Close Encounters

In retrospect, the big lesson to be learned from 2008 was that the global economic system was operating on terrifyingly thin margins. Banks were taking ever-bigger bets on products they didn’t really understand but had very little capital in reserve to cover any losses. There was virtually no slack in the system and this almost proved fatal when the bets went spectacularly wrong.

The same applies now, only on a much bigger scale. The financial system may perhaps be more resilient than it was in 2008 but the global economy as a whole operates with the scantiest of safety buffers and with no margin for error. And that’s true from top to bottom: from the ultra-low interest rates that have been keeping the global economy afloat for the past decade to the scramble to find intensive-care beds in public hospitals. When politicians say the fundamentals of the economy are sound, they could not be more wrong.

Here’s the naked reality. The past 30 years have seen global markets — especially global financial markets — increase in both size and scope. Long and complicated supply chains have been built: goods moving backwards and forwards across borders in the pursuit of efficiency gains; hot cash flowing into emerging markets looking for high returns and flowing out again just as swiftly at the first sign of trouble.

The development of stronger global institutions might have acted to constrain some of the excesses of transnational capital but not since the 1930s has multilateral cooperation been so lacking. The only effective form of international coordination comes from central banks, which ensure that money is cheap and plentiful. Any attempt to raise interest rates to what would once have been considered more normal levels is met by stock market panic and is quickly reversed.

The 2020 decade is the weakest since 2010. This means that millions of workers are only one payday away from penury. For most, self-employment is a daily struggle to make enough to live on. Small businesses, such as family-run restaurants, operate on wafer-thin margins. For them, the cost of taking out an emergency bank loan (assuming they could get one) would wipe out their profits for the next two years.

What this amounts to is a world clinging on by its fingertips, even in what passes for the ‘good times’. There are no lessons to be learned from what has happened globally since China warned the World Health Organisation (WHO) on New Year’s Eve that it might have a problem on its hands. It would be an act of supreme folly to write off 2020 as an aberration and assume that everything can return to normal.

Some changes look inevitable. Companies will shorten their supply chains as a result of the disruption caused by the pandemic. Extra money will have to be found for health systems so that they can operate with more spare capacity. Covid-19 has exposed the risks of a country, such as Pakistan, running down its domestic manufacturing base and relying so heavily on outside loans. Investment bankers are surplus to requirements when the country is almost bereft of testing kits and ventilators.

Other reforms look tougher. There is a need for a stronger international system to both manage the fight against the pandemic and minimise the economic damage it has caused. No country can operate a go-it-alone approach to Covid-19, despite what American President Donald Trump might think.

Currently, Pakistan is hardly any different from among the worst Covid-19-hit cash cases worldwide. An economy that was only just recovering from an external crisis that saw the country go back to the International Monetary Fund (IMF) and then on to G-20 nations has now been dealt a body blow whose impact is unimaginable. During every major economic crisis in Pakistan — and there have been several of them — the wheels of the informal economy have chugged along. Today, the country stands to lose the most, particularly the tens of millions of workers who rely on the cash-based sector to provide them with the bare minimum income required to meet their daily needs.

In many ways it was a cause for concern for what awaits vulnerable segments of society that led Imran Khan to waver. The human and economic cost of this indecision cannot be calculated for the time being, but one must recognise that it was empathy for the vulnerable and not an anti-science worldview that delayed the federal government’s response to the crisis.

With more economists now believing that Pakistan’s fiscal deficit will be significantly worse than projected this year, and with the fallout from the pandemic pushing millions into unemployment and poverty, the country could have the worst cash crisis since 2018, when economic growth fell to 3.4 percent — the lowest of all times. And it’s no longer just the human and economic costs of the pandemic — other crises are at risk of being neglected by our policy-makers or unwittingly exacerbated by the outbreak.