Hard times

One report after the other on the world economy is indicating that we are heading towards a serious economic crisis.

The Covid-19 pandemic has severely impacted the production, trade and services sectors globally. Many sectors of the global economy will take years to fully recover. The recovery from this deepest recession will be slow and painful. We need to prepare for hard times ahead.

The World Bank in its latest forecast for the world economy, ‘Global Economic Prospects’, has projected that global economic activity will shrink by 5.2 percent this year.

The World Bank has said that “the world is facing an unprecedented health and economic crisis that has spread with astonishing speed and will result in the largest shock the global economy has witnessed in more than seven decades. Millions of people are expected to be pushed into extreme poverty.”

It will be the sharpest contraction in the world economy since 1945-46 when the global contraction was 13.8 percent. It will also be the fourth worst global downturn over the past 150 years in the capitalist economy. Only the Great Depression of 1929 and two periods soon after World War I (1919-1921) and World War II (1945-46) experienced a sharper decline in global capitalist economy.

The report says that economic activity in advanced economies is anticipated to contract 7 percent in 2020 as domestic demand and supply, trade, and finance have been severely disrupted.

For the US, the updated World Bank forecast is for GDP to fall 7 percent this year, before growing 3.9 percent in 2021. That estimate is similar to top forecasters for the National Association for Business Economics who forecast a 5.9 percent drop in for the US this year. The US Federal Reserve is projecting the economy to shrink 6.5 percent in 2020 and the unemployment rate to be 9.3 percent by year end.

For China, the world's second largest economy, the World Bank forecast growth will slow this year to a barely discernible one percent but rebound to 6.9 percent in 2021.

For the 19 European countries that form the Euro Zone, the World Bank projected a drop of 9.1 percent this year, followed by growth of 4 percent next year.

This sharp economic decline will have a devastating impact on the incomes of working people. The World Bank report has pointed out that the per capita income of most countries is going to contract in the largest fraction since 1870.

The per capita incomes of more than 90 percent of emerging markets and developing countries are expected to fall. “For all countries, the drop in per capita incomes is expected to average 6.2 percent, much larger than the 2.9 percent fall during the 2009 financial recession.”

The huge decline in incomes means more poverty and misery for poor and working people. So it is not surprising that the World Bank report expects between 70 million and 100 million people to fall into extreme poverty. More people will fall below the poverty line as a result of rising unemployment and sharp decline in incomes.

Let’s take India as an example. A latest study – ‘How Are Indian Households Coping under the Covid-19 Lockdown? 8 Key Findings’, carried out by experts at the University of Pennsylvania, the University of Chicago and the Mumbai-based Centre for Monitoring the Indian Economy (CMIE) – has pointed out that nearly 84 percent of Indian households are seeing decreases in income since the lockdown began. Nearly a third of all households will not be able to survive beyond a week without additional assistance.

The study found a “sharp and broad negative impact on household income” as the pandemic diminished their staying capacity, adding that the unemployment rate in the country had crossed 27 percent in early May, up nearly four-fold from levels in January-February.

The poor and the most vulnerable sections of the population are going to bear the brunt of this crisis. They will need assistance from governments to see off the hard times. Demands for unemployed benefits including unemployment allowance will increase as young people will find it difficult to get jobs.

But we have a problem here. As the World Bank report pointed out, the pandemic has laid bare the weaknesses of national healthcare and social safety nets in many countries. It is necessary to put in place social benefit systems that can provide an effective, flexible, and efficient safety net during disasters.

It is good to see that the World Bank recognises the need of a social security net and strong public healthcare systems. In the past, the same World Bank and IMF imposed policies of austerity under the neoliberal economic agenda. That forced governments in developing countries to undergo the structural programmes. The role of governments and states was reduced in the running of the economy.

The neoliberal onslaught of the last four decades on welfare state, social programs, public health and education and unemployed benefits has taken away most of the social benefits and welfare programmes.

“The health and human toll grows; the economic damage is already evident and represents the largest economic shock the world has experienced in decades. For emerging markets and developing countries, many of which face daunting vulnerabilities, it is critical to strengthen public health systems, address the challenges posed by informality, and implement reforms that will support strong and sustainable growth once the health crisis abates.”

It is time to rethink our economic policies and direction. Neoliberalism is not the way forward. This time try something else. Democratic Socialism might be an option. Let’s try it out.

The writer is a freelance journalist.