Rethinking the Global Economy
Mauritius also needs to do some profound rethinking and initiate fundamental reforms, including land reform, required to usher a new socio-economic order which rallies the nation
By Mrinal Roy
As the world is gradually lifting the lockdown restrictions enforced to combat and contain Covid-19, many people earnestly hope to snap out of the pandemic (nightmare) back into the comforting normality and humdrum of their pre-Covid-19 days. Life would then continue as before.
This will certainly not be the case. Covid-19 has forced the world economy to a standstill. The US economy is expected to contract by 6%. Forty million Americans filed for unemployment benefits in the last two months. The European Commission forecasts that the eurozone area’s economy will contract by a record 7.75% over the course of 2020. In a show of EU solidarity, the European Commission has proposed a €750 billion recovery fund to reboot economies hit hard by the coronavirus outbreak. The southern EU countries worst hit by Covid-19 would get the lion’s share of the proposed fund, which includes €500 billion in grants and the rest in loans.
“Emerging countries and developing countries like Mauritius are so dependent on trade that even if they manage to contain the virus, their recovery will depend on actual demand for their exports. This will depend on the status of Covid-19 in export markets, economic recovery in these counties and whether sales outlets and supply lines are reopened and consumer confidence and demand is robust and back on track. There could be new opportunities to cash in on. However, this process could take longer than expected…”
Countries across the world are massively increasing their debts to support households and businesses. It is estimated that the US and the EU have committed in terms of government spending, central bank cash injections, tax cuts, loan guarantees, etc., a staggering $ 7.4 trillion or 23% of their GDP. This is a colossal sum.
What if?
Should industrial, emerging and developing countries manage the Covid-19 crisis through enormous and mounting public debt? In a recent interview on BBC, Raghuram Rajan, Professor of Finance at the University of Chicago Booth School of Business is quite chary of unsustainable debt levels being blithely contracted by governments across the world to deal with the dire economic crisis provoked by Covid-19. Raghuram Rajan is credited to have, as early as 2005, warned about the growing risks in the financial system and proposed policies to reduce such risks, ahead of the 2008 financial crisis.
Countries across the world are managing the pandemic in different ways and have had mixed success. Many appear to be rashly easing lockdown restrictions too soon. Covid-19 is still rampant in many countries such as the US, Brazil or Russia which together have registered more than 2.9 million cases of infection or more than 44% of all Covid-19 cases in the world.
Enormous sums of money have already been invested to contain the pandemic. Should there be a resurgence of the virus, there is a real danger that countries will have very limited resources to fight a new wave of Covid-19. For example, Italy which has debts of 160% of its GDP is short of funds to support a recovery of its economy. The EC recovery funds which are principally earmarked to assist the recovery of southern EU states such as Italy are therefore a welcome lifeline for these cash-strapped countries. Not every country has such substantial support.
Viable option?
There is across the world a massive expansion of debt to finance economic recovery packages. Is the unbridled use of debt to maintain jobs, income and companies until an elusive recovery a viable option going forward?
Even if there is no resurgence of Covid-19, recovery could take time because of diverse factors. Emerging countries and developing countries like Mauritius are so dependent on trade that even if they manage to contain the virus, their recovery will depend on actual demand for their exports. This will depend on the status of Covid-19 in export markets, economic recovery in these counties and whether sales outlets and supply lines are reopened and consumer confidence and demand is robust and back on track. There could be new opportunities to cash in on. However, this process could take longer than expected.
At the current very high levels of indebtedness, financial resources available even to developed countries to continue to finance idle sectors are thin. It is extremely costly to keep people at home or maintain restaurants while they are closed or support airlines when planes are grounded. Hard choices will therefore have to be made.
Unsustainable debt
Countries cannot continue to accumulate higher levels of debts, despite lower interest rates. They need to rethink the way forward and review their priorities. Should the economy be transformed or do we need a new economy to adapt to an enduring Covid-19 afflicted world?
The world must accept the fact that the hospitality business, open frontiers and international air or cruise travel and tourism will take significantly more time to normalize their activities. Instead of bankrolling grounded airline companies at costly public expense, we should be looking at downsizing airlines as international air traffic will be very constrained in the next few years.
Mauritius faces a daunting situation. Tourism which is the biggest contributor of gross value added (GVA) in the country will be constrained by the embargo on international air travel, quarantine rules and the Covid-19 situation prevailing in many countries which are our principal sources of tourists. The global business which is another important contributor of GVA in the country is overshadowed by the decision of the European Commission to include Mauritius in its revised list of high-risk countries with strategic deficiencies in their anti-money laundering and counter-terrorist financing frameworks in accordance with the new methodology adopted by them.
As a general rule, we need to make sure that we are not keeping unviable economic activities alive at enormous costs to our finances. We need to protect people but do we protect their jobs in stalled sectors or do they need new jobs in the new economy? Continuously increasing indebtedness restricts our options. Countries therefore need to make sure that adequate funds are available when required to create new jobs and to fund the required stimulus packages to steer a robust economic recovery in a recast world economy and bring down massive unemployment relatively quickly.
Trade wars and the current conflict between the US and China on Covid-19 does not help at a time when the world needs to come together to stem this common threat.
Resentment can turn to rage
In his latest book, ‘The Third Pillar: How Markets and the State Leave the Community Behind’, Raghuram Rajan writes:
‘If people lose their faith in their ability to compete on the market place, if they feel that the elite have monopolized all opportunities, popular resentment can turn to rage.’ Anything which causes popular outcry is unsustainable and has to stop. The world needs to fix the burning issue of widening inequality undermining society and building angst in the world. The world is yearning for a new world order which is fair and endorsed by all stakeholders.
The core issue is the sustainability of society. There is therefore an imperative need for a new leadership to bring these profound transformations to solidly anchor and assure socio-economic sustainability going forward. Globalization must work for everyone. There is increasing resistance to globalization as the world has failed to ensure that people left behind especially in industrial countries, emerging markets and developing countries have had a fair deal.
A better tomorrow
There is also an urgent need for a new and more ambitious leadership to rethink how best to manage and overcome the economic challenges of the Covid-19 pandemic and put in place the required policies for a sustainable future. Enlightened leadership is a commodity which is in short supply. We desperately need to turn things around as, apart from Covid-19, there are so many serious challenges facing the world such as climate change or institutionalized inequality. For that we need global cooperation from leaders across the world who are committed to work together to create a new and inclusive world for all.
Mauritius also needs to do some profound rethinking on the state of the economy and initiate the fundamental reforms, including land reform, required to usher a new socio-economic order which rallies the nation. The Covid-19 challenges have triggered a profound rethinking across the world to shape and establish a new world order for a better tomorrow.
* Published in print edition on 5 June 2020
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