Covidonomics: Macroeconomic policy and geopolitics in the wake of the coronavirus

Photo: Reuters

The extent to which the 2019-nCoV acute respiratory disease pandemic has captured the global imagination can hardly be overstated. 

Not since the 1918 Spanish flu outbreak have public health systems in countries as far apart as China and Iran and Italy been so completely overwhelmed. 

As of March 25, 452,156 coronavirus cases (confirmed) have been diagnosed worldwide, with 20,494 reported fatalities.

However, the economic and geopolitical upheavals that Covid-19 seems poised to bring about in its wake might end up defining our decade, much more indeed than its obvious epidemiological impact. 

The Wuhan coronavirus delivers a one-two knockout punch to an overleveraged world economy in the shape of simultaneous shocks to aggregate demand – a direct result of the necessary lockdowns to mitigate extreme disease transmission – and aggregate supply, through major disruptions to global supply chains. 

International integration and multilateralism have already been placed under attack in recent years by populist leaders such as Trump, le Pen, Putin, Farage, and Modi, but nothing quite animates protectionist politicians as the global outbreak of disease. 

Over the past three decades, globalisation-on-steroids has fostered an unprecedented centralisation of market and supply chains, creating a system in which a single point of failure can disrupt the manufacturing of consumer goods: Apple's recent difficulties with Foxconn and iPhone manufacturing are a case in point. 

In the immediate aftermath of the US-China trade war and the feeble "Phase One" interim arrangement, this will cause manufacturers around the world to rethink China as the Ground Zero of basic assembly and possibly put US-China "decoupling" on the fast track. 

While this provides considerable opportunity for countries like Bangladesh and Vietnam to attract manufacturers eager to reduce their China exposure, firms' indirect exposure to US-China trade through domestic input-output linkages affects their responses to tariff announcements. 

This could simply induce a lot of OECD countries to repatriate manufacturing entirely and rely increasingly on automation. 

Simply put, the East Asian export-led growth path may no longer be available to the vast majority of developing nations. 

Pessimistic animal spirits have shown themselves in recent weeks with the Dow Jones index recording its sharpest points drop since 1987. 

The global shipping industry slowed to the point that a greater tonnage of container ships was idled around the world in February than during the worst points of the 2008 financial crisis. 

Noted analyst Nouriel Roubini has warned that a greater economic catastrophe than 2008 is now all but certain, and a deeper crisis than the Great Depression of 1929 cannot be fully ruled out. 

Let us begin with an examination of the Chinese situation: the delayed, if highly effective, response to the outbreak brings into sharp focus certain pathologies of its repressive political system. 

Communist Party of China officials are working overtime to shift the global narrative surrounding their delayed and often harsh response to the outbreak by championing its eventual (and tenuous) success. 

China is even beginning to provide material aid to countries afflicted by the pandemic, in particular to Italy (a BRI member) and Spain. 

But the fact remains that as far back as March 2019, Chinese scientists Yi Fan, Kai Zhao, Zheng-Li Shi, and Peng Zhou of the Wuhan Institute of Virology and UCAS Beijing had warned that it was "highly likely that future SARS- or MERS-like coronavirus outbreaks will originate from bats, and there is an increased probability that this will occur in China". 

Seven weeks in the initial stages were allowed to lapse, and five million people moved out of Wuhan in that period. 

Dr Li Wenliang, an early whistleblower, sought to alert people of a mysterious respiratory disease in December 2019, only to be reprimanded by local officials and forced to confess to "rumour mongering" and recant his initial observations. 

He later succumbed to the same "rumoured" coronavirus, leading to an unprecedented call for free speech on Weibo, the Chinese microblogging platform. 

Dissident writer Fang Fang's Wuhan Diary on Chinese social media details the harrowing nature of life around mass deaths and under a stringent lockdown. 

On the back of the Hong Kong protests, international uproar over re-education camps for Uyghurs in Xinjiang, the bruising trade war and intense arm wrestling over Huawei, and the slowing of the Chinese economy with a rising credit-to-GDP gap (often regarded as the best single early warning indicator of financial crises), President Xi Jinping finds himself staring at the People's Republic's most daunting existential crisis since the 1989 Tiananmen Square pro-democracy uprisings. 

China's GDP shrunk by 13 percent in the January-February period alone. Xi's ambitious $1 trillion infrastructure project, the Belt and Road Initiative, has also had to bear the brunt of the PRC's Covid-19 response trajectory. 

A freeze on the flow of Chinese labour is a significant factor in these disruptions. 

China will likely continue to face significant tradeoffs between public spending on domestic health and economic recovery and its financial subsidies for the Belt and Road Initiative in its response to the crisis. 

To put it bluntly, this could be China's Chernobyl.

Meanwhile, central banks around the world have engaged in aggressive monetary expansion, with the US Fed leading the way, cutting interest rates almost to zero and committing to "unlimited quantitative easing". 

But unlike the 2008 crisis, most central banks (including the Fed) are out of ammunition and are running perilously close to the zero lower bound constraint. 

Once the zero lower bound binds, the impact of shifts in demand on output and investment are magnified, because conventional monetary policy can no longer act as a shock absorber. 

In such cases, the economy experiences a liquidity trap. 

However, aggressive fiscal policy – in particular, policies that sustain consumption and investment – can be of help. 

The Senate passed an unprecedented $2 trillion stimulus package, which would give direct payments to most Americans, expand unemployment benefits, and provide a $367 billion programme for small businesses. 

The British Chancellor of the Exchequer Rishi Sunak announced among other things that his government would establish a coronavirus jobs retention scheme for all employers, large or small, that will cover 80 percent of wages, up to 2,500 British pounds a month, something unheard of even during the Second World War. 

Restoring full employment, however, is likely to come at the cost of overshooting any inflation and fiscal deficit targets, even risking stagflation. 

But most governments have responded with wartime urgency.

Last but not least, the coronavirus exposes vulnerabilities across the board, from increased risk of zoonotic disease due to accelerated human encroachment upon animal habitats to weak public healthcare systems. 

Conditions for informal and temporary workers remain woefully precarious almost everywhere. Vulnerable refugees and people in urban slums are cramped in facilities where social distancing is an unaffordable luxury. 

Panic buying and understocked inventories make shortages in essential goods and food riots a distinct possibility.

More than just a disease, Covid-19 reminds us of the need for public transparency and social solidarity. 

As in Albert Camus' "The Plague", we are reminded that in times of crises, freedom and civic duty become one and the same. 

One thing is clear: the world after the spread of the coronavirus will be radically different from the one that preceded it.

Sahasranshu Dash is an independent researcher associated with the Department of Economics at Ravenshaw University, India, and the South Asia Institute of Research and Development at Kathmandu, Nepal