KAMPALA – The effect of the Coronavirus on Economies
There is an English saying that “the taste of pudding is in the eating”. (too much British influence) If you really want to know how something tastes you must eat it. Today the world is being ravaged by the Coronavirus. Different people understand it in different ways depending on where and who they are. They have to taste it to understand it. There are many theories as to why the virus is in the world in the first place, who created it, the reason for creating it and where it will end. As I urged in one of my earlier submissions, where it originated and who did it is not very important now. The issue is stopping it and restoring normality in the world and getting economic activities to their feet. The issues of origin may however be important in relation to the objectives of whoever created it and why it got into public space. None the less our discussion here focuses on how the Coronavirus pandemic manifested itself, the damage it has left in its path and how to move on especially in economic terms. What is the way ahead for the different countries and economies and indeed the entire world?
Looking at the different countries, the key countries are China, the United States, Europe and Africa as a group, or say the developing countries generally. I would add India as one of the key countries to look into whenever we are discussing the future of the world. Though we shall not discuss it here.
So the question is what will happen after the Coronavirus has gone away. We sincerely hope it will and very soon and with minimum damage especially to the poor souls in developing countries. This is what I have said we shall have to eat the pudding to know how it tastes. The economic distortions have to manifest themselves before we know what they are. Both China and United States are the world’s leading countries. They are biggest countries, the United States is the biggest economy followed by China. What contrasts them is that, the US has a population of about 380 million people while China has the population of four times that, approximately 1.4 billion people. China has over 700 people in the middle class, so statistically China appears to have a bigger advantage over the US but the US is definitely much more ahead in terms of the numbers of goods and services an individual consumes. The US has also had the added advantage of being a world leader in technology. But otherwise both are now literally developed countries given the GDP and the per capita GDP. ( USA Nominal GDP$21.44 trillion and China Nominal GDP$15.5trillion )USA per capita GDP is over US$ 60000 per year while China is now approximately US$18000
The economic rivalry between the two of them is on now and again. This rivalry is alluded to as the likely cause of the Coronavirus pandemic among other factors. When nations compete for resources chances are they will conflict. A war between countries may be is a result of sharing scarce resources. A war may result from disagreement on objectives of each country, it may arise as a result of how different people mainly leaders see different things. So in nutshell, what has being happening between China and United States is struggling for resources, struggling for who dominates the world and this has been and/ or is the most likely source of conflict and it also appears to be pointing to the source of Coronavirus pandemic.
There are various reports about what happened to the global and individual country economies after the break of the Coronavirus pandemic. How did the countries react? How were they affected? How did the economies fare? Some of the indicators is the degree of destruction that the virus is causing to various economies or it has caused or will cause to various economies. Economies world over will experience recessions. Already this has happened defying the usual definition of a recession. It is just how big the decline in the economy will be that is not known. But the damage has already started. It may be worse than what has happened already. From this damage a new world order may emerge.
The damage by the Virus
We cannot tell the degree of the damage but key players in financial markets especially the World Bank and leading Commercial banks may be able to make predictions on how different economies will be affected. Statistics shows that China suffered a huge drop in manufacturing. Being the world factory as it closed its borders and as other countries closed down, closed borders, the Chinese economic machine suffered. It is reported that industrial output fell by 13.5% in January. Fixed asset investment fell by 24.5%, private sector investment fell 26.4% and retail sales by 20% in the same month. This was just the beginning. February was worse. The number of unemployed rose February and March figures are worse. Most economies worldwide are predicted to lose about 50% of their projected growth rate this year. On April 09, 20202, the number of unemployment in it US reached 15 million! 10% of the country’s work force! If the virus is contained soon, leading economies may take up to a year or more to get back to normal, but what normal? How about the poor countries? How will the world look like?
We know as we write now, that China has been able to control the virus. We now have reports that China is opening up, reviving its production machinery and trying to restore the economy to normal. We know that the US is still experiencing challenges with the pandemic, so far, with numbers rising. Today the US is most affected economy in the world with about 30% of the worlds infections. How will this damage the economy? It has caused terror around the world and unemployment.
We are not sure of what will happen to African countries because either the virus will not hit them as badly as it has done elsewhere or it will hit them very very badly. Unlike China which has already concluded the biggest part of the problem, Africa is yet to experience it and of course we can only speculate. There are all kinds of reason as to why it is not yet there, there are all kinds of reasons what will happen to Africa and other developing countries. Developed countries are evacuating their citizens from developing countries, what is the fear? Despite this the important point to look at now is the economics of the aftermath. Africa is largely poor, poor medical facilities, life style makes contagion faster and more dangerous. With the different conspiracy theories, Africa needs to brace for the worst.
