“The COVID-19 crisis has been a brutal reminder that, for all of our wealth and technological mastery, we are still vulnerable to catastrophic tail risks. To ensure future prosperity, we must adopt a growth strategy that places collective risks front and center, rather than treating them as an afterthought.” – ‘Minding the perils of progress’ by Daron Acemoglu
Global economic systems that under Neoliberalism, for many decades now, had pushed back the role of governments in terms of focused planning, and in evolving institutions and regulations that incentivized organizations/corporations specifically, and economic agents generally, to pursue economic goals that allowed reaching outcomes that were not driven by short-sighted economic gains, but rather those that led to sustainability, reversed the ravages of climate change, and reduced inequality.
The risks of a neoliberal policy framework facing economies had come to the fore quite clearly during the Global Financial Crisis of 2008/09 (GFC), when pursuit of speculative and short-sighted economic gains in the banking sector and capital markets, which in turn did not address the huge downside risks involved in the shape of, for instance, on how weak the relationship was of such investments for the real sector that produced needed tangible output and jobs, and remained unmindful of the weak repayment capacity of economic agents and corporations, given the risky nature of investments, and the big proportion of borrowing relative to the repayment capacity.
Yet the world hardly learnt from that jolt, and there was little inward thinking by policymakers almost everywhere – national policy outlets, or multilateral agencies – to reverse this neoliberal mindset. Resultantly, according to the International Monetary Fund (IMF), while the loss in global output stood at 1.9 per cent as a result of GFC in 2009, the loss from the pandemic is expected to be much worse, whereby the global economy is expected to shrink in 2020 by 4.9 per cent; even more than what was earlier expected by the IMF in April, when it projected real GDP growth rate globally for 2020 at negative 3 per cent, which in turn underlines the fact that global economy is facing very uncertain times.
Instead, as a result of neoliberal policies adopted by policymakers that let mostly unregulated ‘market signals’ dictate all, instead of also keeping in view the overall needs of economy and society, and that did not allow a multi-disciplinary approach in formulating economic policy; where both the developed and developing countries did not evolve policies that enabled proper preparation for instance against a pandemic that we are seeing now. Covid-19 has come as dark clouds over economic growth prospects.
As national statistics with regard to second quarter data of 2020 start pouring in the damage to economic growth has been exceedingly profound globally in terms of output loss. Surveying this data reveals that among rich countries, the UK became the worst hit from the pandemic in terms of economic growth. In a recent Wall Street Journal article “UK economy shrinks by more than any other rich country,” Jason Douglas points out in this regard: “The country’s gross domestic product shrank 20.4% in the second quarter, equivalent to an annualized rate of 59.8%, its statistics agency said Wednesday. In the same period, US and German output declined by around 10%, while Italy lost 12%, France 14% and Spain 19%.” At the same time, negative economic growth rates were quite small, relatively speaking, for all these countries during the first quarter of 2020, whereby, for UK it stood at negative 2.2 per cent, Spain and France at negative 5.2 per cent and negative 5.9 per cent, respectively, Italy at negative 5.4 per cent, Germany a lot less at negative 2 per cent, and US at negative 1.3 per cent.
When compared to the data on economic growth from the first quarter of 2020, the decline in economic growth in these countries was quite small, showing the deep dent that these economies has received from the severity of the pandemic; which underlines the immense need for governments to be more prepared in terms of economies that planned in a long-term manner, something which was seen missing in the prolonged delay of policy in realizing the advances coronavirus-based outbreaks since the very first in the shape of SARS way back around 2002. The world seems to be paying from the ‘greed of the few’, for which the demos in developed countries with greater roots of democracy, particularly, are also to blame for lack of activism to attack this elite capture, and push for reversal of neoliberal policies, which for one, allowed big pharmaceutical companies to go for short-term gains by manufacturing body creams, and not vaccines.
The pandemic has deeply affected growth rates in emerging and developing economies as well. According to IMF’s July 2020 update of World Economic Outlook (WEO), “Following the release of the April 2020 WEO, the pandemic rapidly intensified in a number of emerging markets and developing economies, necessitating stringent lockdowns and resulting in even larger disruptions to activity than forecast… First-quarter GDP was generally worse than expected (the few exceptions include, for example, Chile, China, India, Malaysia, and Thailand, among emerging markets, and Australia, Germany, and Japan, among advanced economies). High-frequency indicators point to a more severe contraction in the second quarter, except in China, where most of the country had reopened by early April.”
Another faultline that the pandemic has exposed in terms of being a significant cause of denting growth in times of great vulnerability is that countries that are dependent on a narrow base driving economic growth and jobs are in particular at severe risk. This has been amply shown by the economic devastation being faced by many countries in Latin America and the Caribbean that were mainly dependent on tourism and hospitality industry.
In a recent Project Syndicate published article “Latin America’s triple sudden stop,” Eric Parrado highlights: “A mobility tracker developed by the Inter-American Development Bank for 20 Latin American and Caribbean (LAC) countries shows that between the second week of March and the third week of June, the number of people travelling more than one kilometre daily fell by levels ranging from 22% in Brazil to 48% in Chile. Many people have been unable to earn money or spend it… Travel restrictions have also affected international businesses and tourism… Tourism, which accounts for one in ten jobs and an average of 18% of GDP in the smaller LAC countries, is also in a slump. It is still unclear when the sector will be able to reclaim its vital role in the region… It is highly likely that Latin America and the Caribbean will suffer a large recession this year, losing 8-10% of GDP, implying that the region will take more than three years to recover to pre-pandemic GDP trend levels.”
In his inauguration speech to the Mexican Congress on December 1, 2018, Andres Manuel Lopez Obrador, the then and current President of Mexico hit the nail on the head in terms of the direction the world must take to become far more resilient, and better prepared, in both avoiding and dealing with crises of the sort of GFC and the Covid-19 pandemic, when he said: “We will do all we can to abolish this neo-liberal regime”.
Among others, a concrete advice to governments for undoing the neoliberal assault is given by Danny M. Leipziger in his article “Economic growth strategies beyond Neoliberalism: do we need new models for the 21st century?” in these words: “The primary prerequisite for success is being able to link longer-term strategic directions with medium-term economic management, and this may require the coordination of economic ministries under single senior leadership of a deputy prime minister or equivalent, the clear vision of where the country wants to be in 10 years time, reliance on technocrats rather than politicians to implement policies, and the monitoring of those policies on a systematic basis… What has changed, however, is the previously held belief in the advanced economies that unfiltered markets will yield optimal results and broad improvements in welfare. The US is a clear example showing how weakened regulation, asymmetric management of moral hazard behaviour versus bailouts in the financial sector, tax avoidance, and basic perversions of good government by lobbyists has robbed the capitalist mantra of some its gloss.”DR OMER JAVED, "Global economic growth woes in the midst of pandemic," Business Recorder. 2020-08-14.
Keywords: Economic growth , Economic activity , Economic systems , Economic agents , Economic gains , Capital markets , Pakistan , WEO , Chile , China , India , Malaysia , Thailand , GDP , IMF , GFC