THE GREAT RECESSION AND COVID-19

• Topics: ECONOMY
• Pages: 5
• Words: 1330
• Date added: May 25, 2020

 

CRITICAL COMPONENTS OF THE GLOBAL POLITICAL ECONOMY

Before defining the most critical components of the global political economy, it must be pointed out that the critical aspects of the global political economy are different in times of general prosperity and growth than in a time of crisis. This paper will discuss what defines the world when there is a shock in the system and when the livelihood of the general population is at stake. In these moments, there are three critical components to examine: general economic robustness, weaknesses (bubbles) in the economy, and the ability to collaborate, on both an intranational and a global scale, to counter the crisis.

Clearly, industrialization had a huge impact on the current strength of global economy. In a similar manner, the dot-com boom introduced new momentum to the global economy. These two shifts, coupled with international trade, contributed to a more robust, developed, and global economy. However, with barriers to trade shrinking, the result is an increasingly interconnected world. This makes the world more susceptible to shocks.

Moments of shock reveal if the global political economy is prepared to give a global response or if the state of global economic governance is not yet willing to cooperate—or even capable of fighting the recession. We know through game theory that cooperation can result in a more favorable position for all who play. However, a simple prisoners dilemma game is not enough to convey real world complexities. Mutually shared incentives, shadow of the future, and number of actors participating are all factors that confuse the situation. Additionally, with populist heads of state leading many of the global powers today, cooperation even less likely to occur.

COMPARING 2008 TO TODAY

Before the spread of the Coronavirus, one might have argued that the global political economy most accurately mirrored the interwar period. However, at least for a moment, the current global political economy more accurately resembles the Great Recession. When comparing both events, we will discuss what precipitated both crises, how they affected the global economy, and responses at the global and national level.

What Started It

Much like the winter of 2008, the stock market is currently in a free fall. In 2008, the surging housing prices made a bubble consisting of ill-advised securitized subprime mortgages. Some argued that this bubble was the result of America’s stubborn laissez-faire predilection: capitalism burning too hot. One could give a similar complaint about the American sentiment before the Coronavirus spread to the United States. For a couple of months, many believed COVID-19 was just an overseas issue. For those following Trump’s tweets, COVID-19 was blown out of proportion. Following Trump’s tweets, supporters likely did not. Because people felt secure, they likely did not practice social distancing, which fueled the spread of the virus. Once the threat was impossible to ignore, the virus was beyond containment and the economy was visibly injured.

The Economic Effect

Currently, many people are not working. Though they are technically employed, the result is the same as unemployment in a recession. Without a steady flow of income, people wll soon run out of savings. Because people spend less, investment and entrepreneurship will decline. These effects coincide exactly with the results of the 2008 recession. Furthermore, the interconnectedness of the economy is also revealing the weaknesses in economies in autarky.

Responses

We do not know yet how the United States government will respond to the economic crisis that has resulted from COVID-19, but we can assume that there will be some kind of stimulus package response. To prevent solvency crises, central banks worked together tin cross-border lending. In a similar manner, countries shared information on the spread of COVID-19 and made appropriate travel bans.

CONTRASTING THE TWO RECESSIONS

Economic downturns are often exacerbated by people holding onto their money, entrepreneurs investing less, and rising unemployment. The impetus and responses of the events, however, are often different. In this case, the two mechanisms that precipitated either crises are obviously different: the Coronavirus and the housing bubble. The reactions are the interesting divergent part of this equation.

Different Crisis, Different Economies

Even though unemployment rose during the great recession people were allowed to work. Economies could at least find their comparative advantage. An open economy raised the trough of the recession. But for the current crisis, we do not possess such a luxury. Many people are forbidden to work, and many importing and exporting sectors are on pause.

American Response

As for the American response to the 2008 recession, the main mechanisms included bank bailouts, recapitalization, state asset purchases, and state guarantees for debt. The current stimulus is still under debate, however there is one aspect that is entirely different from the original response: the idea to give each American under a certain wage limit a relief check.

China’s Response

There is one more interesting development from this crisis. China has been the biggest rival to the United States’ power. But China’s own predilection to shirk responsibilities limits their global influence. However, because China was the first power to come out of this crisis, they are in a unique position to aid other countries. This opportunity is allowing them to act in an uncharacteristic manner. China is leading in aid now that the Coronavirus has subsided there. It is not shirking. Sending ventilators.

PREDICTING THE FUTURE

It is unclear how the Coronavirus will play out in the coming months. But assuming there will be an end to the pandemic, we can make some predictions on the global political economy based on how the recovery of the great recession played out.

A Reason for Optimism

To look on the bright side, the rebound will likely be quick. The recovery from the 2008 recession was relatively speedy. Since people are artificially out of their jobs, the potential energy, when released, will jumpstart the economy.

A Reason to Worry

Even though it was globalization, and the break in the supply chains that resulted in the sharp decrease, it will be globalization that will fuel the uptrend. As for future economic shocks, continued integration and globalization will only make the economic impact of any pandemic greater. Interdependencies of economies magnifies the impacts of shocks. This means, over time, smaller and smaller pandemics will have greater effects on the global political economy.

Increased Inequality

Pandemics also significantly change the flows of value in an economy. Those companies that have the least amount of barriers raised as a result of a pandemic will have flows rushing to them. In the end, companies like Amazon, and those similar, will grow at an unmatched rate. Alternately, people who work non-essential jobs, or jobs that cannot be shifted online, no longer contribute to the economy. Thus, are no longer making an income. This bottleneck and major shift of economic flows will contribute to greater inequality.

The Legacy of this Crisis

A 2009 international pool showed “respondents supported major reforms of the international economic system”. The very same polls indicated that these individuals wanted more “powerful global financial regulator”. Like then, there will be similar calls for change in the international health care and economic systems. As Basel III was to banks, there may be new regulations by CDC and/or WHO. There may also be an international mechanism put in place to streamline vaccine development and production.

Finally, there may be concentrated long-term effects like the European debt crisis after Great Recession. People may take out loans with the expectation that they will quickly pay them back post-COVID-19. If the virus lingers too long, people may start to default on their debt. Even more, people who were laid off as a result of this crisis may have problems finding work again. Even if Coronavirus ended today, the economic effects of the virus will last long after the final patient recovers.