The Covid-19 pandemic has caused an enormous jolt to the world economy. We are in the midst of the biggest global slump since the Great Depression of the 1930s. The present recession in Britain is being described as the worst for 300 years.
How are we to understand this shock in historical terms? This is important if, as many experts predict, there will be more pandemics. Martin Wolf, chief economic commentator of the Financial Times newspaper, devoted a useful piece last week to addressing this question.
Wolf argues, “Covid-19 has demonstrated a social and economic vulnerability far greater than experts imagined.”
If the pandemic kills five million people, it would amount to 0.06 percent of the world’s population. Compare this with the so-called “Spanish flu” of 1918-19, which is estimated to have killed between 2.4 and 6 percent of the world’s population. Older plagues had an even higher body count. More than a third of Europe’s population died in the Black Death of the mid-14th century. Some 93 percent of indigenous people are estimated to have perished in the smallpox pandemic brought to the Americas by the Spanish conquerors in the 16th century.
The economic cost of Covid-19 has been huge—Wolf guesses as high as 75 percent of world gross domestic product. This is much higher than the forecasts economists made before coronavirus hit, projecting the impact of a pandemic comparable to 1918-19.
“Why, then, has the economic damage of such a comparatively mild pandemic been so huge?” Wolf asks. “The answer is: because it could be. Prosperous people can easily dispense with a large proportion of their normal daily expenditures, while their governments can support affected people and businesses on a huge scale.
“The response to the pandemic is a reflection of economic possibilities and social values today, at least in rich countries. We are prepared to pay a vast price to contain pandemics.”
There is an element of truth to this argument. Rich economies have more resources to spare to prioritise saving lives. And Wolf reproduces the Institute for New Economic Thinking’s now famous chart that refutes the idea there is a “trade-off” between saving the economy and saving lives. On the whole, those states that prioritised saving lives also lost less economic output. China is the standout case.
But it isn’t just about how rich an economy is. The same chart shows that the states that suffered the biggest losses of lives and output include Italy, Britain, Spain, and France. The US and Belgium aren’t far behind.
So some governments in the wealthy North have chosen to prioritise profit. In the process, they killed tens of thousands of especially black and poor citizens and tanked their economies. Britain under Boris Johnson has failed particularly spectacularly.
Add to this the fact that poorer economies often aren’t in a position to choose between lives and profits. The International Monetary Fund estimates that states in the advanced economies have increased spending by about 20 percent of national income. The governments of the poorest economies have, by contrast, been able to find the equivalent of only 2 percent of output.
But, once again, this isn’t just a matter of absolute wealth or poverty, as the examples of Cuba and Vietnam show. Additional government spending has been financed largely by higher borrowing. The Institute of International Finance estimates that global debt will rise to over £200 trillion by the end of the year, around 365 percent of GDP.
Despite the noises from the Tory right, this isn’t a problem for governments such as Britain’s, which issues debt in its own currency and can borrow at ultra-low interest rates. But poor economies that have already accumulated large foreign debts don’t have the same room for manoeuvre.
The Marxist blogger Michael Roberts points out that six states have already defaulted on their foreign debts, with more to come. This “coming debt disaster” underlines that how well or badly states cope has everything to do with the prevailing relations of economic power.