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June 2020, No. 94


Cover Story

A New Global Crisis


The global trading system has now been significantly hit by trade tensions, tariff wars, increased uncertainty and now COVID-19 – with changes foreseen in its overall structure and order.


Dr. Mohammad Ali Farzin, Development Economist


The Corona Virus (COVID-19) pandemic is now a global crisis. The global impact of the crisis will (according to UNCTAD) possibly result in a 2-3% (about $2 Trillion) fall in the global economy’s GDP. Estimates had world GDP growth slowing from 2.9% in 2018 to 2.6% in both 2019 and 2020. Now with COVID-19 a fall of the global growth rate below 2.5% will create significant long term structural problems in investments, trade, savings and business confidence.

 The economic effects of the new global crisis – if left uncompensated - will lead to a combination of: loss of consumer and investor confidence; weaker aggregate demand; widespread insolvency; rising debt, and heightened debt distress; asset price deflation; worsening income distribution; and will cause further global recession.

 The Government of Iran has now responded through a combined cash,  loan and payments postponement relief package. The cash transfer and loan is to the value of 100 Thousand Trillion Tomans (equivalent to about $25 billion); the moratorium on all payments to Government by the business community for a three month period is equivalent to about $30 billion (includes postponement of payments such as taxes, employment insurance contributions, interest rates on loans, utility bills etc). Besides, the lowest 20% income earning families (4.3 million households) have also been targeted, through direct cash transfers to the households and through cheap micro/small loans – so as to keep up the monthly income of these households near to the minimum wage. This is equivalent to about $3 billion.

 Before this new outbreak, the world had also been confronted with three major crisis in debt, population and global trade.

 

The Debt Problem

Many countries are in debt and many creditor countries are also having political economy problems. Global debt (national and foreign) is estimated at $250 Trillion, or 3 times the size of global GDP, of which: USA’s foreign debt is $20 Trillion; Japans national debt to GDP ratio is 250%, and Greece’s is 181%; China is a huge creditor; India’s foreign debt is $540 Billion; and Indonesia’s is $395 Billion. With large scale political economy issues, and many countries going towards business insolvency; for example, the EU debt issues (Germany vis-a-vis Greece, Italy and Spain).

 In all this Iran has remained relatively debt free (with a low foreign debt of only $8 Billion) with no foreign debt crisis threat in Iran – although the national internal private/banking debt is fast rising, while national liquidity is also beyond national GDP. 

The new COVID-19 may now prompt global debt restructuring and waivers, so as to ensure rehabilitated economies can sustain.

 

The Population Challenge

The global population is fast rising – and creating issues and uncertainties with regard to its welfare, health and work. Especially on ageing and the young population dividend. Over 8 billion people on the planet, with 60% in Asia alone, and Iran’s is 83 million. The average age of the population is 30 years (and so relatively young); in Asia it is 32; in Europe 43 and in the USA it is 38 years on average. China is 37; India 27 and Iran at only 31. The population dividend is possible to leverage – as long as appropriate socio-economic policy is in place. 

Asia’s work force alone is 2.7 billion – or 60% of its own population. Significant potential for development. The world is also confronted with an old aged population problem – that is dependent on the work force; while many countries have average ages of 50 years.

 Resource allocations and policies will have to increasingly take a people and population perspective, given the scale of the matter, while future private investments and corporate business will also be attracted to countries with younger aged populations, that are healthy and educated – and not just to cheap work force regions. Iran will be one of them.

 The new COVID-19 pandemic will change policy towards more health systems development, and a possible fundamental change in the way we consume and produce.

 

The Global Economic and Trade Crisis

The global trading system has now been significantly hit by trade tensions, tariff wars, increased uncertainty and now COVID-19 – with changes foreseen in its overall structure and order. World trade will continue to face strong constraints and global trade will also have to respond to the real economy – the technological change and need for creating jobs and accelerating development. 

Trade growth in 2018 was weighed down by new tariffs and retaliatory measures affecting widely-traded goods, weaker global economic growth, volatility in financial markets and tighter monetary conditions in developed countries. World merchandise trade value was up 10% to $19.5 trillion in 2018, partly due to higher energy prices. The value of commercial services trade rose 8% to $5.8 trillion in 2018, driven by strong import growth in Asia. However, WTO had already expected merchandise trade volume growth to fall to 2.6% in 2019 — down from 3.0% in 2018. Now it has been hit drastically.

 The WTO, which oversights global trade, is now also left uncertain. Its foreseeable that after COVID-19 a new global trading order will take shape – and hence WTO’s structure and functions will also change. Iran, and eleven other countries, are not members of WTO. 

Trade will possibly no longer play its conventional role for driving GDP growth with such high levels of uncertainty. Strengthening, while restructuring, the global rules-based trading system is required – to make it fairer for developing countries.                 

 

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