BROKEN

Global lockdown

In the 14th century, during the plague, merchants travelling on ships were made to spend a period of 30–40 days on their vessels as an effort to ensure that they do not spread or contract the disease. This practice of isolating an individual to a specific area for prevention came to be known as quarantining.

To fathom quarantining an entire nation: with multiple cases being reported each day and the death toll increasing at a rapid rate, various states to prevent their healthcare systems from collapsing imposed a nationwide lockdown, starting with Italy.[5] This included suspension of international and domestic public transportation, prohibition on public gatherings, restriction on trade of non-essential goods and services, etc. Economic ramifications are certain and have already become noticeable across various domains.

Rapid unemployment

A study of the 2008 global financial crisis shows that the unemployment rate does not display sudden spurt. The recession which started in the first quarter of the financial year had an unemployment rate of 5.5% in May 2008 which went on to increase to a high of 6% by the end of 2009 when the recession had already ended.[6] The answer to this phenomenon lies in the simple concept of business cycles. Businesses are reluctant to hire a workforce when they are sceptical of the economy entering the expansion phase of the business cycle.

The Covid-19 situation seems to be slightly different with governments issuing directives to ensure that both public and private sector employees are provided for despite the lockdowns. However, such measures only come in the form of directives. The private sector is not legally bound to either retain their employees or continue providing them salaries and wages. In India, unemployment rates have touched a record high of 27% in May compared to the meagre of 6.7% during mid-March.[7]

Supply chain disruption

To explain supply chain disruptions simply, imagine an industry that manufactures mobile phones in China. For this purpose, it procures raw materials from Vietnam and Taiwan, then sells it to a distributor located in Germany, who then forwards these finished goods to wholesalers and retailers across the country. Now, due to an emergency in Vietnam, the supplier is unable to provide raw materials to the Chinese assembler which in turn would lead to the manufacturer procuring these raw materials from other suppliers which may or may not be as profitable. The emergency has thus disrupted the supply chain.

Due to the pandemic, several industries and manufacturers have had their supply chains disrupted. This is especially due to the increased globalization of the manufacturing sector as countries like China have almost created a monopoly over certain goods. This disruption has brought about a halt in the production process across various industries and therefore, the secondary sector as a whole is suffering massively. In a survey conducted in March 2020 by the Institute of Supply Chain Management, 75% of the companies have reported either a direct or indirect form of supply chain disruption due to the ongoing pandemic.[8]

The Slump in market demand and shrinking profits

The social responsibility of a business is to maximize the wealth of its shareholders.[9]

To make the situation tougher, the market demand has fallen drastically to the extent of almost propelling the global economy into a state of recession. Several factors are considered to determine whether or not the global economy has entered a recession, this includes a decline in inflation-adjusted per capita GDP along with signs of vulnerability in industrial production, market demand, capital flows, oil consumption and unemployment.[10]

A key component in understanding market equilibrium is that of demand. Sudden fall in market demand can frenzy businesses into a state of chaos. A slump in demand is equivalent to a fall in the number of goods and services sold, and to minimize their losses, manufacturers reduce their production level, output level, capital invested, labour engaged.

International energy crisis

The energy sector, traditionally perceived to be stable and static to change, has fallen prey to the pandemic with oil prices plunging to record low levels. The International Energy Agency (IEA) released a report detailing the impact of Covid-19.[11] It remarked that this “once-in-a-century crisis” has taken a severe toll on the global demand levels. The West Intermediate Texas (WIT) futures contract, a grade of crude oil used as a benchmark in oil pricing, saw global price levels of oil fall by 300% to $39 per barrel.[12] The primary reason for this was due to the low level of transportation taking place across various countries due to the lockdown. With the storage capacities for crude oil about to be maxed out, there are perhaps fewer options available for both large and small petrostates but to reduce the production levels.

Emerging economies and FDI

Most countries bank upon their manufacturing sector for economic growth and the current pandemic seems to have hit industries the hardest. The United Nations Conference on Trade and Development (UNCTAD) has predicted that the negative effects of the outbreak would be primarily seen on the energy, automotive and airline industries.[13] China and India compete extensively in the manufacturing sector and are also heavily reliant on Foreign Direct Investment (FDI) to ensure sustainability. However, the UNCTAD has also estimated that global FDI levels are bound to fall by around 5%–15%, implying that emerging economies are likely to suffer severely due to the pandemic.

GLOBAL SOLIDARITY vs. NATIONALIST ISOLATION

The Covid-19 pandemic has brought nations across the world at a threshold where they must decide whether in the process of rebuilding their economy, they would adopt an open border approach or would be apprehensive of foreign trade and immigration. There are several aspects to this predicament. First, China, which can easily be characterized as a modern-day economic powerhouse, has faced severe backlash from the international community due to its initial handling of the coronavirus outbreak. This has resulted in reports suggesting that major manufacturers from the United States, South Korea, etc are withdrawing from China and finding other alternatives.[14] The US-China trade war which eventually escalated during the pandemic will certainly alter the scenario of a China-led globalization model. 

Second, countries like India, which are major exporters of pharmaceutical drugs and other medical equipment have to determine if they will start hoarding medical necessities produced locally or are going to ensure that these are distributed and rationalized proportionately across nations.  The recent tussle between US and India surrounding the supply of the 29 million units of hydroxychloroquine[15] can be cited as an appropriate example demonstrating the dilemma that Indian drug manufacturers are facing.

