IPE AND PHALESTINE LATER BUT FIRST IPE

[DATE]
INTERNATIONAL POLITICAL ECONOMY

The Pandemic Depression

The Global Economy Will Never Be the Same
By Carmen Reinhart and Vincent Reinhart
September/October 2020
Although dubbed a “global financial crisis,” the
downturn that began in 2008 was largely a banking
crisis in 11 advanced economies. Supported by
double-digit growth in China, high commodity
prices, and lean balance sheets, emerging markets
proved quite resilient to the turmoil of the last
global crisis.

The current economic slowdown is different. The

shared nature of this shock—the novel coronavirus
does not respect national borders—has put a larger
proportion of the global community in recession
than at any other time since the Great Depression.

The pandemic has created a massive economic

contraction that will be followed by a financial
crisis in many parts of the globe, as nonperforming
corporate loans accumulate alongside
bankruptcies. Sovereign defaults in the developing
world are also poised to spike.

This crisis will follow a path similar to the one the

last crisis took, except worse, commensurate with
the scale and scope of the collapse in global
economic activity. And the crisis will hit lower-
income households and countries harder than their
wealthier counterparts.
IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

Indeed, the World Bank estimates that as many

as 60 million people globally will be pushed into
extreme poverty as a result of the pandemic. The
global economy can be expected to run differently
as a result, as balance sheets in many countries slip
deeper into the red and the once inexorable march
of globalization grinds to a halt.
ALL ENGINES DOWN
In its most recent analysis, the World Bank
predicted that the global economy will shrink by 5.2
percent in 2020. The U.S. Bureau of Labor
Statistics recently posted the worst monthly
unemployment figures in the 72 years for which the
agency has data on record. Most analyses project
that the U.S. unemployment rate will remain near
the double-digit mark through the middle of next
year. And the Bank of England has warned that this
year the United Kingdom will face its steepest
decline in output since 1706. This situation is so
dire that it deserves to be called a “depression”—a
pandemic depression. Unfortunately, the memory of
the Great Depression has prevented economists
and others from using that word, as the downturn
of the 1930s was wrenching in both its depth and
its length in a manner not likely to be repeated. But
the nineteenth and early twentieth centuries were
filled with depressions. It seems disrespectful to the
many losing their jobs and shutting their businesses
to use a lesser term to describe this affliction.
Some important economies are now reopening, a
fact reflected in the improving business conditions
across Asia and Europe and in a turnaround in the
U.S. labor market. That said, this rebound should
IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

not be confused with a recovery. In all of the worst

financial crises since the mid-nineteenth century, it
took an average of eight years for per capita
GDP to return to the pre-crisis level. (The median
was seven years.) With historic levels of fiscal and
monetary stimulus, one might expect that the
United States will fare better. But most countries
do not have the capacity to offset the economic
damage of COVID-19.

More recently, exports were harmed by the U.S.-

Chinese trade war that U.S. President Donald
Trump launched in the middle of 2018. For
economies where tourism is an important source of
growth, the collapse in international travel has
been catastrophic. The International Monetary
Fund has predicted that in the Caribbean, where
tourism accounts for between 50 and 90 percent of
income and employment in some countries, tourism
revenues will “return to pre-crisis levels only
gradually over the next three years.”

he slowdown has caused a huge drop in the

demand for energy and splintered the fragile
coalition known as OPEC+, made up of the
members of OPEC, Russia, and other allied
producers, which had been steering oil prices into
the $45 to $70 per barrel range for much of the
past three years. OPEC+ had been able to
cooperate when demand was strong and only token
supply cuts were necessary. But the sort of supply
cuts that this pandemic required would have
caused the cartel’s two major players, Russia
 IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

and Saudi Arabia, to withstand real pain, which

they were unwilling to bear.

The resulting overproduction and free fall in oil

prices is testing the business models of all
producers, particularly those in emerging markets,
including the one that exists in the United States—
the shale oil and gas sector. The attendant financial
strains have piled grief on already weak entities in
the United States and elsewhere. Oil-dependent
Ecuador, for example, went into default status in
April 2020, and other developing oil producers are
at high risk of following suit.
‘
spell of unemployment, making them less
attractive to potential employers. The most
vulnerable are those who may never get a job in the
first place—graduates entering an impaired
economy. After all, the relative wage performance
of those in their 40s and 50s can be explained by
their job status during their teens and 20s
What is perhaps more troubling, this depression
arrived at a time when the economic fundamentals
in many countries—including many of the world’s
poorest—were already weakening.

