Facing the greatest economic crisis since the Great Depression


11th May, 2020

Authors: Yves Tiberghien, UBC, Alan S Alexandroff, University of Toronto and Colin Bradford,
Brookings

Three months into the COVID-19 crisis, the world is not only facing a pandemic that keeps claiming lives, but also the greatest economic crisis since the 1930s. Growth has turned negative, unemployment keeps rising, trade is collapsing, capital flows are fleeing emerging markets, and remittances are falling.

It is impossible to know if this shock to our interdependent system will fade away in a ‘V-shape’ recovery by 2021 or break critical components in the global architecture. What we do know is this: the collective actions of systemically important players and international institutions will determine whether the international system bounces back from this crisis.

The field of international political economy has taught observers two key lessons over the years: the global economic system is prone to different shocks and when important countries face them early and together, the system can be saved. When leading states engage in nationally derived tit-for-tat strategic interactions, the system breaks down.

The crisis hit amid trade conflict and security tensions. Every major summit or international organisation now directs some of its attention towards the US–China confrontation. Effective multilateralism by the principal powers is not working well.

The good news is that global institutions at the ministerial or technical levels are performing well. This second line of defence is providing some degree of collective action. Central banks and national stimulus packages in major countries are also playing an important role.

Relying on these mid-level links and institutions comes with a cost: they cannot provide the strategic vision needed to turn the crisis into an opportunity. They are unable to capitalise on the global demands of the current circumstances and use them to usher in a better collective future with greater social cohesion and more sustainable life.

The good news is that global institutions at the ministerial or technical levels are performing
well. This second line of defence is providing some degree of collective action. Central banks
and national stimulus [2] packages in major countries are also playing an important role.

Relying on these mid-level links and institutions comes with a cost: they cannot provide the
strategic vision needed to turn the crisis into an opportunity. They are unable to capitalise on the
global demands of the current circumstances and use them to usher in a better collective future
with greater social cohesion and more sustainable life.
The April 2020 annual growth forecast [3] showed a drop of 6.3 per cent compared to estimates
made in January [4]

. As IMF Chief Economist Gita Gopinath argued [5], ‘this makes the Great
Lockdown the worst recession since the Great Depression, and far worse than the Global
Financial Crisis … for the first time since the Great Depression both advanced economies and
emerging market and developing economies are in recession’.
The projected growth rate for advanced economies is -6.1 per cent for 2020 and -2.2 per cent
for emerging economies. These figures exclude China which is projected to grow at 1.2 per
cent. All estimates assume the pandemic and confinement measures will end by June.
Otherwise, economic growth will be much worse.

According to the World Trade Organization, trade may fall [6] by anywhere between 13 and 32
per cent in 2020. Global remittances towards low and middle income countries are projected to
fall by 20 per cent, a loss of US$100 billion [7]. Capital flows are fleeing emerging and
developing countries [8] at a much faster pace than during the global financial crisis of 2008.
Consequently, many countries are facing negative currency movements. In the first quarter of
2020 alone, several major countries — including Brazil, Columbia, Mexico, Russia and South
Africa — faced currency drops relative to the US dollar of 20 per cent or more. This increases the
burden of dollar-denominated debt — a replay of 1997.

Yet, several positive developments in global leadership are noteworthy. Major central banks are
providing liquidity to the system and helping countries distribute massive domestic stimuli. The
US Federal Reserve stopped purchasing bonds between 2015–2019, reducing its holdings to
15 per cent of GDP by late 2019. In the first quarter of 2020, US holdings fell to about 4 per
cent. The Bank of Japan owns 40 per cent of Japanese outstanding government bonds and
announced on 27 April that it was removing an upper limit on bond purchases and would also
increase purchases of corporate bonds [9].

