COVID-19 in the world economy: momentum and retreat

The adoption of new technologies in the context of protectionism and nationalist policies has gained momentum.

05/07/2020
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This note aims to contrast what the COVID-19 pandemic has meant in economic and social terms and the pattern it may give for a change in economic relations. The adoption of new technologies in the context of protectionism and nationalist policies has gained momentum. The different realities faced by low- and high-income countries and sectors lead to different responses and consequences. The new projections where all economies contract while China expands will be a source of conflict between East and West. The fact that there is one remaining economy that pulls the world economic growth indicates that international economic relations will veer east.

 

As anticipated (http://www.obela.org/en-analisis/covid19-the-beginning-of-the-domino-effect), growth forecasts for the world economy at the beginning of the year were optimistic. At the end of June, the world output has a yearly projection of -4.9% (IMF) -5.2% (World Bank) and -6% (OECD). In worst-case scenarios, the latter two organizations foresee contractions of -8 and -7.7%, respectively. The International Monetary Fund anticipates that the United States will contract by -8.0% while China will observe a growth of 1.0%. The Euro Zone and Latin America are to contract by -10.2 and -9.4%, respectively. According to World Bank president Malpass, the year 2020 is the worst in terms of growth since the 1929 crisis and possibly since the 1872 Long Depression.

 

The impact on growth dynamics has been global. The experience of the pandemic in emerging economies, however, is far from that of advanced economies. The question is why governments with higher fiscal and monetary capacity to conduct countercyclical policies have similar growth results. One hypothesis is that they face simultaneous supply and demand shocks that cancel out the expansionary efforts of governments.

 

The difference in the structure of the labour market between advanced and emerging economies is evident. Developed economies have formal labour markets with a smaller informal edge. Emerging economies have high levels of informality that are strictly related to small and precarious legal markets. High levels of informality are closely related to the low taxing capacity of the governments of these countries. This situation generates a series of problems, such as the lack of access to universal health care or unemployment insurance. They are non-existent in emerging economies, which, under present conditions, prove to be a fundamental countercyclical factor in containing the loss of income resulting from the harmful effects of the pandemic.

 

The pattern of consumption is another aspect where there are marked differences, in terms of purchasing power and in the way purchases happen.  Higher-income sectors observe an explosion in the use of online shopping, including the supermarket, which allows individuals to remain confined. The payment instrument is the credit card. Lower-income sectors buy in markets, that are poles of contagion in the world, and they pay in cash. High-income segments travel privately, while the low-income population travels by public transport, which is now another pole of infection.

 

While in advanced economies, the implementation of new technologies allows the transition to new forms of consumption, subsistence income is a dominant feature in emerging economies. In the face of the lack of economic activities, loss of income and employment, there is no choice but to seek revenue in any way with exposure to the pandemic. For production and services, there is a strengthening of robotization, which allows for social distancing. This technological change occurs to a greater extent in advanced economies, but will happen sooner rather than later in emerging countries, aggravating formal unemployment.

 

The pandemic is beginning to generate a setback in terms of the Sustainable Development Goals (SDGs). Projections are for an increase in poverty, inequality will worsen, and restrictions on fossil fuel energy use will diminish to foster economic growth at the expense of the environment and climate change. The challenges are to generate an economic revival that promotes employment, sustainable agriculture, the reduction of global value chains, the increased use of renewable energy, and the discovery of a vaccine and treatment that are universal and free of charge.

 

- Oscar Ugarteche, Senior Researcher "C", IIEc-UNAM, SNI III Conacyt, obela.org coordinator Conacyt

- Alfredo Ocampo, Faculty of Economics, UNAM, Member of obela.org

 

Source: OBELA - Observatorio Económico Latinoamericano www.obela.org

 

 

 

https://www.alainet.org/fr/node/207663
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