No changing of the tides

Hany Ghoraba
Tuesday 14 Apr 2020

Despite the disruption caused by the current Covid-19 coronavirus pandemic, there is unlikely to be an economic tidal change after the crisis is over, writes Hany Ghoraba

As the Covid-19 coronavirus crisis grows more profound across the globe, claiming the lives of nearly 110,000 people and infecting over 1.78 million others by 12 April, the world is racing to develop a reliable vaccine to save humanity from the worst pandemic in over a century. 

However, as the world is vehemently searching for a reliable vaccine or cure, the elephant in the room is the state of the world economy, which is growing worse by the day. As most of the world’s major cities have slowed to a snail’s pace during the crisis, its manufacturing plants, agriculture, stock markets and trading centres have also come to a virtual halt due to enforced curfews and lockdowns preventing most human gatherings. 

These health and safety measures intended to save human lives have a steep economic cost, and the global economy was already on the edge of recession before the coronavirus crisis. Now many economists are predicting its near total collapse. 

Many questions still surround how to tackle the world’s most challenging crisis since World War II and how normal life can be restored even if the virus itself is eventually contained. These questions are not easy to answer, but life will return to normal eventually and maybe even faster than many pundits and analysts think. One line of thought says that the Covid-19 crisis could give rise to a new world order and see the rise of China to inherit the throne left vacant by the United States. 

However, neither of these things is certain. There is too little data available to forecast what will happen in the coming period or in the post-coronavirus era. There is also exaggeration or even wishful thinking in the ominous forecasts that say that the Western capitalist counties are doomed after they survive this crisis.

Such forecasts stem from the possible recession that the Western economies may suffer from as a result of the crisis, predicting their fall in favour of the rise of the Chinese. However, this analysis neglects the fact that the Chinese economy’s meteoric growth over the past three decades has been largely reliant on exporting goods to these Western countries and their thriving economies. As a result, China, as the world’s leading exporter, could take an even bigger hit than the Western economies should the latter falter and fall into recession. 

Thousands of Chinese manufacturers would be out of business in record time, especially those that are reliant on exports to Western countries such the states of the European Union, the United States and Canada. The rising economies in Asia, Africa, South America and the Middle East will hardly fill the gap if the Europeans and North Americans are unable to import Chinese products. 

The credit lines granted by the Chinese government to developing countries have helped Chinese exporters to grow exponentially by facilitating their entrance to markets that had previously relied on Western products. But these credit lines have a limit, and they cannot be provided indefinitely. In many cases, and even before the current economic crisis, some countries had defaulted on their debts to Chinese lenders, such as Kenya’s inability to pay a two billion Euros loan to the Exim Bank of China taken out to build a new port in Mombasa. 

The situation had exacerbated to the extent that China was threatening to take over the new port from Kenya. China remains Kenya’s largest lender, and Chinese loans account for more than 72 per cent of Kenyan foreign debts, which are more than 42.8 billion Euros. This situation is an undesirable one for any developing country, and Kenya thus faces defaulting on Chinese debt and possibly leading to the seizure of one of its main assets.

Moreover, China is facing a backlash from the Western countries as well as from Asian economic and political rivals such as Japan. There is a growing trend for foreign investors in the Chinese economy seeking to relocate their investments to their home countries to make up for the economic stagnation and recession that has befallen them. 

Japan has allocated $2.5 billion to Japanese companies seeking to relocate their investments out of China. Other calls, which have gone hand-in-hand with calls to boycott Chinese products, are being heard in the United States coming from various politicians. But economic boycotts against China will not lead to any tangible results in either the shorter or the longer term, as economic ties to China are too intertwined, and boycotting Chinese companies will lead to harming American and Western companies as well. 

 At the same time, while China is vying for the top spot as an economic superpower, it is very much aware that there is no point in manufacturing products that will have no markets if it loses its largest export markets in Europe and North America as a result of the recession that may befall these economies. In fact, the Chinese economy will be equally hit if the EU and US economies suffer in the coming period, which means that it is in the best interests of China for the global economy to remain in its current position, as there will be no real winners if the economic superpowers start to fall out with each other. 

As a result, even during this dark period of economic uncertainty when there are shifting tides favouring one country against another, a general restructuring is unlikely to be straightforward due to the complex global economic structure. This is not to say that China may not eventually claim the top spot as the biggest economy in the world should the current state of near recession drag on after the coronavirus crisis is over. But no war like World War II has destroyed the economic or industrial might of the other existing main players.  

Therefore, returning to normal rates of production after the crisis is over will be attainable provided that governments, central banks and commercial banks provide the necessary incentives to save ailing companies through loans and other programmes intended to facilitate the return of companies and industrial plants to full production. Losses will be incurred by the banks, and some companies may not be able to withstand the tide of events, but a total economic meltdown can be avoided with smart planning and execution.

Germany has already announced an economic-stimulus package of over one trillion Euros, and the US has allocated over $2 trillion to support the economy. Other countries are taking similar action to support their economies and allow them to survive the current crisis. These actions and others on the socio-economic level will ensure the survival of the global economy despite the speculation of many economists worldwide. They will also mean that such uncertainties will not change the global economic balance much in the coming period.


The writer is a political analyst and author of Egypt’s Arab Spring and the Winding Road to Democracy.


*A version of this article appears in print in the  16 April, 2020 edition of Al-Ahram Weekly


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