No Free Lunch

A fragile world economy

Stock markets are plummeting, and the world economy is fast heading toward recession (translation: sustained decline in production and incomes). Is the fast-spreading COVID-19 mainly to blame? Pundits are saying no. Even before COVID-19 emerged, analysts already warned that the global economy and financial system were headed for another crisis similar to what we all saw in 2008. According to this view, COVID-19 has merely hastened it. One might ask: So what does it matter, when what’s important is that economies are in a downspin and we need to find solutions fast? The answer, of course, is that we can only come up with the right solutions if we clearly understand the fundamental causes of our current economic troubles and these could lie well beyond the coronavirus we’re all dreading now.

In January, before the coronavirus contagion became a wide concern, the World Bank warned in its Global Economic Prospects report that the risk of a fresh global debt crisis was at hand. It noted that four waves of debt accumulation had occurred over the last 50 years, and the current wave that started in 2010 appears to be “the largest, fastest and most broad-based increase” in global borrowing since the 1970s. The bank further warned: “The history of past waves of debt accumulation shows that these waves tend to have unhappy endings. In a fragile global environment, policy improvements are critical to minimize the risks associated with the current debt wave.”


The World Bank noted that global debt climbed to a record high of about 230 percent of gross domestic product (GDP) in 2018. For emerging and developing economies, total debt reached an all-time high of almost 170 percent of GDP, a 54 percentage-point increase since 2010.

The other fundamental weakness already felt by the world economy well before COVID-19 is shrinking world trade, hence global economic activity, induced by US President Donald Trump’s trade war against China. He may have failed to understand the wider implications of the move, thinking he was “punishing China” through high tariffs that greatly reduced imports from them. While pain on the side of US exporters of products and services to China was expected from the latter’s retaliatory moves, it was anticipated, rightly or wrongly, to be less than the pain China would suffer. But what was perhaps neglected or underestimated by US trade strategists was the economic fallout inflicted on the rest of the world, which also hit back on the US economy, evidenced by the significant decline in its trade with the rest of the world other than China as well.


Observers attribute this chain reaction to the rapid rise since the turn of the century of global value chains (GVCs), or the phenomenon where production is split into activities and tasks carried out in different countries. Rather than confine the range of production operations to the same location, GVCs spread them across countries, sourcing component goods and services from where they are cheapest. Thus, an “American made” Boeing aircraft is actually composed of components and services produced in dozens of countries (including the Philippines), making “Made in the World” a much more accurate tag. It was the lowering of trade barriers since the 1990s that facilitated GVCs, and China became a dominant player and critical link in most such chains since its entry into the World Trade Organization. After COVID-19 forced widespread factory closures in China, the domino effect across the world through the crippled GVCs now threatens to shrink the entire world economy this year.

Two lessons emerge from all this: One, GVCs must henceforth provide for enough redundancy so that disruption in one link need not cripple the entire chain. Two, debt must be prudently managed to avoid the ballooning that has occurred anew, risking another financial meltdown. Thanks to our economic managers across administrations, our country’s debt-to-GDP ratio is now a mere 41.5 percent, having peaked at nearly 75 percent in 2004. With relatively lower trade-to-GDP and debt-to-GDP ratios, we may yet emerge less scarred than many other economies when COVID-19 finally blows over.


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