Covid-19: four economies and the call for system change

By Vittoria Malgioglio and Dalila Cataldi

Three months have passed since China first locked down the city Wuhan, in a bid to prevent the spread of Covid-19. In only two months, the world changed so drastically that we still don’t know the exact magnitude of what has come upon us, and between partial and full lockdowns, only one thing is clear: it’s a huge shock for the whole world economy. The effects of this are already palpable for the most vulnerable classes, and what everybody really wants to know is: what will happen in the next months? What are governments likely to do? What should I ask for as a citizen?

The answers can be very different according to the area: we asked four different professors, who focus on Latin America, Europe, East Asia, Middle East.

Latin America:

María Gabriela Palacio: Assistant Professor of Latin American Economics at Leiden University.

“The COVID-19 crisis intersects with aspects of precarity that were brewing in Latin American economies. The region had witnessed an increase in informal activities in a way that leaves informal workers without economic security.” In other words, irregular workers cannot simply take sick leave or cope with unexpected emergencies.

— Almost half of the Latin American Population has no access to social security —

“Social (or rather, physical) distancing and lockdown remain privileges for formal workers covered by social security — note that more than 47 per cent of the Latin American population has no access to social security.

However, do Latin American governments have the fiscal space to cope with COVID-19? Given the levels of interconnectedness with global markets, the impacts of this crisis range from a reduction in trade volumes, drop in commodity prices, disruption of global value chains and a surge in capital outflows next to a tightening of financial conditions, as financial markets adapt to increased uncertainty and fragility.”

Experts predicted “an increase in the number of people living in poverty to jump from 186 to 220 million in 2020. For Latin American governments, coordinated efforts are needed to lift some of the financial constraints, including debt-resolution strategies.

Economic, political and social forces mediate a crisis like this, with uneven consequences on human lives, resulting in a system of make live or let die. When we eventually step out of this crisis, we would have learned about the multilateral order in which we operate, our governments and their priorities, and mostly, ourselves.”

Middle East:

Christian Henderson: Lecturer of Middle Eastern economics at Leiden University.

In the longer term state involvement will have to continue if the economy is to be revived. At this rate airlines and travel companies are unlikely to survive more than two months without government support. Generally many sectors will suffer as a result of a collapse in demand. In some cases companies will have to be nationalised or given state aid.”

— The State is the only one that can prevent economic disaster. —

“The only actor that now has the means to prevent economic collapse is the state. High levels of unemployment will likely remain unless state investment creates new jobs.

Yet, government support for the private sector must come with stringent conditions, something which was absent from the bail-out package for banks following the 2008 crisis.

This mistake should not be repeated. Politically this is an opportunity to implement much needed progressive and environmental measures.

Recovery packages should consist of investment that allows a shift to renewable energy and the construction of affordable housing. States should ensure that the conditions of workers are improved by abolishing temporary contracts and raising the minimum wage.

Globally there needs to be a universal public health care system in order to prevent similar epidemics, and development aid should be allocated to poorer countries in order to expand their public health capacity and economic recovery.”

East Asia:

Dr. S. Shibata: lecturer of East Asian economy at Leiden University.

“One thing we can be sure about is that many economies will go into recession, and Japan is undoubtedly one of them. Even before the crisis, the Japanese economy was often associated with the long-term recession.

Already, in October 2019, the Japanese economy was experiencing a contraction and workers’ wages have been slow to rise.

Nearly 40 per cent of the workforce are employed as non-regular workers. This means that they work without long-term and stable employment contracts, and typically earning low wages.

— From 2008 to today, the same mistakes? —

Today, we are witnessing a trend similar to what happened in 2008, when non-regular workers are the first to be fired and forced to act as a “shock absorber” in the time of recession and crisis.

We are likely to see longer working hours for some workers, and an increase in the rate of unpaid wages and unpaid overtime. We can also expect a temporary increase in unemployment, despite there being a labor shortage in Japan.

We can also expect some employers, especially in the hospitality industry, to increase the trend towards automation as a result of the Covid-19 crisis, automation often leads to a situation where workers are required to work harder in order to handle the same amount of work with a smaller number of staff. And this has a tendency to worsen wages and working conditions, with non-regular workers likely to be most badly affected.

North America and Europe:

Dr J.Fynn-Paul: lecturer of North American economics, European economics, and macroeconomics at Leiden University.

“I would strongly argue that those who opted for a total shutdown have made several fundamental mistakes: they overestimated the danger this virus posed and fanned the panic; and they dramatically underestimated the social and economic damage posed by the shutdowns.

Even conservative news channels have bowed to public pressure, and keep putting up scare article after scare article.

Political leaders “also spread rumours to each other, anecdotally from their ‘doctor friends’ that hospitals are overburdened everywhere or soon would be (99% of them globally are not, nor will they be). This is sheer, internet-bourne panic.

— What happens when leaders panic —

We still don’t know the long term implications, but it might be that stocks rebound, as the virus subsides: after all, there is basically nowhere for money to go otherwise. But we still don’t have information on just how many businesses have been crippled, many of them permanently by this.

A self-inflicted total economic shutdown? This is the stuff of economists’ nightmares. Government shutdowns will not just have an effect on the stock market, which will probably recover soonish.

The problem is that governments are spending lots of money to bail out the markets, and they are going into debt.” And if governments have too much debt, “they have to cut social services to pay for it, so the government for years will cut services to the poor.

The other main tool to fight a sick economy is to lower interest rates — this makes money cheap so that businesses can borrow, and therefore spend more, which leads to economic growth and more jobs. But if interest rates are already at zero, then the government can’t lower them more.

So if the economy gets sick again, with interest rates at zero… What can you do to help it? You might just have to suffer through an entire great depression, before things will get better. That means 20 or more percent unemployment, and often, a lot of political unrest.

Most probably, it will be poor people who suffer from this the longest, especially in the US and other countries where the welfare state is weakest. It might also be the case that many small business owners will be hard hit. This is another major group to look out for.

Let me re-emphsize that this economic crisis, for the poor, is entirely artificial.

We could have sequestered the elderly, and let everyone else work, and the poor would have not been nearly as hard-hit as they are. Virtually none of them under 80 would have died.

To me, this whole crisis teaches some very important things. One scary lesson is that the government can, overnight, shut down the economy and society, even in a democracy. Secondly, most people are likely to jump right onto the public bandwagon more often than not.” Because of this, we need robust checks and balances on the government, coupled with as much critical thinking that we can possibly teach in schools and universities.

“But there is at least one silver lining. This is the realization that, if we wanted to, we could dramatically change our economic system, tomorrow.

This shutdown reminds me that as a society, where there is a will, there is a way.It will now be up to us to create idealistic, fun and inspiring leaders who can help us lead the way. Greta is a good start. But there is plenty of room at the podium.”

What we can extrapolate from these contributions is that the poor and non-regular workers are the first and most affected by this crisis. Yet, now we have the more opportunities than ever to change this uneven system into a more sustainable one. And if “where there is a will, there is a way,” it is up to us to get there.

Funder of The Hague X Beirut, passionate about communication and politics, but also wine and food. Living anywhere on the globe, with focus on MENA, China, EU.

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