/ 4 April 2020

An unprecedented crisis: The economic ramifications of Covid-19

File photo by Delwyn Verasamy/M&G


A certain word has been floating around these days. No, it is not “coronavirus”; nor is it “pandemic”. It is “unprecedented”. As in, the current crisis is unprecedented in the history of human civilisation.

Which is odd, since there is nothing unprecedented in viruses or plagues. They have been with us for us long as we have been around, and for as long as we have been around they have laid to waste grand misconceptions of human power.

No, what is unprecedented about the current crisis has little to do with the novel coronavirus itself. What is unprecedented about this crisis is that the human race has changed. So much so that lessons drawn from past plagues are of little use in the current crisis.

The effects of globalisation 

The first major difference is that the entire world is interconnected. Before the outbreak, thousands of flights criss-crossed the globe on a daily basis and supply chains for everyday goods stretched around the world. This presented the novel coronavirus with an — here is that word again — unprecedented opportunity. Whereas previous plagues were confined to one or two geographic regions, the novel coronavirus has been transported at breakneck speed across the world. Even far-flung locales such as Papua New Guinea have not been spared. For the first time in the history of human civilisation, we are facing a truly global plague.

The ubiquity of the virus means that countries are no longer separated by space so much as they are separated by time. Entire nations have been reduced to points on the same graph. Italy, Spain and the United States are further along that graph than South Africa. By looking at these other countries, we can see our own future.

It is bleak. Everyone — individuals, corporations, entire nations — are competing for the same goods. For individuals, the competition is for toilet rolls, hand sanitiser and spaghetti. For corporations, the competition is for government aid. And for nations, the competition is for ventilators, respirators and masks.

This competition is really only zero-sum to the extent that it is treated as such. But as nations lock their borders and halt the export of crucial goods, there is increasing evidence that this is exactly how it is viewed. The challenge is that this crisis will result in increasing isolationism, when that is the last thing the world needs.

By contrast, co-operation can save lives by shipping ventilators and other crucial goods — including doctors — to areas as and when they are required. Co-operation, not competition, is the way out of the crisis. Unfortunately, there is little evidence that this is happening.

A global response

The second major difference to previous pandemics lies in our collective response to this one. When the influenza epidemic hit in 1918, the response was casuistic. In the United States, for example, some cities such as St Louis reacted aggressively and managed to slow the rate of infection. Others, such as Philadelphia, reacted too late. According to one study, Philadelphia’s fatality rates at the height of the epidemic were eight times as high as those in St Louis.

No surprise then that when the novel coronavirus hit the world it followed the example set by St Louis more than a century ago. The difference is that this is the first time that entire nations have been under lockdown. It is, to use that word again, unprecedented.

This novelty is connected to the previous one. As the virus has spread with the help of our worldwide transport infrastructure, we have had to react faster, more stringently and more globally than ever before. 

Economic damage

The really unprecedented factor is also the one that will cause the longest-lasting damage. Never before have governments willingly inflicted so much harm on their economies. The closest economic comparison we have to what is happening now is the Great Depression. In the US, the current crisis has already set a grim record, as close to 10-million Americans have filed for unemployment.

But even the Great Depression does not set a precedent for what is happening now. As Great Depression expert Barry Eichengreen has pointed out, the unemployment rate back then rose to its maximum over four years. Now, it is likely to shoot up dramatically in a very short period of time. As John Cassidy of the New Yorker has noted, the speed at which we are falling into economic depression is — wait for it — unprecedented. If and when the economy starts up again, there will be far fewer jobs to go back to.

To combat this worst-case scenario, governments are taking action that is completely without precedent. Politico-philosophical debates about the role of the state are giving way to the reality on the ground. Big risks require big government, and the government has never looked bigger.

Denmark made the first salvo, taking the extraordinary measure of telling private companies hit by the effects of the pandemic that it would pay 75% of their employees’ salaries.

The United Kingdom was next, providing £330-billion of state guarantees for bank loans to firms, equivalent to 15% of the country’s gross domestic product. More importantly, the British government is, for the first time in its history, stepping in to pay private wages. It is promising to pay 80% of private wages for employees of firms hard-hit by the lockdown, and a similar amount for people who are self-employed. Chancellor of the Exchequer Rishi Sunak has said there would be no limit on the funding available to pay people’s wages. No wonder then, why he kept using that word — unprecedented — to describe the scheme.

Similarly, the US has announced a $2-trillion aid package — the largest in US history. As part of the deal, every US citizen making less than $75 000 a year will receive an once-off sum of $1 200. Germany, too, has recently announced measures totalling about €750-billion. The G20, in total, has pledged about $5-trillion in measures to combat the economic fallout.

These are remarkable developments not only because the amounts are mind-bogglingly huge, but also because of the ways that they will be dispersed. A significant chunk of the money will be in the form of direct payments to citizens. As such, it is an unprecedented expansion, in very short order, of the role of the government in the economy. For the first time in history, the state is stepping in as a guarantor of private wages.

And that is only if we consider the money that is being paid to individuals. Much of the money will go to business. In that case, it is effectively handing the state the power to choose the winners and losers in the economy. What is more, the state would be foolish to hand out loans without securing them. As such, businesses will have to put up equity or assets as collateral, with the result that the state may end up owning vast swathes of the economy. As Simon French, chief economist of broker Panmure Gordon, has put it: “The danger is that free market economies end up resembling Soviet tractor collectives.”

The South African response

South Africa does not have the means for such expansive fiscal measures. It has neither the money nor, now that Moody’s has downgraded our sovereign credit rating to sub-investment grade, the creditors to do this. For one, there will be no cash bailout to South African consumers. This presents more than just an economic problem. People can stay in isolation only for as long as they have money to burn. In the absence of a measure to hand citizens spending money, South Africans will need to return to their jobs earlier than people in Europe or the United States. The result may well be that the virus flares up as and when we return to work.

For another, the debt relief fund launched by the department of small business development to help relieve the effects of the economic shutdown on small, micro and medium enterprises, is far too small. The billions that the Oppenheimer, Rupert and Motsepe foundations have donated are miniscule compared to the needs of South African businesses. To stay solvent, these businesses will shed workers. Even large businesses are not immune. Already Edcon is contemplating business rescue. Thousands if not millions of South Africans will lose their jobs. In the context of a global economic depression, their plight will be all the worse. The South African economy, already a broken ship, will be forced to navigate awfully turbulent waters.   

In his March 23 letter to the nation, President Cyril Ramaphosa said that this crisis would put the very existence of the nation to the test. That is a remarkable statement for the president of the Republic to make. And yet he is right. The crisis and its consequences could end up tearing at the very fabric of our already threadbare society. Problems that have been festering for decades have suddenly and irrevocably been brought to a head. Sovereign debt and economic inequality are now matters of life and death.  

It would be overly pessimistic not to note that every crisis brings opportunities. The Black Death is thought to have sparked the Renaissance. Similarly, the current crisis is prompting the South African government to do things that it should have done in any case, some of them a long time ago. Minister of Human Settlements, Water and Sanitation Lindiwe Sisulu has made the outstanding announcement that her department will ensure that all communities have ready access to clean, running water. (Never mind that these communities have always needed running water.) The City of Cape Town, and other metros, has scrambled to get shelters for homeless people), never mind that they too have always needed shelter.

The world that you left when you went home on March 26 is not the one that will greet you if and when you return. Unprecedented events have a way of changing the world. Whether it is a world that you would want to enter depends on the choices that we make now. We must ensure that they are good ones.

Quentin du Plessis is a teaching and research assistant in the department of private law at the University of Cape Town