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Global economic prospects under Covid-19 crisis

Covid-19 has badly exposed the lack of interdisciplinary approach of mainstream economics – the theoretical basis for widely practiced economic policy, both at the level of most countries and multilateral institutions – whereby, as a result, the economic models being employed saw the coronavirus pandemic as an ‘exogenous’ shock.

It would have made more sense if the nature of exogenous shock was a sudden earthquake or flood – some natural disaster – or an unlikely war or conflict of a wide-spread nature, yet the possibility of a coronavirus-related pandemic happening was quite likely in the circles of public health sector; and for long time, given SARS coronavirus happened way back around eighteen years ago, and many dangerous versions of coronavirus epidemics happened after that, for instance, MERS coronavirus happened eight years ago.

Had economic thought process and policy been more open to other disciplines, and in this case to the field of public health, there would have been better preparedness in terms of managing the ‘great lockdown’ – as the April edition of International Monetary Fund’s (IMF) World Economic Outlook (WEO) puts it – that the world now finds itself in, as economic policy seems to be far behind in the race against Covid-19. Hope the discipline of economics will get back to its original political economic thought process, whereby it understood the importance of factoring-in the happenings and thought process of other fields.

In one important instance, therefore, the lack of adoption of this multidisciplinary approach by the IMF has meant that their global growth projections of as near as January 2020 have been totally toppled, mainly because the threat of Covid-19 was not internalized by economic models and policy. Hence, according to an opinion piece ‘The world economy is now collapsing’ in Financial Times by Martin Wolf, “In January, the IMF forecast smooth growth this year. It now forecasts a plunge of 12 percent between the last quarter of 2019 and the second quarter of 2020 in advanced economies and a fall of 5 percent in emerging and developing countries.”

The Global Financial Crisis 2009 (GFC 2009) had already exposed the many unrealistic assumptions of mainstream economics – not to mention the greed of the financial system, supported by a lack of regulatory framework for markets overall, as a result of a receding government control/influence under the neoliberal assault starting from the Thatcher-Reagan era – when according to the IMF the global economy saw a recession of 0.1 percent.

Yet, both mainstream economics, as taught in leading educational institutes of the world, and as employed in economic modelling in multilateral institutions like the IMF, did not revisit in the light of ever-higher voices from alternate/heterodox economic policy corners – one based on a political economic tradition of economics, which was pushed to the margins centuries ago under the surge of the scientific method – that started to take up greater space in academic research over the last few decades, mainly because of the negative fallout of neoliberal policies for an increasingly large number of economies, and especially after the GFC 2009.

Resultantly, this time around, lack of multidisciplinary approach appears to be having a significant say, as the global real GDP growth rate is expected to turn to negative 3 percent in 2020, making the current economic crisis the worst global economic crisis since the Great Depression of the 1930s. Here, projections for advanced economies are even worse at negative 6.1 percent, and emerging markets and developing economies at negative 1.0 percent. And that is only the ‘baseline’ scenario of the IMF, one which is optimistic about 2021 – where for that year it has projected global growth at 5.1 percent, of that of advanced economies at 4.5 percent, and emerging markets and developing economies at 6.6 per-cent – but which makes ‘quite hopeful’ assumption that economies globally will come out of this lockdown in a significant way in the second half of 2020. In a separate study, according to the World Bank, in the particular case of Pakistan, “Real GDP growth is projected to contract by 1.3 percent in FY20 as domestic and global economic activity slows down sharply in the last four months of the fiscal year. The outbreak of Covid-19 will impact growth beyond FY20. Under the baseline scenario, growth will remain muted in FY21 before reaching 3.2 percent in FY22.”

This is quite a hopeful projection for recovery in global economy in 2021, since initially the economists had assumed that Covid-19 pandemic will not cause long-term economic shut-downs, and therefore the global growth recovery would take rather a ‘V’ shape – a quick downturn in global growth, but quick upturn happening due to a relatively short need for lock-downs. But seeing that a more permanent safeguard against Covid-19 is only possible once a vaccine is made available for commercial use (where according to a top US scientist Dr. Fauci it would take another 12-18 months for a vaccine to become available) and it is not clear whether ‘herd immunity’ would guarantee, at least at this stage of research, such immunity that could last another wave of the Covid-19 even later this year, has drastically shifted economic thinking to a recovery more on the lines of a ‘U’ – one with longer recovery time – or of the likes of a ‘W’ shaped recovery – with waves of pandemic bringing with them huge swings towards economic slump.