In part as a result of this prior instability, more

sovereign borrowers have been downgraded by
rating agencies this year than in any year
since 1980. Corporate downgrades are on a similar
trajectory, which bodes ill for governments, since
IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

private-sector mistakes often become public-sector

obligations.
The United Nations has recently warned that the
world is facing the worst food crisis in 50 years. In
the poorest countries, food accounts for anywhere
from 40 to 60 percent of consumption-
related expenditures;
y contrast, the aggregate stimulus of the ten
emerging markets in the G-20 is five percentage
points below that of their advanced-economy
counterparts. Unfortunately, this means that the
countercyclical response is going to be smaller in
those places hit harder by the shock. Even so, the
fiscal stimulus in the advanced economies is less
impressive than the large numbers seem to
indicate. In the G-20, only Australia and the United
States have spent more money than they have
provided to companies and individuals in the form
of loans, equity, and guarantees.

Central banks have also attempted to stimulate the

failing global economy. Those banks that did not
already have their hands tied by prior decisions to
keep interest rates pinned at historic lows—as the
Bank of Japan and the European Central Bank did—
relaxed their grip on the flow of money. Among that
group were central banks in emerging economies,
including Brazil, Chile, Colombia, Egypt, India,
Indonesia, Pakistan, South Africa, and Turkey. At
prior times of stress, officials in such places often
went in the other direction, raising policy rates to
prevent exchange-rate depreciation and to contain
IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

inflation and, by extension, capital flight.

Presumably, the shared shock leveled the playing
field, lessening concerns about the capital flight
that usually accompanies currency depreciation
and falling interest rates.
Just as important, central banks have fought
desperately to keep the financial plumbing flowing
by pumping currency reserves into the banking
system and lowering private banks’ reserve
requirements so that debtors could make payments
more easily. The U.S. Federal Reserve, for instance,
did both, doubling the amount it injected into the
economy in under two months and putting the
required reserve ratio at zero. The United States’
status as the issuer of the global reserve currency
gave the Federal Reserve a unique responsibility to
provide dollar liquidity globally. It did so by
arranging currency swap agreements with nine
other central banks. Within a few weeks of this
decision, those official institutions borrowed almost
half a trillion dollars to lend to their domestic
banks.
The fiscal stimulus in the advanced economies is less impressive
than the large numbers seem to indicate.
What is perhaps most consequential, central banks
have been able to prevent temporarily illiquid firms
from falling into insolvency
Central bankers have used virtually all the pages
from this part of the playbook, taking on a broad
range of collateral, including private and municipal
debt.

The long list of banks that have enacted such

measures includes the usual suspects in the
IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

developed world—such as the Bank of Japan, the

European Central Bank, and the Federal Reserve—
as well as central banks in such emerging
economies as Colombia, Chile, Hungary, India,
Laos, Mexico, Poland, and Thailand. Essentially,
these countries are attempting to build a bridge
over the current illiquidity to the recovered
economy of the future.
By themselves, these monetary stimulus measures
are not sufficient to lead households and firms to
spend more, given the current economic distress
and uncertainty. As a result, the world’s most
important central bankers—Haruhiko Kuroda,
governor of the Bank of Japan; Christine Lagarde,
president of the European Central Bank; and
Jerome Powell, chair of the Federal Reserve—have
been urging governments to implement additional
fiscal stimulus measures. Their pleas have been
met, but incompletely, so there has been a massive
decline in global economic activity.

The International Monetary Fund predicts that the

deficit-to-GDP ratio in advanced economies will
swell from 3.3 percent in 2019 to 16.6 percent this
year, and in emerging markets, it will go from 4.9
percent to 10.6 percent over the same period. Many
developing countries are following the lead of their
developed counterparts in opening up the fiscal tap.
But among both advanced and developing
economies, many governments lack the fiscal space
to do so. The result is multiple overextended
government balance sheets.
IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

The International Order Didn’t

Fail the Pandemic Alone
The United States and China Are Its Crucial
Pillars
By Thomas R. Pickering and Atman M. Trivedi
May 14, 2020
At the heart of the problem is the failure of the
world’s leading powers, starting with the United
States and China, to invest in and empower the
multilateral system. Washington’s sins of omission
and Beijing’s sins of commission have conspired to
sideline international institutions, helping frustrate
their common goal of ending the pandemic.
Just because global collaboration has not defeated
the virus does not mean that international
institutions should be relegated to the dustbin of
history or written off as key players in the ongoing
response to the crisis. International institutions—
from the UN Security Council to the G-20 to the
WHO—are essential to respond effectively to the
coronavirus pandemic and its economic toll. But in
the absence of U.S. or Chinese leadership, it will
fall to other powers—particularly EU members and
Asian democracies—to step forward to renew these
institutions and support their leaders so they are
better able to address the immediate challenge of
the pandemic and other crises yet to come.