What would happen to global growth if nationalist governments restrict international trade? Here is a possible theoretical chain of events, if leaders of these governments, to protect their sovereign interests, push for reforms where businesses have to try and sustain in their local market. This would result in a major setback to emerging economies who are heavily reliant on strong export. A toll on export implies a much lower growth rate. Dissatisfaction amongst the producers may then lead to immigration. Where would these producers immigrate to? Open markets with lesser encumbrances, higher growth prospects, and lesser restrictions on trade. Therefore, cooperation between States is undoubtedly the most sustainable method of rebuilding the global economy.

Liquidity injections and care packages by multilateral

Foreign Assistance is not an end in itself. The purpose of aid must be to create a condition where it is no longer needed.[16]

Growth projections for 2020 are looking grim. With the global economy showing a negative growth rate of −1.0% and a further contraction of another 3% are on the cards if the situation does not subside in the latter half of the year. Multilaterals like IMF, World Bank, OECD, are, however, trying to accelerate the downtrodden economic conditions and minimize the damage accrued

For the protection of the interests of emerging economies and low-income countries, the International Monetary Fund(IMF) announced an issue of $1.3trillion for increasing state reserves and maintaining liquidity.[17] The World Bank joined the fray by making available a $12billion care package as the pandemic reached 60 countries, with developed countries like Italy and Spain on the verge of a health and economic collapse.

CONCLUSION

 According to Geology, fault lines in the earth’s crust are caused due to tectonic shifts which can be observed as fractures on the surface of the fault zone. The Global economy is full of these fault lines that are a result of the feeble and unsustainable capital structures and policies that economies have adopted. The fractures are more evident than ever as the world fights an enemy which it was least prepared to go against. Yet, all hope must not be lost. As Roosevelt famously said:

“We have always held to the hope, the belief, the conviction that there is a better life, a better world, beyond the horizon.” [18]
We mustn’t hesitate to take further strides as we have nearly verged on this horizon.

Opinion expressed by the authors are personal.


[1] Mark Twain, Letter to Olivia Clemens (Aug. 16, 1896).

[2]Black death ‘discriminated’ between victims, ABC Science (Jan. 29, 2008)http://www.abc.net.au/science/articles/2008/01/29/2149185.htm.

[3] Oxford JS, The so-called Great Spanish Influenza Pandemic of 1918 may have originated in France in 1916, Philos Trans R Soc Lond B Biol Sci. (Dec. 29, 2001).

[4]Coronavirus: Which countries have confirmed cases?, AlJazeera (July 27, 2020) https://www.aljazeera.com/news/2020/01/countries-confirmed-cases-coronavirus-200125070959786.html.

[5] Coronavirus: Italy extends emergency measures nationwide, BBC News (Mar. 10, 2020) https://www.bbc.com/news/world-europe-51810673.

[6] Bureau of Labor Statistics, U.S. Department of Labor, Unemployment in December 2008, The Economics DAILY, https://www.bls.gov/opub/ted/2009/jan/wk2/art02.htm (visited May 09, 2020).

[7]  Unemployment Rate in India, CMIE, https://unemploymentinindia.cmie.com/ (last visited July 27, 2020, 23:30PM).

[8] COVID-19 Survey: Impacts On Global Supply Chains, Institute of Supply Chain Management (Mar. 11, 2020)https://www.prnewswire.com/news-releases/covid-19-survey-impacts-on-global-supply-chains-301021528.html.

[9] Friedman M., The Social Responsibility of Business Is to Increase Its Profits, in Corporate Ethics and Corporate Governance 173-178, Springer, Berlin, Heidelberg (Zimmerli W.C et al. eds., 2007).

[10] Stijn Claessens and M. Ayhan Kose,Recession: When Bad Times Prevail, International Monetary Fund,https://www.imf.org/external/pubs/ft/fandd/basics/recess.htm (last visited May 9, 2020).

[11] IEA, Global Energy Review 2020, (Apr. 2020) https://www.iea.org/reports/global-energy-review-2020.

[12] Saloni Sardana, Oil plunges 321% into negative territory for the first time ever as demand evaporates, Markets Insider (Apr. 20, 2020, 11:39 AM) https://markets.businessinsider.com/commodities/news/us-crude-oil-wti-falls-to-21-year-low-1029106364.

[13] UNCTAD, Trade and Development Report Update, The Covid-19 Shock to Developing Countries: Towards a “whatever it takes” programme for the two-thirds of the world’s population being left behind (March 2020).

[14]Kenneth Rapoza, China Set To Lose Tons Of Businesses Post-Pandemic, FORBES (Apr. 20, 2020)

https://www.forbes.com/sites/kenrapoza/2020/04/20/china-set-to-lose-tons-of-businesses-post-

pandemic/#1b1585bf13f4.

[15] Hydroxychloroquine: India agrees to release drug after Trump retaliation threat, BBC NEWS (Apr. 7, 2020)

https://www.bbc.com/news/world-asia-india-52196730.

[16] Foreign Aid, THE BORGEN PROJECT https://borgenproject.org/foreign-aid/ (last visited May 9, 2020).

[17] Phil Thornton, Policy makers urged to build support for $1.4tr IMF liquidity injection, GLOBALCAPITAL (May 7,2020) https://www.globalcapital.com/article/b1lj91sdgxyjk5/policy-makers-urged-to-build-support-for-14tr-imf-liquidity-injectionity-injection.

[18] BARBARA MCFARLAND & HAL MCFARLAND, FAREWELL TO ROSEGATE: THE JOAN KIGER STORY 44-45 (AuthorHouse, 2014).

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