Ever since Covid-19 became a pandemic forcing much of humanity to confine themselves to their homes, the mainstream of the western economy has been debating what kind of economic crisis we are facing. The institutional vision of the Federal Reserve is that economic affairs were going well before the pandemic, so economic policy should avoid severe damage to macroeconomic conditions so that once the actors return to normal, they resume the activity where they left off. However, when taking a systemic perspective, the picture does not seem so simple. For Carmen Reinhart, the drastic fall in aggregate demand, the loss of jobs, the serious oil crisis, the deterioration of the macroeconomic conditions of the “emerging markets”, the fall in demand for raw materials by China, can convert a public health crisis in a systemic financial crisis.
Thereafter, the gaze grows pessimistic. When comparing the first consequences of the crisis caused by the Covid-19 with the “global financial crisis” and the Great Depression, Nouriel Roubini maintains that the behavior of this crisis will not be in the form of V or L, that is, neither a Drastic recession followed by a drastic recovery or a drastic drop followed by prolonged depression. In his opinion, the scenario is drawn for an I-shaped crisis given the possibilities that the macroeconomic artillery being used will quickly run aground before the choice of either financing with monetization of the deficit and generating inflation or financing with indebtedness causing an increase in Interest rates.
The gloomy looks grow as we turn to the global South. Stiglitz has pointed out the obvious in this regard: first, the global recession will cause a forced landing of trade balances thanks to dependence on exports. Second, greater job insecurity is contradictory to the effectiveness of social distancing measures, as deficit finances are contradictory to large-scale stimuli. It proposes to finance these incentives by allocating the IMF’s Special Drawing Rights to “developing countries” as well as a suspension of debt payments. However, global finance does not seem to be prepared for such an act of justice. For example, the Comité de Acreedores de Argentina has recently declined a proposal for debt restructuring. Mariana Mazzucato, for her part, points out that the public health crisis can be intertwined with an economic crisis (which had been germinating before the pandemic) and the worsening of the climate crisis, forming a “triple crisis” that will not be resolved without, for example, a radical reorientation of the direction of public money or reinforcement of workers’ negotiation mechanisms.
Despite diverging on multiple issues, the authors cited seem to treat the crisis as something that is in the future and not part of the present. A much more attentive observer to the dynamics of the global political economy like Adam Tooze has pointed out that:
This was not a banking crisis like the one in 2008, but, had it not been for the spectacular intervention carried out by the US Federal Reserve, the Bank of England and the European Central Bank, we would now be facing not only the ravages of Covid-19 and the disastrous social and economic consequences of the lockdown, but a financial heart attack as well.
The most appropriate way to answer the question that gives this comment its title is by comparing the Great Contagion with the Great Recession that started in 2007. While the Great Recession began in high finance, the Great Contagion is a public health crisis that is forcing a sudden halt to economic activity on a global scale. However, it is also exposing how the fundamentals of the global economy were not entirely solid. It is fair to remember that the GDP of the United States grew on average 1.5% annually from 2007 to 2018 while the European Union grew 1.1% in the same period. In other words, the two industrial pillars of the western world were in a prolonged stagnation before the Great Contagion. Furthermore, the engine of this poor growth was in US hypertrophic consumption financed by the federal debt acquired by Asian exporters and made possible by the low-interest rates of the FED.
Unlike the Great Recession, the Great Contagion did not originate in a banking crisis, so the FED’s performance as a lender of last resort through currency swaps could prevent a sudden financial “heart attack” when “investors” of the world they looked for endorsement in dollars and bonds of the Treasure. This abrupt centralization of capital/wealth has already put peripheral and semi-peripheral economies in maximum tension. The wave of devaluations of the Latin American economies means that the Central Banks are preferring to face the shock of external demand, allowing the devaluation of their currencies and the consequent inflation with the intention of limiting the fall in production and not reducing external competitiveness. The problems begin not with the liquidity crisis but with the solvency crisis. Debt denominated in foreign currency and in the short term is an endemic disease of Latin American economies. The two most serious cases at the regional level are Venezuela and Argentina. The first country has been in default of its external commitments since 2017 in a context of sanctions, political crisis, and the worst economic crisis in the history of the region. The second has entered into default in the midst of a restructuring attempt. Despite heterogeneities, sovereign risk has increased across the region since 2015, and gross debt held by central governments stood at 44.8% of GDP in 2019.
The situation begins to be worrying when we look at the variables of the “real economy”. The increase in the dollar has made debt service more onerous at the same time that export products have become cheaper. ECLAC foresees a decrease of 15% in the value and 6% in the volume of regional exports. In addition, it estimates that remittances to the region will fall between 10 and 15%. Unlike the turbulence of 2013, trade with China will not cover the gap left by the fall in exports and remittances, since it is estimated that this will decrease by 24% in 2020. Likewise, external financing seems to be, at best of the cases, insufficient.
Tracking the impact of containment measures on employment and autonomous economic activity of small and medium industries can be a good way to get closer to estimating their recessive effects. According to a preliminary study by ECLAC, the impact will gradually increase from the primary sector to services. By being concentrated in the weakest sector, the confinement finds in a precarious and informalized regional economy the breeding ground for a dramatic collision of employment and living conditions.
Latin America has not yet experienced the ravages of the pandemic in terms of public health, but it is already facing the economic ravages that the Great Contagion will cause. Regional stagnation since the Great Recession had been managed (with greater or lesser effectiveness depending on the case) thanks to a global economy that found its main lifeline in interdependence, and in East Asia its engine. However, the economic recovery of the western world never materialized. To this was added, to aggravate the conditions, the commercial and technological war between China and the United States as the first stage of a hegemonic dispute for the command post of the capitalist world-economy. The Great Contagion has caught many off guards that not everything was going perfectly in the dream factory of capital accumulation.