Hyderabad: The coronavirus is throttling the global economy. In a matter of weeks, the highly contagious disease has pushed the world to the brink of a recession more severe than the 2008 financial crisis. The depth and duration of the downturn will depend on many factors, including the behaviour of the virus itself, public health responses, and economic interventions.
Given the extraordinary nature of the pandemic-induced crisis, experts anticipate the worst economic fallout since the Great Depression.
Sanjay G. Reddy, an associate professor of economics at the New School for Social Research in New York, spoke at length about the pandemic and its effect on the global economy.
The excerpts are:
Q. How is the present crisis unfolding in the US, both in terms of public health and its impact on the American economy?
Ans. The effect on public health remains to be seen. Estimates from some models suggested that with no action, at one point suggested that the mortality rate this year might increase by one third or a million deaths.
But that now seems unlikely, with latest official estimates suggesting that they may be only 60,000, which is an increase of only two per cent above regular annual mortality.
The gap between the original anticipation and the ultimate result gives some idea of the scope of the uncertainties that have been involved. The impact on the US economy is massive.
Unemployment Insurance claims, which are an indicator of joblessness, are being made at a historically unprecedented rate, having nearly 17 million (more than 10 per cent of the workforce) in only the last three weeks.
Many economists believe that the unemployment rate will cross the level in the Great Depression, of twenty-five present.
The impact on employment, earnings, and the fortunes of ordinary American families, who are more market dependent and have a smaller safety net than in most other advanced countries, will be enormous.
The support passed by the US Congress for ordinary Americans are likely to help a little but to be insufficient to the real increase in their needs as a result of the forced shutdown of businesses and loss of work opportunities.
There may well ultimately be increased homelessness, poverty and social problems, which will, in turn, have indirect health consequences.
The stock market reaction, which has been very volatile, swinging by amounts that are normally inconceivable (approaching at times ten per cent per day) shows that private investors are having great difficulty understanding what the long-term effects will be, and are being driven between optimism and pessimism (the 'animal spirits' of investors referred to by John Maynard Keynes).
Q. With respect to the world and Indian economies; what was its condition before COVID 19 struck, how is the pandemic affecting it today and what is likely to be the future of the economy with respect to the present crisis?
Ans. There were already many sources of fragility in the Indian and the world economy even before the pandemic.
In India, these included large debt overhangs, slowdowns in consumption and investment and potential vulnerability to outflows of foreign funds. Many of these features are present in other developing and developed countries.
For quite some time, there had been concern that it was time for a cyclical downturn, even though there had been considerable uncertainty about its timing.
The rollback of globalization as a result in part of the change of attitude to trade by the Trump administration in the US added to this atmosphere. In Europe, Japan and elsewhere there was tepid growth.
The pandemic has arisen in this difficult environment. It makes a global recession, almost a certainty, and it may become a depression.
How quickly the world economy can escape this outcome will depend in part on how quickly lockdowns are lifted and daily life normalized. Investors, should not expect business as usual, though. The estimates of the impact on India's economy have, in my view, been too optimistic.
My judgment is that India should prepare not just for lower growth but for a possible contraction, even a sizable one, if the global economy is unable to recover quickly.
Q. After the pandemic is brought under control, which sections of society are most likely to bear the brunt of the present economic crisis?
Ans. In countries as disparate at India and the US, although all have suffered disruptions to their day to day pattern of life, the most profound harm has been experienced by the relatively poor and insecure.
In India, these include daily or casual workers. In the west, they also include so-called 'gig' employees working as well as others with insecure or precarious employment and income.
But even employees with previously fairly secure jobs have experienced the brunt of closures of factories, restaurants, etc. or the difficulty of running farms, due to disruptions in access to inputs, labour, and final markets.
Of course, there has also been a huge hit to investors. The big worry is that there will not be a quick enough 'bounce-back' from these difficulties, even if restrictions are removed, for instance, because firms in trouble are closed permanently.
In order to prevent this, not only must there be normalization sooner rather than later (combined with targeted and well-designed measures to monitor and control the disease) but there must be adequate supports to ensure continuity of incomes, relief from demands from creditors, etc. This implies that the government will have to be involved in a wide range of supports to businesses.
It is not clear that the Government of India has been thinking along these lines to a degree that is in any way adequate, and state governments do not presently have the financial wherewithal to do all that is necessary.
Q. In the world and in India how will the pandemic impact employment opportunities for the people? Will this lead to large scale unemployment?
Ans. Once again, the key question is one of whether there will be permanent or only temporary effects of the crisis, which in turn depends heavily on what measures the government takes to regularize the situation soon and to provide needed supports to firms and to workers. In the world at large, large scale unemployment is already emerging, but it will take months to know the true extent of the fallout.
Q. How will this economic crisis impact Indians working and studying in the US? Will this affect the future prospects of Indians looking for opportunities in the US?
