Beyond the human tragedy, Covid-19 has created an economic crisis around the globe. As per the analysis of the Centre for Global Development, this economic downfall is largely due to ‘diversion behavior’ which includes three kinds of actions. Firstly, certain types of behavior are prohibited like that in China and Italy where one can see the closure of shops and factories. This has implications for the informal economy where there exists no paid leave. Secondly, individuals have reduced travel aspects and their going out activities. Thirdly, we can easily see that firms and institutions have witnessed either proactive measures or government bans.
Diversion behavior affects all sectors of the economy which includes health, manufacturing, retails, transportation, education, and others. The supply and demand side has decreased income levels. Supply-side says that reduced production drives up prices for consumers while the decline in demand hurts business owners and their employees. Although these reductions are short term in nature, they can be translated into long-term episodes.
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In one of the research columns titled, “News and uncertainty about the economic fallout of COVID-19: Survey evidence and implications for monetary policy” by Alexander Dietrich, Keith Kuester, Gernot Müller, Raphael Schoenle, 24 March 2020, it is suggested that the effects of the Covid-19 pandemic on the global economy are negative, large, and highly unknown. As far as short-term reductions are considered, governments need to examine people’s expectations and the related range of certainty. The research used a survey of US households with related variables of both formal and informal economies.
Given the pandemic lockdowns, the health sector may soak up more resources where physical infrastructure will lag. Education is the most affected sector which may lose human capital in the end. Students are vulnerable as either they may not learn or leave the system at all. Early indications suggest that if we take coordinated measures then this uncertain loophole may have less severe implications. These measures include containment of pandemic, strengthening of the safety net and stringent assessment of implications.
The initial forecast regarding the Chinese economy has come to be inaccurate. In February, China’s manufacturing and services sector was got the record low statistics. Automobile sales sank 80% whereas export saw a 17.2% fall. Although the outbreak has been slowed in China, their economic recovery will be challenged with a decreased ratio of demands. Europe and Japan are already existing in recession territory whereas the likelihood of the US in this loop may gain some uncertainty. Organization of Economic Co-operation and Development (OECD) predicted that global GDP will be lowered by one-half a percentage point for 2020 (from 2.9 to 2.4 percent). In the worst-case scenario, as per Bloomberg Economics, full-year GDP may attain zero percent.
Pakistan is no exception. Diversion technique can be witnessed in all four provinces with absolute travel restrictions. In March, the Pakistan Stock market dropped around 10% with reports that $610 million has flown out of the country. There is a 30% decline for crude oil in the international market. It is beneficial for Pakistan as its economy is oil-dependent. Unfortunately, the tax-starved government may not fully pass the impact on the masses. Under these circumstances, the authorities should respond swiftly and clamp down hard on profiteers. There should be astute planning and execution in the educational sector as well. The Asian Development Bank proposes four scenarios i.e., best case, moderate impact, worse case, and the worst case. Given the account of CPEC and BRI, the Pakistani government must indulge all resources to at least gain a moderate impact.
So far now, national governments have responded with uncoordinated policies towards the virus. China has announced billions to deal with companies that are facing liquidity problems. In the United States, Federal Reserve along with bank regulators has decided to prevent the growth shock from turning into a broader financial crisis. The European Central Bank and Bank of England have yet to decide the future of their monetary policies. However, G20 has pledged to take appropriate fiscal and monetary measures. Also, G7 finance ministers reaffirmed their commitment to deal with the crisis. None of the organizations or countries has outlined specific steps. As far as the World Bank and International Monetary Fund is concerned, they announced $50 and $12 billion in response to the virus, respectively.
The situation is evolving which has driven the global economy into a downturn. It requires massive funding to help developing nations and, as per IMF Chief Kristalina Georgieva remarks, the world has already entered a recession. Scientists don’t know the virus’s behavior, transmission rate, and the full extent of contagion. To escape the tragedy, we need coherent, coordinated, and credible policy responses around the globe.
The writer is a team member and a student of MPhil from Centre for South Asian Studies, University of the Punjab, Lahore.
Disclaimer: Views expressed in this article are those of the author and Balochistan Voices not necessarily agrees with them.
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