By Junaid Ashraf
After the heart-wrenching news of Uighur Muslims in the concentration camps in yet another dungeon of dark satanic mills on the planet, equally disturbing and painful news of people dying from Coronavirus began to emerge from China.
Responding to the crisis, the Chinese authorities went on to lock down seventeen cities. The virus has infected more than 68,500 people so far, killing almost 1665. It may take time for scientists to find the solution to the virus but one thing is clear – given the degree of interconnectedness of the global economy, the economists have not learned a lesson from the financial crises as it may blow into something big.
Just after the financial crisis of 2008, the Queen of England went to the London school of Economics and asked the economists why they could not predict something as big a crisis if they were so smart. The short-term crisis in the US plummeted the stock markets wiping out 8 trillion in value between late 2007 and 2009, unemployment rose to 10 percent, homeowners lost 9.8 trillion in wealth as the value of their houses came down and their retirement accounts vaporized. All the big banks had to be bailed out by governments. The global economy suffered. This storm struck the western capitalism so hard that it evoked the memories of the financial crisis of 1929. John Maynard Keynes had come up as a savior then, weakening somehow the Marxist pessimism of inherent doom of capitalism. Just after the financial crisis of 2008, some called for changes within the paradigm and some called for a complete paradigm shift. The financial crisis had demonstrated to us how a Chinese businessman had gone bankrupt because of the losses his American customers suffered, who couldn’t purchase his products.
Some economists today argue that the economic impact of the coronavirus epidemic will be minimal because it will affect some Chinese service sectors like tourism or restaurants. If the people in the locked down cities can’t go to work, the industrial sector and production will take a hit. The losses can’t be quantified because it largely depends on the way Chinese authorities are able to control the epidemic. In fact, Oxford Economics consultancy, which deals with forecasting the Chinese economy, quantified the losses based on doing away with the worst possible scenarios.
The American far right government, however, went on to cheer in jubilation because the loss of Chinese economy means jobs for Americans. Either this is meant to tell the American investors that ‘all is well’ or that the American economy is run, as has been rightly pointed out by some well-known economists, by a band of thugs. Starbucks stopped its chains in China recently. Furniture sellers and retailers stopped selling their products in China. Hyundai stopped its input products in the supply chain. Even the mobile phones or laptops you are reading this article on could well have parts manufactured in China. China doesn’t just import but exports as well – be it the luxury goods or the billions Chinese tourists spend in Europe. In today’s economy, companies don’t set their entire production chain in one country. In fact, Chinese companies borrow intermediate inputs to production from elsewhere and multinational companies have their units in China.
Some have argued that the effect of coronavirus would be minimal as China set an example in controlling the economic effects of SARS in 2003. First, this is not 2003. Second, the damage caused by this epidemic is not quantifiable because it continues to pose a threat. Third, when the American ambassador told Jack Ma a few years ago to sell the American bananas on Alibaba, this denoted an unprecedented degree of interconnectedness of global economy, unlike in 2003. Fourth, the scale of production in China and its importance in relation to global economy is not the same as it was in 2003.
Those economists, who tend to make the epidemic of coronavirus as a little bit of loss of target for Chinese GDP which they can manage by either fiscal or monetary easing, tend to forget that this is not a usual business cycle slowdown event. If businesses can’t operate and can’t make profits to repay their interests, it will halt spending and investment at a grand scale.
Even in the usual business cycle fluctuations, people suffer gains and losses in an interest based economy. It becomes difficult for entrepreneurs to repay their interest. The profit-loss sharing mechanism in traditional cultures would act a shield to an extent. In fact, a Princeton university economist wrote in his dissertation if the financial crisis could have been averted if such a traditional system were in place. Add to this the interconnectedness of the global economy: when one country sneezes, the entire world catches the flu. It is high time for economists and greedy bankers to come out of the cocoon and listen to the question that the old granny asked twelve years back at the LSE.
Junaid Ashraf is a student from Kashmir. He has done his post-graduate studies in economics and English literature. He is about to start his doctoral studies in economics in Istanbul. He has written opinion pieces, fiction and poetry for various newspapers and literary magazines. Research, writing poetry and fiction are his main interests. Besides that, he is a sports enthusiast and likes playing football, cricket and skiing.
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