I alluded to the fact that control of 5G is one of the hottest topics on the table and is being related to the Coronavirus. Some people feel that actually China, as I write now controls the 5G and that has already proceeded to control 6G and what is for grabs is 7G. That all these developed countries have been working towards it and China may have moved ahead. The dispute between the USA and the Chinese company HUAWEI rotates about 5G. If China has moved ahead to control the technology then it means that China has capacity to control many cyber activities in the world including a war. There have been public outcry by various people in the west who always think China is secretive in its activities. China’s political system is not open. But which country freely talks about their research especially that which leads to gaining superiority over other countries. More still if the research is for military purposes.
Following the Japanese economic miracle in the 1970s and 80s Japan exported to the US and started developing excess funds, these moneys were borrowed by the American economic system. Japan was fixed in a meeting between Finance ministers of Japan and the US in New York in 1985. At that time Japanese economy threatened to surpass that of the USA. China has been in a similar position in recent years. But China is more subtely aggressive. It uses mainly government owned companies to do business. America is based largely on debt so they borrow from the world and they use that money for consumption. Remember the worlds trade is pegged to the dollar. So, they have the flexibility to do what they want to do to the economic process. In the last 30 years China has been the economic juggernaut. It has been exporting to the whole world over. Of course this has made them demand raw materials from everywhere around the world setting it on a confrontational path with other countries. Of course, the American economy is still the biggest using current prices. That is where people crank up many products from the shops. Everybody wants to export to America. That is where the markets are. But this is changing. According to IMF, using Purchasing Power Parity, Chinese economy is the biggest in the world producing US$25.3 trillion in 2018. This is was followed by the European Union with US$22 trillion and the United States third with US$20.5 trillion. As China took over most industrial production in the world, the American people started spending a lot of money buying goods from China. China has therefore over the years developed a surplus in their balance of Trade (BOT) with the USA and indeed with the entire world. The Chinese reserves have ballooned and the Americans have been borrowing this money. This has elevated China to a higher level in world affairs.
The Chinese Response
Because of the magnitude of Chinese exports, the Coronavirus may change things. There is a school of thought in America that thinks the US should revert to manufacturing again. They cannot do so unless if they close their market to imports. If they lock out imports the corresponding countries will also lock out American goods. First a trade war, then possibly a real war. The winner will be the one that controls both 5G or 6G. because of the Chinese economic muscle the Chinese currency is likely to be recognized for trading purposes worldwide. It is thought that among the things that China is going to do especially using the incoming technologies is to have a currency that does not require the dollar, this is the cryptal currency. China may develop its own digital currency or has developed its currency and this may make trading move away from the dollar zone to the new cryptal currency created by China. This is going to turn tables, this means that globally China will call the shots. This will devastate the American economy. I believe the Americans are not taking this laying down. The American military industrial complex has been at work.
Today if you want to buy something from any country, the seller wherever he is in the world, normally prices the goods they are selling to you in dollars. This has been a requirement even when you are a Ugandan selling to a Kenyan next door. What China may do is change the world system from dollars to the Renminbi or for that matter into the cryptal currency! The cryptal currencies are some of the 4th Industrial Revolution technologies that are coming up in the world and with cryptal currency you do not need a dollar, you don’t need these current forex exchange rates. So, we may see a major change in the currencies and in the trade patterns.
Another important change that may be coming up is with financial markets. Financial markets is where those who have money avail it to those who need it for investment and here we have organizations, and we have countries. Organizations usually do this through stock exchange and nations tend to go out to borrow from the World Bank, other regional banks and also from governments. The countries with excess savings are China and Japan! The largest companies in the Forbes world list are now predominantly Chinese. The biggest banks are now Chinese. The tide has shifted. A new world order is rolling out. The key players in financial markets are no longer predominantly American.
If the American government wants money and it’s not available in the American market it will go to borrow this money by issuing a bond in a Chinese market to get the money that they want. So, what is happening right now is that it seems there is a shift from the American and European of course including the British financial markets to the Asian markets mainly China.
The recent drop in shares in western financial markets made leading western companies prey to Chinese predator investors. It is possible China may today have substantial ownership of American companies. China had the money to pay for stocks whose prices were falling, China did the logical thing, BUY. At the peak of the Coronavirus in China the Shanghai Composite index fell by about 20%? But by now it has recovered to its early January level. The Dow Jones and FTSE are yet to recover. They also fell by over 20%.