After Trump pulled U.S. assistance,

China augmented its contribution to the WHO by
$30 million.
 IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

The G-20 has since committed $5.4 trillion in

economic stimulus packages and agreed to
grant temporary relief on bilateral loans to
developing countries. G-20 trade ministers,
however, did not fare as well.

COVID-19: Impact on Global

Shipping and China’s Economy
Insights from Basil M. Karatzas.

By Mercy A. Kuo

With international transport at the forefront of trade and dependent on travel and
human interaction, the shipping industry has been impacted materially both
directly and indirectly from the outbreak of COVID-19. Operations of shipping
companies and related industries, including terminals, ports, etc., have been
affected due to personnel having been advised to refrain from traveling or reporting
to work.

The shipbuilding and ship repair segments have collapsed as people do not want
to travel to China and South Korea; shipping finance and ship brokerage have also
been affected as they involve travel and also require some momentum and
enthusiasm, which presently are in low supply.

Supply chains and logistics have been affected as well; for instance, we
understand that the Chinese trucking industry has collapsed too, as the
government has imposed travel limitations, which prevents containers-for-export
from reaching the loading dock, and containers-for-import keep piling on the dock
waiting for discharging vessels.

Container exports out of Chinese ports were heavily disrupted due to the
disruption of operations in China’s ports as they were short staffed and also
unable to receive and forward containers inland. The port of Hong Kong was less
 IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

disrupted at the time, in terms of port operations and staffing, and saw volumes
pick up

Coronavirus: The Threat to the

Global Economy
From border closures to factory shutdowns, the
epidemic threatens a heavy economic cost.

By Anthony Fensom
February 03, 2020
Chinese tourists spent some $277 billion worldwide in 2018 and the curtailing of
this lucrative travel market could erase up to 3 percentage points of gross
domestic product (GDP) from the most exposed economies such as Hong Kong,
Cambodia, and Thailand.

These disruptions also set to hit other Asian nations, with Vietnam, Taiwan,
Malaysia, South Korea, and Thailand particularly exposed due to their supply
chain linkages. And while a Chinese demand shock would have the biggest impact
on emerging markets, Germany and Japan are considered vulnerable too due to
reduced exports.

Investors have felt the impact too, with Asian currencies, stocks, and bond yields
all retreating in the rush for safe havens such as gold and U.S. dollars. Global
equity prices have dropped by around 3 percent, with Hong Kong’s bourse down
over 7 percent in a month, Indian stocks down over 3 percent, and Japanese and
Korean stocks losing around 2 percent.

Chinese markets were also expected to face selling pressures Monday when they
reopened from their extended Lunar New Year holiday. The Shanghai Composite
Index dropped by almost 8 percent on Monday, the first day of trading after the
break.
 IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

The crisis could yet get worse, with Capital Economics warning of a potential
global slowdown.

“The extensive efforts to contain the coronavirus will cause GDP growth in China
and emerging Asia to slow sharply in [the first quarter],” global economist Simon
MacAdam said in a research note Friday.

“We still hope the economic and market disruption will prove temporary. But,
given China’s prominent position in global supply chains and some financial
assets’ stretched valuations, there could be global economic fallout if factory
closures are extended further and the market sell-off deepens.”

Sri Lanka’s central bank has already attributed an interest rate cut partly due to
fears over the virus’ impact, with policymakers in Thailand and the Philippines
seen following suit.

Compared to the SARS outbreak in 2003, which caused 8,096 infections, the
impact of the coronavirus is expected to be far greater due to China’s current
position as the world’s second-largest economy and biggest resources consumer.

ANZ Research has estimated that China’s GDP growth could be dragged 0.9
percentage points lower by the coronavirus crisis, resulting in headline growth of
5 percent – its slowest pace since 1990.

Industrial production and exports will decline, based on a loss of 3.5 working days
in the quarter, while a plunge in tourism will trim the services sector’s GDP growth
by 0.9 percent,” the bank’s economists said in a January 30 report.

Outside China and India, the bank’s economists expect Asia to lose as much as 0.5
percentage points in the first quarter, with the impact dependent on how quickly
the outbreak can be contained.
 IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

The already recession-hit Hong Kong could lose up to 1.4 percentage points of
GDP growth from reduced Chinese tourism and trade, followed by Vietnam (down
0.8 percentage points), Thailand (0.7 percentage points) and Taiwan (around 0.6
percentage points lower).

lready hit by a bushfire crisis that has caused a slump in overseas tourists, Australia
could lose another 0.2 percentage points of GDP in 2020 as a result of the
coronavirus, ANZ Research predicts.

