The world economy and COVID-19: a multidimensional crisis
China will gain more leeway with its "soft power", but the United States will not lose its place as a world power. Oil prices have jeopardised Russia’s and Saudi Arabia's projects. The Islamic State group will boost its influence only in like Syria and Iraq. Prof Ouhab-Alathamneh Nassima (PhD) teaches economics at Paris-Nanterre University, specialising in geopolitics and energy geo-economics.
Paris (AsiaNews) – A multidimensional (social, economic, geopolitical) crisis is weighing heavily on a world affected by the COVID-19 pandemic, this according to Prof Ouhab-Alathamneh Nassima, 39. She has a PhD in political science, geopolitics, and energy geo-economics, and teaches economics at Paris-Nanterre University. In this comprehensive interview, she looks at China's positive prospects, which however will not undermine US leadership. She allays fears about a possible food crisis, but is concerned about Russia’s and Saudi Arabia’s economic crisis. For her, what is really in crisis, and this has been the case for a while, is a model of market economy based on hedonism and inequality.
Is the current economic crisis only the result of the health crisis the world is experiencing at present?
The global economy has survived many crises, like those of 1873, 1929 and 2008. Although such crises are inevitable, several underlying factors amplify their impact, in particular their social consequences, to the extent that they accentuate the disparities between developed and less developed countries. In addition, since the advent of a new form of unfettered capitalism after the fall of the Soviet bloc in 1989-1991, the world economy moves at the pace of markets and capital. As a result, the market economy very quickly sealed interdependencies between industrial-monetary poles and the multinationals in accordance with the principle of hedonism whose goal is to increase the wealth of a small part of holders of capital. On the one hand, the precautionary measures imposed by states (which put economic activities on hold) have had, irreversible effects on national production, showing their high dependency on outside sources (medical equipment, food products, etc.); on the other hand, this has led to an unprecedented collapse in supply and demand due to the breakdown of the production chain. Consequently, several companies are in a state of insolvency, and a good number of employees are faced with unemployment (more than 20 million in the United States, 11 million in France). It is clear that, notwithstanding the global economic recession caused by border closures and the slowdown in trade between states (between 3 and 7.5 per cent of GDP), this health crisis is only accentuating the flaws of the existing economic system.
What is the difference between the current financial crisis and previous ones? Is it only the result of the health crisis the world is experiencing today? How do you explain what is currently going on in global financial markets?
The previous financial crises were systemic crises linked mainly to the monetary system, starting with that of 1929 when thousands of security holders and speculators lost their assets, thus causing a great economic depression followed by brutal deflation and a general collapse in production. The 1987 stock market crisis and the 2008 subprime crisis had limited effects on the global economy. These crises marked a certain instability in financial capitalism favoured by globalisation and excessive trade liberalisation. In other words, since the 1860 Free Trade Treaty between the United Kingdom and France, trade and financial flows have multiplied between industrialised European countries before spreading to all the other emerging states after 1929. The increase in capital has turned the banks into the centre of today’s capitalist system. When speculative bubbles burst, it causes a collapse in the prices of financial assets; this has the effect of destabilising banks, weakening production channels and reducing productive investments. Whilst previous crises were limited to the financial system, the current health crisis is characterised by the many dimensions it generates in all sectors of the economy. Beyond COVID-19’s social impact (mass unemployment, indebtedness, decline in household purchasing power, etc.), the effects on financial markets (stocks, bonds and commodities) appeared in the first days of this crisis since they are very speculative and volatile. Stock markets lost 30 per cent, particularly the Paris stock exchange, that of Shanghai and those in the Gulf states. In addition, the volatility of financial markets is very sensitive to statements from various leaders and organisations. To date, market losses have been limited thanks to the control of interest rates, which are relatively low. This makes it possible to increase liquidity on banks’ balance sheets and prevent their bankruptcy.
Has the dramatic drop in oil prices had a negative effect on world markets? What are the reasons for Saudi Arabia’s decision to flood oil markets?
The fall in world demand, particularly in China, which imports 10 per cent of world oil, and oversupply caused the price of the black gold to collapse, particularly for the crude produced in Texas, which lost more than 300 per cent of its value (-37 dollars a barrel) a few days ago. As for Saudi oil overproduction, the reason lies in disagreement among producers in OPEC, headed by Saudi Arabia, and their allies in OPEC+, mainly Russia, on a possible cut in production by 1.7 million barrels per day in accordance with the agreement in principle reached in 2016 at the Algiers Conference. Russia's refusal to cut its production in order to reach a certain market equilibrium (and not support US shale producers) pushed the Saudi kingdom to boost its own production by 2.5 million barrels a day in a “lose-lose” strategy. Russia responded by increasing its output by some 600,000 barrels a day, causing prices to plummet by 30 per cent on 9 March. This about-turn came at a time when the health crisis significantly impacted global oil demand, which has dropped, according to the International Energy Agency, by 90,000 barrels a day since the start of COVID-19.
