Pandemic economics
PANDEMIC economics has a logic and urgency of its own. Where Covid-19 is a full-blown public health crisis, it is also the biggest economic crisis in a generation. It has resulted in major supply side problems since Chinese manufacturing now occupies a critical position in the global supply chain. Chinese GDP may have declined 10 per cent in the first quarter of 2020, compared to last year. Lockdowns, self-isolations and flight bans have hit economies hard everywhere from the demand side as well.
The Economist reported that international-passenger arrival at the five biggest American airports is already down 30pc. Estimates show that Europe’s GDP will contract 12pc year-on-year in the second quarter, while the Japanese economy will contract by 3pc. Despite a $2 trillion economic bailout, the current economic cataclysm in the US is still unfolding, judging by the number of people applying for unemployment benefits. According to the US Labour Department, 10 million Americans lost their jobs in two weeks. The IMF has declared a ‘recession’ and asked countries to employ aggressive policies for countering the Covid-19 economic crisis.
A recent UN report warns that emerging economies like Pakistan will take an “enormous hit” in the wake of the pandemic. Pakistani exports are likely to decrease significantly, resulting in increasing unemployment and a precipitous drop in foreign exchange earnings. Plummeting oil prices will also lead to significant job losses for Pakistani migrant labour in Gulf countries that will further exacerbate unemployment and the availability of foreign exchange, especially as remittances will collapse. If there is a second wave of this pandemic then the present economic crisis facing Pakistan will look like a stroll in the park.
On the unemployment front, the government may just be able to weather the storm of social unrest through the Rs1.2 trillion ‘economic relief package’. However, things will likely come to a head on the financial account side. During 2019-23, analysts estimate that Pakistan needs to pay about $40 billion as interest on its external debt. In the aftermath of Covid-19, declining foreign exchange earnings and rapid capital outflows, already under way, will severely constrain Pakistan’s ability to service its debt when debt-service payments peak later in the year. There may be a way out, however.
The PM has rightly called for a debt write-off.
Prime Minister Imran Khan has rightly highlighted the need for a debt write-off for developing nations like Pakistan due to the global economic crisis in the wake of Covid-19. Without some debt relief, Pakistan is likely to fall into a lethal debt trap, all but ending hopes of sustained investment in health and education in the future. Given the severity of the present economic crisis, Mr Khan’s call is likely to be echoed by other leaders in the developing world.
Some economists will invariably argue that writing off debts is not good tactics since it would invert incentives for lenders and discourage them from providing loans in the future. But good tactics seldom make good strategy. If developing nations, despite earnest efforts, are unable to break free from debt traps, year after year, then perhaps new thinking is required.
Debt write-offs have a long history. Economic historian Michael Hudson shows that redeeming the poor from debt bondage moved alongside the spread of early Christianity. As recently as 1953, Pakistan and 20 other countries wrote off about 50pc of Germany’s sovereign external debt in the London Debt Agreement. Not only was interest reduced on the remaining portion but Germany was given a grace period until 1957.
Significantly, the agreement stipulated that Germany would only pay interest if it ran a trade surplus and that interest payments would be capped at 3pc of export earnings. These arrangements made interest payments manageable for Germany since it precluded the need for further borrowing just to pay interest on previous debt. Pakistan would have paid only $727m instead of $11.6bn towards debt servicing in 2019, if a Germany-like agreement was extended to it.
The present economic order was established in the wake of the destruction brought about by the Second World War. This order envisaged a stable and prosperous world without exploitative economic competition. The jury is still out, however, on how successful this economic order has been given the inability of so many countries to break free of debt bondage. The Covid-19 pandemic has badly rattled the existing economic order, threatening widespread economic chaos and social unrest, especially in developing countries. Such imminent chaos will only worsen unless significant debt relief can be made available to developing countries.
The writer directs the Social Development and Policy Programme at Habib University, Karachi.
Published in Dawn, April 16th, 2020