What has been the impact of the coronavirus pandemic on the global economy?
Covid-19 triggered a major health emergency and a severe economic crisis. The pandemic came against a backdrop of highly globalized economies, integrated supply chains, a significant share of the services sector, a very high level of public and private debt, and above all unprecedented human interconnectivity. It is a health crisis to which governments have responded by placing the economy in artificial coma, causing a supply shock. Businesses cannot produce anymore, and this has resulted in a sudden and unprecedented halt of economic activity and a substantial tightening of financial conditions. People found themselves out of work. By depriving millions of people of work and income, the sudden cessation of business activity has led to a drop in demand and to an economic recession.
How long may this recession last?
Most analysts do not expect a strong recovery before next year as the shock has been severe. But we cannot make any predictions unless we know the extent of the contraction, how much production has been destroyed and especially the time it will take to control the pandemic.
In developed countries, governments have taken far-reaching actions, learning from the 2008 financial crisis. That crisis has taught us that the cost of safeguarding the system is less than the cost of rebuilding it. In the United States, for example, the activity rate remains lower today than in 2008.
To prevent the economy from collapsing and allow it to restart, it is necessary to support businesses and preserve jobs. This is the policy adopted by European countries, which massively subsidize companies to avoid layoffs.
In the United States, where the labor market is more flexible, the authorities take a different approach. The government has stepped up emergency support for businesses and money transfers to households. It has also significantly increased unemployment benefits in the face of the rapid increase in the number of unemployed.
How are developing countries doing?
Developing countries do not have the means to cope with the crisis. In terms of health, we have the impression that they are doing better because they have drawn on the experience of others and imposed confinement measures very quickly. However, the figures announced by these countries must be put in perspective of their institutional capacities.
The economic impact of the pandemic, on the other hand, will be very difficult to manage in countries where social protection systems are generally failing or non-existent and debt levels are high. Low-income countries must pay $140 billion in debt service this year, including $10 billion in foreign currencies.
Emerging markets are also facing a liquidity crisis. It is estimated that more than $95 billion has left emerging markets since January, the largest capital flight recorded in nominal terms. Capital outflows are more pronounced than during the global financial crisis when measured as a percentage of gross domestic product (GDP). To date, about 100 countries have requested emergency assistance from the International Monetary Fund (IMF), twice as many as during the financial crisis.
In special drawing rights, new borrowing agreements and emergency assistance, the IMF mobilized a total of $1 trillion for countries in difficulty, and the World Bank announced $200 billion. For its part, the Group of Twenty (G20) supported a plan to suspend debt service payments for the world’s poorest countries till the end of 2020. But all that may not be enough and perhaps debt relief for the poorest countries should be considered.
What is the situation of the Arab countries in particular?
On the one hand, there are oil-producing countries, which have overall better healthcare infrastructure and more liquidity but are facing the collapse in oil prices. Most Gulf countries have sufficient reserves to support domestic demand, but the crisis may slow down their diversification plans.
For oil-importing countries, falling prices reduce oil bills but will also impact remittances and tourism. However, most of these countries already suffer from high poverty rates, low growth and debt levels that severely limit the states’ ability to support the most vulnerable sections of the population.
Morocco and Jordan have called for adjustments in their existing programs with the IMF, Tunisia and Mauritania have already received emergency assistance from the IMF, while Algeria, Iraq and Lebanon are preparing applications for IMF assistance.
Will the pandemic bring about structural changes at the global level?
Changes in the behavior of economic agents may upset the global economic and financial order. With the decline in world trade, there has been an awareness of the vulnerability of supply chains. Some essential productions may be relocated, but no country can produce all the goods and services it needs. As a result, there is likely to be more regional integration, with more robust supply chains in place. We may see a tripolar world made up of North America, Europe and East Asia.
But the crisis will also profoundly change the behavior of public authorities, which will be called upon to ensure universal healthcare coverage and more social protection. Pressure on public spending may force states to impose bigger taxes on wealth and higher incomes, which would help reduce inequality. We can also expect massive investments in the post-crisis health sector, particularly research and development (R&D), and this is likely to widen the gap between wealthy economies and the rest of the world.
What about Lebanon? Is the global crisis worsening its situation?
The pandemic ultimately had little impact on Lebanon, as activity had already been at a standstill for several months and the banking sector isolated from the rest of the world.
The pandemic has even given the system a breath of oxygen: falling consumption and drop in oil prices have slowed the flight of foreign exchange; the global context has allowed Lebanon to access emergency international aid and confinement measures have slowed down the protest movement. The deterioration of social conditions has also allowed the traditional political class to reactivate its clientelist networks. But that cannot last. With the global crisis, Lebanon’s partners will refocus on their domestic problems, employment opportunities for Lebanese abroad will be restricted and the Lebanese will take to the streets again. The longer the crisis, the more difficult it becomes to overcome. The country will not be able to emerge from its crisis without an IMF program and international aid.
Can the government’s reform plan save the country?
The current debate is not healthy. Everyone is focusing on the “haircut“ on deposits, while 55% of Lebanese adults are unbanked. It is mainly the decline in income and purchasing power that needs to be addressed. Lebanon, which no longer has the means to defend the pound, will have to exit the fixed exchange rate regime, which it should have done in 2009-2010, when it experienced massive capital inflows. Today, the cost will be much higher, hence the need to rethink social protection and put in place social nets.
Of course, the banks and the central bank (BDL) must be recapitalized, otherwise the country will not be able to have a healthy relationship between the economy and the financial sector. And to do this, one must start with the shareholders of the banks, whose management has not respected the basic principles of risk diversification by placing 70% of their assets in the public sector. On the other hand, the state’s assets should not be sold off in the midst of a crisis, let alone entrusted to a banking sector that has failed to manage a wealth equivalent to 400% of GDP.
The most important thing is to address the source of the problem, which is governance in both the financial and public sectors, in order to regain the confidence of the Lebanese and the international community. Reforms must focus on fighting corruption, clientelism, favoritism and monopolies.
The technical solutions are there, but the remedy to the Lebanese crisis is above all political. We must regain our military and monetary sovereignty. As Daron Acemoglu and James Robinson argue in their book "Why Nations Fail", one of the main factors that determines a country’s economic development is the quality of its institutions, which must be pluralistic and stable.
It is not a question of changing Lebanon’s economic identity, as some say. It is about moving from crony capitalism, which is in the service of political leaders and has replaced the war economy, to a real market economy accompanied by a new social contract.
In the short term, a general impoverishment of the Lebanese population is inevitable as we must pay the price of years of carelessness. But in the medium term, if there is a political change, I am optimistic about the country’s future.