What impact will COVID-19 have on the global economy and the economies of Asian countries, including Saudi Arabia, China and Russia?
The shutdown of most economic activities has had irreparable consequences for the world economy. For example, air traffic has suffered significant losses, estimated at US3 billion, which in turn has had a significant impact on the tourism sector. the World Travel & Tourism Council (WTTC) estimates that 50 million jobs in the sector are at risk, including some 30 million in Asia. With respect to the latter, the losses are, like elsewhere, considerable because, in addition to the distortions incurred by stock exchanges, the industrial and technology sectors experienced a major setback because of their interdependence with China, the top supplier of electronic components in Asia. Japan for example imported more than US$US45 billion worth of Chinese electrical and electronic components in 2019. For its part, China saw its GDP shrink (6.8 per cent since the start of the pandemic), and experienced a significant drop in its investments and exports around the world (-18 per cent in the first quarter of 2020 in terms of exports, creating a trade deficit of more than US billion). In Russia, a recession of 5 to 10 per cent is in the forecast. All its regions depend in part on federal aid, whilst the current crisis has caused serious budgetary imbalances, forcing them to ask for federal assistance. In addition, the sharp fall in oil prices inevitably has had repercussions on the Russian economy, which derives a substantial part of its revenues from oil exports. As for Saudi Arabia, the health crisis reduced its revenues considerably as a large chunk comes from the pilgrimages to Makkah (Umrah and Hajj), estimated at US billion a year. The fall in oil prices also had a negative impact because the economy is dependent on hydrocarbons. The kingdom, which has run budget deficit since 2014, needs oil to be US a barrel to ensure financial balance.
As one of the largest wheat exporters in the world, Russia has decided to stop exporting grain for now. How do you view this decision? Will it have a direct negative impact on the world economy?
Certainly, Russia’s position as the world's leading exporter of cereals is causing some fears about food security. In early April it decided to limit exports to 7 million tonnes until 30 June, with the exception of the Eurasian Economic Union. It is true that Russia’s strategy in this area is aimed at meeting domestic demands and avoid an increase in prices. Russia knows that the price of wheat is higher than that of oil, as was the case in 2010 when Russia restricted its exports due to drought, but in the medium term, limits to Russian exports will not have a direct impact on the world economy because some countries in the European Union, Canada , India and China could supply the market between now and July, when Russia will resume exporting its wheat.
Will the geopolitical and economic map change? How do you see the post-COVID-19 world? Who will lose? Is it possible to see in the future China take control of the world with the United states, or even on its own?
The neo-liberal model that we know has abruptly showed its limits and has become a foil in many respects. Despite a US trillion support plan passed by Congress to counter the effects of the crisis, the inequalities in American society are becoming more and more apparent. In addition, low-income households, already carrying a massive debt load and forced to stay at home to break the chain of transmission of the disease, will certainly be affected more than others by the domestic economic slowdown, which requires a reorganisation of priorities. I do not think that the United States will lose its place as a world economic power, but it will certainly not be the first one, because the contradictions of the liberal system kept afloat until now has aroused a lot of mistrust domestically regarding the effects it has engendered for more than 43 million poor people, that is 13.5 per cent of the population. Precarious access to employment and basic services, which have been largely privatised, causes uncertainties, not only regarding the guarantees that this system offers locally, but also the image it reflects internationally, to the extent that the countries that follow the US system will lose confidence in it. The United States certainly has military and financial resources to deter, in particular the dollar, which is the first international currency, but China has been able to quickly optimise its reputation as a “soft-power" before and particularly after the crisis. Its quick comeback on the global market and the interdependence of global industries with its own will serve its enhanced role on the international stage.
Since you are talking about geopolitics, will COVID-19 be an opportunity for the Islamic State group (Daesh)?
I do not think this pandemic is an opportunity for the Islamic State (IS) group, which considers it “a punishment from God;” on the contrary, the organisation’s leaders have warned their fighters not to go to Europe, the main hotbed of the virus. Some secondary attacks by lone wolves have occurred recently in France and the United Kingdom, but IS’s main area of operations remains in unstable countries like Iraq and Syria. Restricting air travel and movements between cities have limited IS’s reach abroad. However, fewer targeted strikes, particularly in Syria, could reinvigorate some IS-held areas, which could become more active once the Coronavirus outbreak is brought under control.