The G20 meeting of Finance Ministers and Central Bank Governors approved a proposal by
IMF and World Bank leaders to issue a ‘suspension of debt service payments for the poorest
countries’. The suspension is significant not only because it represents a rapid decision agreed
to by major powers, but it also brought China closer to the Paris Club of creditors.
Amid highly visible US–China tensions and intra-EU disappointments, and despite continued
security tension in the East China Sea, bilateral relations between China and Japan are better
than expected. Mutual compassion and shipments [10] of masks and other equipment in both
directions from January to March may have ‘upended generations of China-Japan
antagonism’. Neither side has blamed the other and early generosity from Japanese society
and the private sector towards China has had a positive impact on public opinion.
The Japan-led Asian Development Bank (ADB) and China-led Asian Infrastructure Investment

Bank (AIIB) have shifted their respective funding priorities towards emergency lending to their
members for COVID-19 expenses in the range of US$5–10 billion each [11]. To see such
mutually reinforcing actions announced at the same time by two rival institutions is remarkable.
While the ADB has funded health before, this is a big shift for the AIIB. It signals its readiness to
go beyond infrastructure funding.
Global supply chains are under great duress as a result of both the US–China trade war [12] and
the COVID-19 economic crisis. Medical and electronic supply chains are likely to evolve and
regionalize. Incentives and threats will be used by the United States and others to bring some
critical supply chains home [13]. But while the data so far indicates some lateral moves within
regions, supply chains are proving quite resilient [14]
.
The COVID-19 pandemic hit the global economy particularly hard because it arrived during a
mega geopolitical battle. Many forget that our modern and open civilization depends on a poorly
institutionalized global interdependence. The interconnected economy and any sense of
common global destiny are being tested. Leaders of great powers are adding to the global risks.
Fortunately, past investment in global institutions and webs of bilateral and regional relations
are providing a partial safety net, even if they cannot provide the strategic vision that humanity
now needs.

Yves Tiberghien is Professor of Political Science, The University of British Columbia, and
Co-Chair of the Vision20.

Alan Alexandroff is Director of the Global Summitry Project at the Munk School of Global Affairs
and Public Policy, The University of Toronto, and Co-Chair of the Vision20.

Colin Bradford is a non-resident Senior Fellow of the Global Economy and Development
Program at the Brookings Institution and Co-Chair of the Vision20.
This article is part of an EAF special feature series [15] on the novel coronavirus crisis and its
impact.

References:
[1] not working well:
https://www.eastasiaforum.org/2020/04/04/struggling-to-marshal-collective-action-against
-covid-19/
[2] Central banks and national stimulus:
https://www.eastasiaforum.org/2020/05/04/cooperation-needed-to-reduce-the-costs-of-un
precedented-central-bank-actions/
[3] April 2020 annual growth forecast:
https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020
[4] January:
https://www.imf.org/en/Publications/WEO/Issues/2020/01/20/weo-update-january2020
[5] argued:
https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-thegreat-depression/
[6] trade may fall: https://www.wto.org/english/news_e/pres20_e/pr855_e.htm
[7] US$100 billion:
https://www.worldbank.org/en/news/press-release/2020/04/22/world-bank-predicts-sharpe
st-decline-of-remittances-in-recent-history
[8] fleeing emerging and developing countries:
https://unctad.org/en/PublicationsLibrary/gds_tdr2019_covid2_en.pdf?user=1653
[9] purchases of corporate bonds:
https://asia.nikkei.com/Economy/BOJ-removes-cap-on-Japanese-government-bond-purc
hases
[10] Mutual compassion and shipments:
https://www.brookings.edu/blog/order-from-chaos/2020/03/09/mask-diplomacy-how-coro
navirus-upended-generations-of-china-japan-antagonism/
[11] US$5–10 billion each:
https://www.ft.com/content/1f13dcce-b590-43e9-a15b-188f3f3b966b
[12] US–China trade war:

COVID-19 heightens US–China tensions


[13] critical supply chains home:
https://www.sauder.ubc.ca/news/insights/werners-blog-covid-19-and-global-supply-chain
-resilience
[14] resilient:
https://www.wsj.com/articles/globalized-commerce-might-prove-resilient-to-the-pandemi
c-11587549813
[15] EAF special feature series: https://www.eastasiaforum.org/category/topics/covid_19/

 
 

More Posts in Uncategorized

 
 

Share this Post