WOULD THE WORLD ECONOMY BE TAKEN BACK TO THE CLASSICAL ERA BY THE CORONA PANDEMIC?
Posted on April 20th, 2020

BY EDWARD THEOPHILUS

The world economy has been radically changing since the great depression experienced in the 1930s, meantime, the cold war also supported control of consumer demand and the market economic system forcing many countries to spend for defense activities than investments in development projects. The war mentality limited the production in various areas thereby increased unemployment and excess capacity. The classical economists looked at this situation considering that the wage cut would positively support to increase wage funds and provide more employment opportunities, but Keynes viewed that the idea of the classical economists would negatively impact the effective and aggregate demand thereby creating more unemployment. The other significant point that should be considered by policy-makers is can helicopter money concept get the world out of the depression from the downturn originated from the corona pandemic. My feeling is there is no difference in the helicopter money concept and deficit budget concept of John Meynard Keynes.

The view of Keynes accepted many countries and presented deficit budgets to achieve full employment level.  However, we can see that the views of economists have been changed since the late 1980s especially Chicago economists understood that deficit budget would support hyperinflation and proposed to an inflation tax to take out excess money from the economy.  The current situation is how to off excess money from the helicopter money in the economy and should the world go to a new tax regime in 2022. The World Bank and IMF and other international monetary institutions attempted to correct policies of the world and advantages of such efforts of international financial institutions have gone to developed nations and lower-income countries relegated to a debt trap and to agree with trade policies which were supported to secure the advantages of international trade to developed nations. A higher volume of national income of lower-income countries goes to debt repayment than the investments in economic activities for stability, creating employment and reasonable distribution of national income. Injustice in the distribution of economic gains augmented in the world.

Economists in the IMF predict that the world economy will be recessed by 5% in 2021, which means the corona pandemic will negatively impact all over the world and unemployment has already risen to more than 10% in the developed world as well as in lower-income nations. The prediction of the IMF will have a difficult to abide by lower-income countries and injustice in the world is dominating. The powerful nations did not listen to the cry of lower and middle-income countries and developed nations organized conferences to discuss the matter than taking action to give justice to lower and middle-income countries.  Many people talk about injustice and some predict that the corona pandemic would be an abstruse blessing to recorrect the world. However, people don’t want to go to the Malthus theory, but they want justice.

The COVID 19 pandemic and related economic crisis seem to be directing the world economy back to the classical era giving a new interpretation to economic theory that a pandemic also can push the world economy to depression and nobody can predict about the concussion of a pandemic without inventing an effective medicine to control it. Economists are poor when depression is created by a pandemic because they cannot model and effective way out of the problem.  Economic students never learned this idea before and they were limited to a few points based on experience interpreting the reasons for an economic depression.  Economists never believed such a new interpretation and during the classical era, there were theories relating to all production factors and modernization, during the past three decades economists attempted to a new interpretation for economic growth and development but they reluctant to talk on the difficulties of the poor.

With strong speculation that the world economy will recess or downturn, the temporary policy direction of high-income countries is to recorrect the market demand giving incentives to consumers and the policy of developed nations motivated developing nations such as Sri Lanka to offer few incentives to poor people for their survival. The International Monetary Fund has focused to provide credit facilities rather than to suggest justice in the distribution of economic advantages to lower and middle-income nations.  The most significant support in the pandemic situation is to help them to enhance the exchange value of currencies in lower-income countries to enable them to manage imports, increase foreign exchange reserves and the quality of human life. Neither the IMF nor other international financial institutions are being considered this point.  Many economists feel that it needs restarting North-South dialog or globalization as the corona pandemic crystallizes the disadvantages of or injustice to lower and middle-income countries. The justice to poor nations is not helping to carry begging bowl, but to help them stand on their feet.

 If it looks at the changes initiated in the early 1980s with the invention of microcomputers and mobile phones the automation has been supported by the technology in all areas of the economy conscripted job losses to poor people and to work more times to gain fewer returns. Quick innovations in technology and product developments such as the internet-based UTUBE, Twitter, Facebook, Mobile communication in Whatapp and Viber and other new electronic products have contrived the young generation to follow the technology like mad dogs and spend the assets and revenue to purchase technology.  The advantages of technology and new products have gone to a few rich people.

When analyzing the spending pattern of the household more than seventy percent of monthly income must spend on technology, renting, and debt repayments and people have no opportunity to spend hard earn income on food and other essential requirements such as educating and skills development of kids.  Young kids spend all earning from part-time work on mobile communication and few capitalist owners of electronic products gain billions from poor and it is a clear injustice in the world. Few investors persistent to make new products and exploit the young generation and the economic advantages of innovation go to a few people and poor people push to further difficulties.  Technology (Mobile phone) use to present an immoral presentation and poison brains of people and finally, payments for these presentations go to pockets of limited rich people. It seems that new electronic products such as Facebook, Utube, and many other users to change political opinion and against laws and regulations in countries, but the governments cannot react because the authority is with the owners of products.  They are contrary to democratic rights.  

Before the great depression 1930s, to build a house in developed countries as well as in lower-income countries had an opportunity to poor people and to buy a small piece of land for less than $ 10000, now it has gone to more than a half-million and poor people in developed countries struggle their entire life to repay housing loans, personal loans, and credit card debt while rich people build high rise apartments for renting and exploit poor people.       

After the recession incurred in the 1990s international financial institutions insisted hard conditions to provide credit facilities to lower and middle-income customers. When analyzing the post-pandemic era, the opinion expressed by Victoria Wisnieskey Otero in the South China Morning Post on 18 April 2020 gives valuable points. According to her opinion Corona Pandemic is not a great equalizer, but it could be a force for good if we learned a lesson for the post-pandemic era.” She mentioned two vital points (a) unprecedented livelihood relief measures would work to reduce social inequality, and (b) we must invest not only in supporting individual needs, but also strengthening the fabric of the community.” The spending patterns in the developed world don’t reflect that they are with social inequality and investing in strengthening the fabric of the community.  My feeling is developed countries invest to secure the market that is the source of wealth and they haven’t a genuine concern on social equality. Now developed nations are looking for strategies to regain the lost market and regain assets.  Economic policy-makers in the world need to look back at the practical implementing of policies like a repenting sinner and reduce social inequality.

Going back to the classical era is not the wish of modern people or an option to correct policy. It is seen that some leaders urge supporters to liberate states encouraging protest coronavirus restrictions. Innovation, modernization, and technology are exigencies to the world and all these must be operated in a just society, which means advantages of modernization must reasonably go to rich and poor.  After the great depression during the 1930s a large volume of economic benefits from technology, modernization and innovations went to a small number of rich people in a country. In Sri Lanka, the economic benefits of the service industry attracted to a small group of rich people.  There is a disparity in development between urban and rural areas.

Policy-makers of Sri Lanka need to focus on social equality and the fabric of the community.  The restriction of modernization is not the answer, but it needs expanding modernization to the rural community and supporting for equalizing them with urban people by more investment in the rural production process and creating employment opportunities.    

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