Facing a A$4.5 billion (US$3 billion) hit to international tourist spending, Tourism
Australia has quickly launched a “Holiday Here This Year” campaign encouraging
Australians to travel domestically in 2020, particularly to bushfire-hit areas.

The predicted downturn follows an otherwise bright start to Asia’s Year of the Rat,
partly thanks to the U.S.-China “phase one” trade deal that saw analysts upgrade
their forecasts for China’s GDP growth.

However, Japan, the world’s third-largest economy, is seen decelerating from 1

percent GDP growth in 2019 to just 0.7 percent this year and 0.5 percent in 2021,
as the impact of recent fiscal stimulus fades.

India, which until recently was the fastest growing major economy, is expected to
post a 5.8 percent GDP gain this year and 6.5 percent in 2021, due to “stress in the
nonbank financial sector and weak rural income growth.”

With its own forecasts projecting its weakest growth rate since the global financial
crisis of just 5 percent, the Modi government responded Saturday with a spending
boost.

The new budget includes increased spending in agriculture, water, and

infrastructure projects as well as income tax cuts, including a 3.6 trillion rupee
($50 billion) project to provide piped water to all households by 2024.
 IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

Financial markets reacted negatively however, with the benchmark Sensex index
dropping by 2.4 percent in Saturday trading after the budget failed to meet
investors’ reform expectations.

With both China and India facing economic challenges and Japan cooling, the
Asia-Pacific region suddenly is facing a much harsher outlook after its bright start
to the Year of the Rat. As authorities scramble to contain the coronavirus, the jury
is out on whether the Chinese zodiac animal will bring hardship or prosperity in
2020.

COVID-19: As China Recovers,

Will Its Economy Follow?
Will COVID-19 mark a turning point for China?
By Stephen Nagy
March 30, 2020

China’s exports plunged 17.2 percent in the January-February period compared

with last year. Imports fell 4 percent. On March 6, the China Enterprise
Confederation (CEC) released the results of another survey assessing the Q1
performance of 299 large manufacturers, and more than 95 percent of companies
saw revenues drop, while more than 80 percent saw operational costs go up

These are the second-order effects of the COVID-19 pandemic. A significant

drop in consumption in China, a slow return to the full functioning of the economy,
and the slow return of migrants and other workers to manufacturing centers and
cities mean one of the engines of global growth is running on half speed.

DIPLOMAT BRIEF
 IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

WEEKLY NEWSLETTER

N
Get briefed on the story of the week, and developing stories to watch across the
Asia-Pacific.
GET THE NEWSLETTER

Asia and the Global Economy’s

COVID-19 Plunge
The World Bank’s forecasts are not rosy for the
world economy, but some will hurt more than
others.

By Catherine Putz
June 10, 2020
Supply shortages are expected to affect a number of sectors due to panic buying, increased
usage of goods to fight the pandemic, and disruption to factories and logistics in mainland China.
There have been instances of price gouging.[3] There have been widespread reports of shortages
of pharmaceuticals,[4] with many areas seeing panic buying and consequent shortages of food
and other essential grocery items.[5][6][7] The technology industry, in particular, has been warning
about delays to shipments of electronic goods.[8][needs update]
Global stock markets fell on 24 February 2020 due to a significant rise in the number of COVID-
19 cases outside mainland China.[9][10] By 28 February 2020, stock markets worldwide saw their
largest single-week declines since the 2008 financial crisis.[11][12][13] Global stock markets crashed in
March 2020, with falls of several percent in the world's major indices.
Possible instability generated by an outbreak and associated behavioural changes could result in
temporary food shortages, price spikes, and disruption to markets. Such price rises would be felt
most by vulnerable populations who depend on markets for their food as well as those already
depending on humanitarian assistance to maintain their livelihoods and food access. As
observed in the 2007–2008 food prices crisis, the additional inflationary effect of protectionist
policies through import tariffs and export bans could cause a significant increase in the number of
people facing severe food insecurity worldwide.[14]
 IPE AND PHALESTINE LATER BUT FIRST IPE
[DATE]
INTERNATIONAL POLITICAL ECONOMY

Coronavirus: A visual guide to the

economic impact
By Lora Jones, Daniele Palumbo & David Brown
BBC News
Published
29 June
Global shares in flux
Big shifts in stock markets, where shares in companies are bought and sold, can
affect the value of pensions or individual savings accounts (ISAs).
The FTSE, Dow Jones Industrial Average and the Nikkei all saw huge falls as the
number of Covid-19 cases grew.
The Dow and the FTSE saw their biggest quarterly drops in the first
three months of the year since 1987.