Covid-19 and the economy

Covid-19 and the economy

Amandla Correspondent | Amandla Issue 70 | June, 2020

In many ways, Covid-19 has proven itself an enemy perfectly suited for the modern age. In a time of rolling news cycles and diminishing attention spans, it kills slowly and hangs around for months. Meanwhile, its nature and behaviour are uncertain in a way that makes it perfect fodder for social media disinformation campaigns. However, the decisive factor is that the use of our best defence, the lockdown, requires tremendous and unavoidable economic sacrifice, in a time of profound economic fragility.

In a recent webinar hosted by the AIDC, Marxist economist Michael Roberts presented a structural analysis of the world and South African economy in the context of the ongoing Covid-19-induced global economic crisis. What Roberts, as well as other progressive analysts, has made abundantly clear is that neither the South African nor the world economy possessed the structural capacity to support the deployment of such a costly, albeit necessary, defence.

Of course, there was no real choice in this matter for most countries: running headfirst into the pandemic would have been a death sentence for millions, especially in states with precarious healthcare systems such as ours. Nonetheless, the resulting economic crisis presents completely novel problems, while dwarfing the 2008 global financial crisis in severity.

Economic collapse

An unprecedented simultaneous collapse in global output and demand is underway, and many trade links and supply chains have simply been shut off. Lockdowns have closed entire sectors of the economy overnight; it is this sudden closing of the tap that gives the Covid-19 economic crisis such a distinct character.

Global GDP is expected to contract between 2% and 5% in 2020, while the OECD has predicted a fall in output of up to 25% in member countries pursuing lockdown measures. The World Bank has predicted a recession for Sub-Saharan Africa of between 2.1% and 5.1%, with an expected maximum of $79 billion in output losses this year. The IMF has projected negative per capita income growth for over 170 countries; a totally unprecedented figure.

Closer to home, these effects are playing out in full. A jobs bloodbath is expected in South Africa, with estimates ranging from 1.6 to 7 million job losses, depending on the unfolding of the pandemic and length of the lockdown. The Treasury expects a “deep recession” of 6.4% at best and 16.1% at worst, and the Heavy Chef Foundation (the not-for-profit arm of an entrepreneur education platform) has predicted that up to 75% of all small, medium, and micro enterprises are likely to close if the lockdown continues past July.

Most importantly, there is also the human aspect of the economic crisis: surveys done in the first week of lockdown suggested that up to 34% of South Africans went to bed hungry, up from 28% from the week before the lockdown. Hospitals are now beginning to report the first cases of advanced malnutrition since the early 2000s. The lack of access to basic goods, a permanent symptom of the South African economic structure, has intensified to a critical state. As unemployment skyrockets and many daily odd jobs people do to retain a living remain illegal, this is only likely to worsen.

Of course, the crisis has also sent international capital into a panic. A massive capital exodus from the developing world has taken place since the start of the year. In total, more than $100 billion in assets from developing markets has been withdrawn, $4.2 billion is from Sub-Saharan Africa.

One hundred countries (including South Africa) have already approached the IMF for emergency funding , as they take on new debt in order to finance emergency stimulus packages and fiscal shortfalls. And the IMF calculated that around 40% of developing countries were facing severe debt crises before the pandemic. This existing debt burden has also worsened due to increasing service costs, as currencies continue to weaken in relation to those of foreign creditors, like the US.

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The neoliberal virus

We would be mistaken to think that this crisis has come out of nowhere. The world economy was sick long before the pandemic hit, suffering under a number of pre-Covid-19 ailments. And the South African economy was performing badly:

South African economy growth 2010 to 2020

Writers like Walden Bello and Noam Chomsky have pointed out the ways in which the severity of this crisis can be blamed on the currently dominant mutation of capitalism known as neoliberalism. Conditions closely linked to neoliberalism have all created weak points for the virus to tear at. They include the global interdependence of “free trade”, the weaker public services brought about by austerity, and the increasingly debt-driven global economy, This is just as true in South Africa as anywhere else: decades of non-developmental policy and austerity budgets have left us with communities unable to access basic services like running water for hygiene. The healthcare system was already in crisis and over capacity. And the Apartheid geography of crowded informal settlements, intentionally hemmed in by rivers and highways, remained unchanged.

Added to this, the modern capitalist agri-economy creates breeding grounds for disease, while also pushing deeper into new lakes, forests, and animal species in search of new sources of value. In other words, it is not only the severity of the pandemic that has its roots in the pre-pandemic economic structure, but possibly the fact of the pandemic itself.

A crisis of profitability

However, one critical pre-Covid condition that has been hardly discussed is the weakness of capital, especially in South Africa. As Michael Roberts points out, it is crucial that we take stock of the ongoing crisis of profitability; the falling rate of profit. In a capitalist economy, economic growth is largely reliant on private investment, and the degree of this investment is in turn reliant on its profitability. When profitability is high, investment follows. When it is low, investors will tend to hold on to their capital.

Internal rate of return on capital for G7 countries, 1950-2016. Source: Michael Roberts, https://thenextrecession.wordpress.com)

Right from the start of the century, profitability has been on a steady decline. The 2007/8 financial crisis caused a further dip, from which there has never been any real recovery . This means that there is little incentive for investment anywhere, especially in the real economy.

Internal rate of return on fixed assets for South Africa, 1950 – 2016. Source: Michael Roberts, Covid-19 and the Coming Depression Webinar)

This is especially important for South Africa, where the government has explicitly spurned state-led developmental efforts in favour of courting foreign direct investment and the ever-elusive restoration of “business confidence”. Thus far, this has clearly not paid off. Foreign direct investment has been extremely erratic. It has shown barely any consistent growth over the past decade. Meanwhile, economic growth has flatlined, ending in a recession at the end of 2019. Worse, those capital outflows we mentioned have intensified, totalling roughly $6-$7 billion from February to April alone.

Given these conditions before the Covid-19 crisis, it would be hopelessly naive to believe that the current shock and recession will be followed by a “natural” V-shaped recovery. Whatever Mboweni and Ramaphosa might say, neither domestic nor international capital will be coming to the rescue while profitability remains low.

The problem of debt

And then there is the problem of debt. Before the crisis, South Africa’s debt to GDP ratio (the amount of debt compared to the total value of goods and service produced) was already rising, up to 62.5% in the last budget from a low of 27.8% in 2008. In the 2020 budget, debt service costs constituted the fourth biggest government expense, nearly equivalent with spending on health.

Debt to GDP ratio 2000 to 2020

The austerity measures of this last budget were justified in terms of reducing this debt to a manageable level. But the cost of financing a greater budget deficit in a deep recession, combined with a potential forthcoming IMF loan, have thrown this prospect out the window. As with nearly all of the structural causes and impacts of the Covid-19 crisis, this is not unique to South Africa; the majority of developing countries are in the same boat.

Opportunities in the crisis

The forthcoming debt crisis, the motorless, investment-reliant economy, the clear weakness of a public sector stripped bare by neoliberal policy; for the left, these will be key sites of struggle across the globe for the months to come. The crisis has not only laid bare the fragility and flawed nature of the “old normal”. It has also created the space for change. Will we revive the anti-debt movement and call for repudiation, or will we be bound to unpayable service costs? Will we restructure towards an economy driven by need, or further immiserate ourselves in the hopes that investment will return to drag the economy along? Can we rebuild and reimagine the public sector, so that the next pandemic does not force a choice between life or the economy? The task for the left today is to determine the answers and to press for these demands, in international solidarity with a world suffering from the same disease.