Ans. Undoubtedly, in the short run, the opportunities will be more restricted. As it is, many Indian low-wage workers in the United States are likely to have been affected adversely but even Indian professionals, managers, etc. will be affected, because of the scale of job losses in the US as a whole. Because of the restrictions on travel, the opportunity to come to the US to study and to work may, in any case, be affected adversely.
Many universities do not know whether they will be able to reopen even in the autumn and are worried about whether international students will want to come in the midst of the current uncertainty.
Q. You have studied the Indian economy and the inequalities prevalent in India, how are these likely to take shape in the future?
Ans. Much depends on whether the government is attuned to the issue and does anything to address it. The present government at the Centre has shown no inclination to take the issue of inequalities seriously.
Indeed, it has taken measures such as the abolition of the wealth tax, ironically when many countries elsewhere are considering instituting or re-instituting such a tax (spurred in part by the advocacy for such a tax by the French economist Thomas Piketty, whose work on inequality has drawn much attention) and it has become a popular demand, including in the US, where it was advocated by some of the Democratic Party candidates.
But in my view, more important than taxation is whether sufficient supports are given to small and medium-sized enterprises and ordinary workers to equip them to participate effectively in the economy.
Much more can be done in this area, where the government has taken a passive approach. In that context, the big players have taken all of the spoils, aided in part by their close relationship to the state.
Q. In the past few decades, the neoliberal rationale has been fine-tuning the idea of health care across the globe. How do you think this would change in the coming days?
Ans. I think that the pandemic has very much shown the inadequacy of the neoliberal approach to health care. Consider the case of India. There has been an enormous focus on curative care, most often at the tertiary or hospital level, in the health care sector in India in recent years. This is where the private sector actors are most dominant.
Indeed, even government programs such as Arogyasri have provided indirect financing for this sector. But the biggest need in a pandemic is for a primary health infrastructure capable of outreach, monitoring, follow-up, providing information and basic care - to bring about prevention and to control the spread of disease.
This has been notably neglected in India, as shown both by paltry spending and inattention to the quality of this infrastructure, with notable exceptions within the country (such as Kerala).
Q. As in any crisis, the poor and the informal sectors are the most affected in this pandemic. What should they demand from the governments and corporates in this situation?
Ans. I have addressed this question above to some degree, but let me add that the principle of burden-sharing must be central.
Measures to stop the pandemic have been undertaken on the premise that they were good for all, but some are bearing the cost more than others.
There must be some burden-sharing via government expenditures to support business, farms, and individuals but equally importantly designing better and more targeted policies that impede ordinary economic and social lifeless, as soon as possible. Cash transfers are nowadays a favourite solution in India for every problem but they are not a salve for all ills.
Q. What do you think will happen to the middle classes and lower middle classes?
Ans. There was already an enormous strain on the lower and middle classes in the advanced countries, as a result of stagnant incomes in many countries deriving from global competition from lower-waged and increasingly skilled workers in developing countries in the age of globalization, and the embrace in recent decades of policies which have been unfriendly to trade unions and other means of promoting the interests of workers.
The current economic crisis will deal a harsh blow to these very sections, and this may have significant economic, social and political effects.
Q. Do you think we will enter a fundamentally different socio-political situation by the end of this pandemic?
Ans. There is certainly that possibility. Unemployment rates on the scale that is emerging are potentially damaging to social and political stability, as was the case throughout the world in the Great Depression. Governments must be mindful that measures to promote the public health must be based on a sufficiently broad understanding of how the public health, and common well-being, will be best advanced by in the longer term.
Q. Scholars and commentators have been drawing parallels between the present economic situation and the 2008 economic crisis or the Spanish flu. Is such a parallel warranted or are witnessing something drastically new?
Ans. There are similarities and differences. The 2008 crisis was a crisis of demand more than of supply, ultimately caused by a collapse of investor confidence and freezing of financial markets, leading to a domino effect in various linked markets.
The 1918 influenza epidemic (which hit India especially badly) was a severe health crisis (leading to the loss of perhaps 2% of the world population) and was also an economic crisis (leading to declines of perhaps around 6% of GDP in many countries) but the effects may not have been long-lasting.
There were no lockdowns on the scale we have experienced now in 1918 so the economic consequences today may be worse.
However, mortality rates are likely to be very much lower in the current pandemic than in 1918.
Even the worst-case estimates of world mortality have been around 40 million people or somewhere around one half of one per cent of the world population.
The lockdowns today have created a combination of supply disruption and a demand disruption (because of lost income and employment and because people cannot go out to spend) and this makes the situation qualitatively different from both of the other crises.
Q. Governments across the world have declared economic packages to deal with the current crisis, how can we assess the relief package announced by the Indian government?