Management Guru Akio Morita (RIP) a Japanese SONY founder lamented about financial markets way back in the 1980’s. In his book Made in Japan, Akio Morita raises the issue of American wealth created through trading (speculation) on the Stock Exchange and not through actual manufacturing. He was fearful that one day this may destroy the American economy. Is the time now?
China may therefore be the next big thing in terms of financial markets. It is believed that as China has recovered from virus, investors are finding that the stability in China is giving them more profitable opportunity to put their money into China rather than keeping it in Europe or in the US. This definitely is going to be a major shift in the financial markets globally. If China wants money today it can get it easily because the investors know that China is more stable. As the US Coronavirus figures rise (now the highest in the world with over 500,000 infections) there will be more instability on Wall Street. Veteran investor Warren Buffet is reported to have with a net worth of US$ 74 billion has been reported to dump stocks in anticipation of a further crash. He has already sold off Airline stocks. The Dow Jones may crash further by 50%. The gamble of oil production also backfired. The Saudi looks like at the behest of Americans increased oil production to punish Russia. The Coronavirus dampened the demand. The price of oil collapsed! The Saudis have on their own volition now cut back production to boost prices.
Some of the problems in the American economy have been brought by US leadership itself.
President Trump has not aided the US financial markets in terms of stabilizing them because of his now and again reckless and casual remarks that he now and again makes about markets and about business. He is also fighting the “Deep State” that invisible hand that runs the American government. Once you take office in the US, as President you are humbled by the power of the invisible hand. Its current interests are contrary to those of President Trump! So we may see that in terms of the financial markets, the inflows in China may grow bigger because China will be seen as more stable as feuds is the US leadership linger.
China was able to manage the Coronavirus with precision and ruthlessness that didn’t allow debate or interfering. The Italian Prime Minister admitted that dictatorial decisions in Italy were not easy to make hence the high infection rate in Italy. Before the US took over, Italy had the highest number of infections and death in the world.
Investors are happy with the results and stability in China. Those feeling that China may not take world economic leadership may be betting the wrong horse! Investors don’t listen to governments unless if it is coming to their aide. Hedge master George Soros made a billion dollars profit in 1992 betting against the British government. Investors use their feelings of what the market is because they want safety of their money and they also want to see that they have return on their investment. With the money they have, backed by technology, the roll coaster appears unstoppable in China. It is now fueled by Belt and Road initiative. China is on the move to lead the world. As earlier stated, today the biggest banks in the world are no longer American they are Chinese banks biggest businesses are Chinese.
What can stop China?
There are people who believe that China may have difficulties in the recovery too. The doom sayers as they are called. There is a feeling that China was able to recover her economy very well after 2007/2009 crisis in the US because it had all the money it wanted. Of course, the Chinese money did a great deal to resolve the subprime mortgage crisis in the US. China was affected by putting all its money to the American market. America has been in this leading position globally and their currency being the leading currency where all the trade is expressed. It had this advantage over all other countries.
True the US will do whatever is possible to retain its leading position. After World War II America had 40% of the world economy. This is now 15.2% (2018). So, there is a feeling that China may struggle to recover, there are some predictions that the Chinese economy in the coming years will grow at about 2-3% as compared to the estimated 6% as a result of the Coronavirus pandemic outbreak. This will be slower than predicted. But the American economy may grow slower too. This will be a worldwide low growth pandemic! With revival in manufacturing and the rise of business based on 5G technology
My feeling is there will be nothing that will make investors abandon China, short of a war with the US which is futile for both countries. I don’t think that there is something else that can make China lose its initiative on the economic side having been the worlds factory, having been the world’s leader in manufacturing things. The biggest economy if we use PPP. With all the money and currently No. 2 in the world China stands a chance to lead the world.
The hyped African economic big thing is a still birth! Africa is expected to take over from China as a high growth area. This will not happen! Africa is too divided to diverse and ruled eternally by different countries. It cannot challenge the behemoth China. I feel it’s not going to be a very big problem for China to recover especially that it is now the country that is on the recovery line.
China has resumed production and it will go around the world supporting various economies to see that they too recover. China is walking into different African Capitals signing agreements for raw materials as it aide these countries to build infrastructure. Individual African countries are no match for China. A unified Africa was buried with Gadhafi!
Prof. Waswa Balunywa is Principal of Makerere University Business School in Uganda