The hypes and the hopes

The damage inflicted by Covid-19 globally is not just the growing toll of infections and deaths, the overstrained healthcare workers and the sector.  It is much more (economic, social, psychological and political), and it is not only about now, but also about the future.

There were early warnings of its massive impact on the global economy.  Nouriel Roubini, Professor of Economics at New York University and one-time adviser to President Clinton, wrote in March 2020: "With the Covid-19 pandemic… the best one can hope for is a recession deeper than that following the 2008 financial crisis", and Adam Tooz, a history Professor at Columbia University wrote: "if the last global economic crisis (2008-2010) was a financial heart attack, this one (Covid-19) might be a full-body seizure."

Three months on, in June 2020, both the World Bank and the IMF warned that the global economy is shrinking faster than they predicted in March; it is going through the deepest recession since WWII, shrinking by 5.2 percent. And is resulting in dramatic rise in world poverty and inequality, hurting the poorer countries of the world most. No country is expected to be spared. These world bodies, however, kept the hope alive of a strong come back in 2021, if prudent policies were taken.

China's nearly 40 years of uninterrupted growth has been broken by a steep decline in its growth rate by 6.8 percent in Q1 of 2020; the UK's GDP growth declined by a record of 20.4 percent in Q2 of 2020 Japan by 4.2 percent and the OECD countries by 7.5 percent in 2020. USA experienced the worst Q2 (of 2020) since 1947 with a 32.9 percent decline in GDP. Its exports declined by 64.1 percent and imports by 53.4 percent. More than half of home tenants could not pay their rent; restaurant and bars were hit with more than 50 percent reduction in customers and revenue intakes. Already plummeting global trade (3 percent decline in 2019), is expected to decline by a whopping 13-20 percent in 2020 (WTO).

ILO estimates global job loss at about 400 million. Youths, who constitute nearly 75 percent of workers in the informal sector, are the major casualties. And among them, young women, and youths not in education, employment and training (NEET) are expected to be most adversely affected. The poor are expected to suffer the most. The situation can be extremely vulnerable in Sub-Saharan Africa, the Arab states and in South Asia. The ILO Director General warned that there was "no simple or quick recovery".

Surprisingly, the stimulus measures to overcome these worsening conditions seem to have widened the divide between the rich and the poor countries. ILO noted that some USD 13 trillion dollars worldwide have been spent supporting workers and industry since the pandemic began, "but this has been highly concentrated; 88 percent of that total has been spent by advanced countries on themselves… this is equivalent of about 5 percent of their GDP; the equivalent figure for developing and emerging economies is only 2.2 percent, for the less developed countries, it's even less."

These trends are being accentuated by the woes in the financial sector, which is showing a disconnect from the real economy. This is negatively impacting the risk taking appetite of investors (IMF). Insolvencies and bankruptcies are making high levels of debt unmanageable by some borrowers, thus testing the resilience of bankers. Some emerging frontier markets are facing refinancing risks, and their market access are drying up.

Financing risks can be a real problem for aspiring developing countries (like Bangladesh), and emerging market economies. These countries, which were gathering steam to move forward faster, were pushed back. Big projects taken up have been stopped in the middle, leading to uncertainties about their financing and completion on time.

These impacts aside, the developing countries dependent on remittance incomes, thin lines of exports focused on certain products, are facing declines in their exports and foreign exchange earnings. Those with healthy foreign exchange reserves can do better. But many do not hold much cash reserves.  They may face increasing difficulties in getting access to their funds held in the Federal Reserve Bank, if China, holding trillions of dollar at the Fed, also queue up for withdrawal.

Beyond these economic strains, closure of education institutions, restrictions of mobility, mass sports, and entertainment, are having significant impact on the mental health of both youths and adults.

A survey in China found that a quarter of 7,143 youths (in Changzi Medical College) suffered from mild to severe form of Generalised Anxiety Disorder; these findings were corroborated by findings in India and the UK of panic, anxiety, obsessive behaviour, hoarding, paranoia, and depression, and post-traumatic stress disorder (PTSD) among the youth. Outbursts of racism, stigmatisation, and xenophobia against particular communities are being widely reported in other studies.

The political fallout of Covid-19 can be interesting. Dani Rodrik, professor of Political Economy at Harvard University writes: "No one should expect the pandemic to alter—much less reverse—tendencies that were evident before the crisis. Neoliberalism will continue its slow death, populist autocrats will become even more authoritarian, and the left will continue to struggle to devise a programme that appeals to a majority of voters". But be it the confirmation of the demise of neoliberalism or scripting authoritarian rules in some countries to overcome the Covid-19 crisis, it is quite possible that there will be changes in global alliances and political landscape.

The political alliances of the resource poor countries of the world are shaped up by their need to access resources. The debunked policy of USA, which was putting itself first, reflects its unwillingness to play the leading role in the world. China is emerging as a major player in global development assistance with clever manoeuvring and its "One Belt One Road" initiative. These trends, accentuated by the Covid-19 situation are likely to shape the new global alliances. The conflicts of interests in the South China Sea, in Kashmir, in the Middle East (among many others), are likely to be cast in new formats in the coming years.

Developing countries scared of getting de-linked from global supply chains have to act fast, and mend their economies and alliances. But they will have to look inwards to redefine, mend and develop new supply chains.

Dr Atiqur Rahman is an economist, ex-adjunct professor at the John Cabot University, Rome, and ex-Lead Strategist of IFAD, Rome, Italy.