Ans. The central government's actions are welcome but inadequate. They also show an element of an afterthought, rather than of careful attention to the likely effects of the lockdown at the time of formulating the policy. The government appears to have been surprised by some of the effects, such as the movement of migrants to their homes on foot.
The delivery of food to all who need it will be difficult, since many of those who are deserving may not be eligible in the places that they find themselves.
Similarly, the cash transfers proposed are a patchwork that will help some but not others and which will be inadequate in many cases.
It also remains to be seen whether the administrative machinery can function as efficiently as required in the current situation.
Some states, notably Kerala, have done remarkably well at anticipating the people's needs and responding to them.
The entire approach to the crisis should be decentralized, with the central government providing a backstop and a source of funds and guidance, rather than trying to enact what should be done on a national level.
There also ought to have bee, and there should still be, much more thinking about the effects of public health measures such as lockdowns before implementing them.
Q. What is going to be the nature of impact across the economic and social spectrum? How will this impact the corporations, as well as a large section of Indians employed in the informal sector of the economy? Will this have a drastic impact on rural India, largely sustained by agriculture?
Ans. The crisis may well lead to the collapse of corporations, from startups (which have recently petitioned the government for more support to medium and large scale businesses throughout the country.
The global crisis may also soon begin to affect the country's inward investments and its foreign exchange position, which is presently healthy but can quickly deteriorate.
The impact on rural India may be massive. The collapse of export markets as well as internal markets (documented well by economist R Ramakumar at TISS among others) for specific crops has already been damaging.
The key to avoiding further harm will be rapid normalization, combined with suitable disease surveillance measures and responses (which would have been easier if basic health infrastructure had been stronger).
Q. Scientists are saying that vaccine is the best shot we have at returning to normalcy. And that's going to take several months to come out. How will the world economy change meanwhile? What do you think will happen in India?
Ans. A vaccine may take 12 to 18 months to develop as it is being suggested. Perhaps, there will be other medical discoveries that can be put to more immediate use. But many of these will also be massively expensive to roll out across the entire population.
Even mass testing, widely being proposed in the developed countries, will be a very expensive proposition, and hard to administer, in most developing countries.
This will be true even in India, despite its relatively advanced health technological capabilities in health care compared to many countries. Meanwhile, there is a lot of debate as to how serious the disease risks are, with enormous uncertainties at this time about the extent to which it poses mortality risks to the general population.
There may also be seasonal factors which could work to the advantage of India and other semi-tropical and tropical countries.
India also has an age structure (fewer elderly) which is favourable for having fewer deaths from the disease.
For all of these reasons, India should consider a more calibrated approach, focusing on safeguarding the elderly and other vulnerable groups, for instance by providing special support to their caregivers to stay at home, engaging in random testing and other data collection so as to quarantine or otherwise respond to the disease in specific local hotspots, and so forth.
But any policy approach should be revised in accordance with data and new knowledge, and subject to democratic deliberation and justification. Executive power can be an advantage but also a disadvantage in dealing with a public health emergency, Public understanding, consent and voluntary compliance is necessary for a public health campaign to succeed fully. Nowhere in the world has public health ever been advanced by coercion.
Q. Could this be a "portal" to an egalitarian world with welfarist governments? Or are we entering a dystopian world with extreme
surveillance, rationing of essentials, and heightened inequalities regulated by the state?
Ans. This is an excellent question. We are certainly in a moment in which there is enormous ferment. People in many countries view the existing institutions and elites as having failed and are looking for alternatives. These could indeed take the form of more expansive and inclusive social institutions and a new economic compact.
There is a very strong case for this from a public health point of view, as control of infectious disease illustrates: anyone who is left out is harm to everyone.
On the other hand, as you say, there are many signs of governments using this as an occasion to justify heightened surveillance and control.
As I have argued, the latter cannot ultimately be the basis of public health. Ultimately, one must motivate people to use their liberties well, rather than deny them liberty, and one must also provide them with the enabling conditions to do so.
The police who have lathi-charged migrants returning to their villages on foot in India offer a symbolic image of how a government's acts in the name of the public health can become a danger to public health itself.
Q. Even if we handle the pandemic well, we might get hit by climate crisis soon. We have to respond to these crises as a single unit of species, led by scientists and experts. The interests of businesses and politicians, which currently drive our world, will have to take a backseat. How will capitalism reinvent itself?
Ans. It is essential to have public engagement in the pressing questions facing us, and moreover, a movement which demands solutions that are more than costumery or window-dressing.
It is also necessary to have, as you suggest, a spirit of cooperation across and within countries.
That implies a rejection of narrow-minded nationalisms in favour of broader cooperation within regions and the world as a whole.
The irony is that this, more than nationalism, is what will actually serve the interests of nations, understood as the people who live in them.
We desperately need a rebalancing, in which governments are more responsive to the public interest than business interests.
It will take time to achieve that but if there is some good in these developments it will be that they make a beginning.
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