Unfortunately, however, there appears to be a strong likelihood that Covid-19 will remain sticky for at least the short term, and large-scale lockdowns may have to be enforced a couple of times till the vaccine becomes available commercially, so the optimistic rebound expectations of IMF in economic growth for 2021 may happen later than that. Given this background, it is quite clear that the ‘unknowns’ are quite big, making it exceedingly difficult to rule out the forecast that the initial positive boost to global real GDP as the lockdowns ease – as IMF assumes in its baseline scenario – will face a number of ‘economic headwinds’ on the back of possible rebounds of the Covid-19 pandemic; especially for emerging and developing countries where the capacity health sector is already weak, and fiscal space is not that much.

Hence, the IMF offers three additional scenarios, and which are articulated by Martin Wolf in his same article in the Financial Times: “In the first, lockdowns last 50 percent than the baseline. In the second, there is a second wave of the virus in 2021. In the third, these elements are combined. Under longer lockdowns this year, global output is 3 percent lower in 2020 than in the baseline. With the second wave of infections, global output would be 5 percent below the baseline in 2021. With both misfortunes, global output would be almost 8 percent below the baseline in 2021.”

In the same vein, policymakers in Pakistan should also come up with different economic scenarios, and an accompanying funding strategy and overall economic policy for each scenario. In this regard, Pakistan should also work with the donor community to chalk out a debt relief plan for each of the possible scenarios. At their end, the donors should also come up with an effective framework to accommodate planning and mapping resources to enable this support, for each of the scenarios. Building reliable economic scenarios would also require the country to adopt some clearly defined thresholds based on scientific principles with regard to the time duration and physical extents of lockdowns. Moreover, these thresholds should be made public so that there is a greater sense of certainty, and little controversy regarding lockdowns. According to Gita Gopinath, Chief Economist at IMF, “Flattening the spread of Covid-19 using lockdowns allows health systems to cope with the disease, which then permits a resumption of economic activity. In this sense, there is no trade-off between saving lives and saving livelihoods.”

Hence, while it is important that government saves the poor and vulnerable from hunger generated by lockdowns that the government thinks is just beyond its capacity to both enforce and provide relief to the vulnerable segments, at the same time the legitimate needs of lockdowns should be compromised as less as possible – and if possible not at all – through improving the capacity of the relief effort on the part of the government, and the support it could get from the donor agencies.

Complacency in this effort may lead to premature ending of lockdowns that ultimately may expose people to a second wave of the Covid-19 crisis. Also, politics everywhere should take a backseat, and decisions on lockdowns should not be based on saving economies with a greater intention to win elections, than purely to help the people suffering from hunger. Already, there is a rising criticism that politics, and wrong market signals under the neoliberal assault, all allowed the pandemic to have a much greater impact than better preparedness and timely actions should have allowed.

In this regard, a renowned public intellectual, George Monbiot, in his opinion article ‘Our politics isn’t designed to protect the public from COVID-19’ in The Guardian highlighted the link between election financing of political parties by corporations and the impact of this on public policy and, in turn, in its capacity to deal with crises: According to the writer, “Politics is best understood as public relations for particular interests. The interests come first; politics is the means by which they are justified and promoted… Their purpose was to render governments less willing and able to respond to public health and environmental crises… While nobody has a commercial interest in the spread of coronavirus, the nature and tenor of the governments these interests have built impedes state attempts to respond quickly and appropriately.”

It is important also that a large-scale debt moratorium/relief is received by developing countries. Currently, for instance, IMF “approved immediate debt service relief to 25 of the IMF’s member countries under the IMF’s revamped Catastrophe Containment and Relief Trust (CCRT)… [which] can currently provide about US$500 million in grant-based debt service relief” for 25 countries, and it is hoped that it will be extended to a large number of needful countries, including Pakistan.

Improvement in global economic prospects indeed depends significantly on a meaningful debt relief effort towards the developing economies. But, before that, a meaningful debt relief effort by creditor countries and multilateral institutions is essential for keeping the needed economic support in the health sector of these countries to effectively fight coronavirus, which have traditionally been very weak. This effort must also address deep balance of payments issues that the current crisis is likely to create. Such a support from donors would also allow these countries to stand a better chance in this time of crisis to save themselves from future macroeconomic, growth and debt disasters.

Dr Omer Javed, "Global economic prospects under Covid-19 crisis," Business Recorder. 2020-04-17.
Keywords: Economics , Economic issues , Economic prospects , Economic policy , Global economic , Economic crisis , Emerging markets , GDP growth , Global growth , Financial Times , Environmental crises , China , Pakistan , CCRT , IMF

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