While the mathematics behind the number of cases, deaths and recoveries is relatively easy to understand, the effects of this pandemic on the global economy are less clear and we believe it is critical that our readers know what’s happening, so that governments are being held to account for their financial management of this crisis.
While we are all living in solitude and practicing social distancing, we know that businesses, big and small, are suffering and that everyone’s jobs and salaries are taking a massive hit. We hear South African President Cyril Ramaphosa discussing R1 billion contributions to the solidarity fund by the Oppenheimer and Rupert families, and his promise to stamp out price hiking on essential goods. We have read about the United States’ economic stimulus package that’s going to boost businesses around the country through $2 trillion bailouts, as well as means tested grants to families and workers, which are all targeted at relieving all of us who will be struggling to make ends meet. Even in Spain, they’ve decided to nationalise their healthcare system, while Rwanda is distributing food packages to its people. The real question is what the economic theory behind all these proposed solutions is and what the practical consequences will likely be.
On day four of lockdown in South Africa, we’re still coming to terms with the fact that we can’t go out, we’re living in close quarters with the people that we’re so used to escaping from for a few hours a day, we don’t have the space we’ve been taking for granted and, perhaps worst of all, we can’t buy alcohol! But the worst is to come. When payday comes around, we might only be receiving half of our salaries, if we’re lucky enough to get anything at all. Part-time workers are in serious trouble and rent, bond and electricity payments aren’t stopping. For those essential workers that still have to risk their lives by going to work every day, transport systems have been shut down. Even businesses will be struggling and governments around the world have put certain measures in place to prevent economic freefall. So what role does economic theory play in this?
Supply and demand
Any layman that has ever touched on the topic of economics has heard about supply and demand. The basic idea is that, as supply – the amount of a product produced by businesses/manufacturers – increases, prices decrease; and visa versa. And as demand – the amount of products that people want – increases, prices rise; and visa versa. This is because all of economic theory surrounds a simple truth in society – the concept of scarcity – that there are a limited number of products, goods and services and not enough to go around. Here’s a look at what a supply and demand curve looks like:
The Y-axis is the price of a good (P), while the quantity produced (Q) is represented on the X-axis. The supply curve (blue) has an upward-right sloping curve, because of the “marginal cost” of production (i.e. the increased cost for producing more items). So the more you supply of a product, the more it costs. The demand curve (red), on the other hand is downward-right sloping, because the higher a price of a product, the less people there are that are willing to pay for it – i.e. if a bottle of milk costs $20 dollars, nobody would buy it, but a lot more people would buy it if it cost 20c.
So, when the supply curve and the demand curve meet, indicated by P’ and Q’ meeting, is where the graph is found to be in “equilibrium”. That’s how many products are being produced at a point in time and what people are paying for them. So what does this mean for the state of our economy at the moment? Well, let’s consider face masks and ventilators:
A year ago, face masks (outside of Asia) were not really in demand, outside of hospitals, clinics and other healthcare facilities. Yet, today, thanks to the coronavirus pandemic, demand has increased significantly. The same applies for ventilators. The increase in demand (shown by the rightwards shift from D1 to D2), and no change in supply means that equilibrium shifts from P1 and P2 and Q1 to Q2. In other words, companies will produce more masks/ventilators, but there is no change in the marginal cost of producing them. They therefore are able to charge higher prices and make higher profits. And, as massive corporate businesses, their business incentives are focused on profits. And the sharp increase in demands and higher scarcity, because they aren’t incentivised to produce more, has allowed them to charge exorbitant prices. The price of a face mask has increased by 166% on Amazon, while and a ventilator that costed $18.20 in mid-January fetched for $199.99 by the end of February. This is a clear example of what is known as price gouging, and has been acknowledged as illegal business practice by California’s Attorney General, Xavier Becerra.
However, in her interview with NPR, New York Attorney General Letitia James has said that there is “no definitive answer” as to what can be considered as price gouging. And it would take months, if not years for lawmakers to actually punish institutions for their price changes, which would only serve to take resources away and distract from the real issue at hand– the virus itself, and finding a cure and treating sick patients. It could be argued that the demand for face masks may have increased by 166% or anything to that effect. And is it possible to keep track of all the individual vendors that may be guilty of price gouging at this time.
And this is not limited to American businesses but vendors from around the world. In South Africa, President Ramaphosa announce that the government will be enforcing strict regulations to prevent businesses from hiking prices. And 11 firms are currently under investigation for being guilty of selling products such as face masks and hand sanitisers at inflated prices amid the Covid-19 crisis. But, in a country like South Africa, where our resources will be stretched to say the least, can we afford to put time and money into investigating companies? And by the time those investigations are all said and done, will it make any difference to how the people are suffering economically right now anyways? Right now, we’re caught between a rock and a hard place and there is very little, if anything, that can be done about it.
They say that corruption is like an iceberg. We only see the tip of the iceberg that is above water, the rest of it is well-hidden underwater. And most of that corruption is not the corruption that is clear for all to see, the Jacob Zumas and Donald Trumps of this world. It’s businessmen whose names we don’t know, who live outside of public scrutiny, who have politicians in their pockets, donate to campaigns, and who literally own the media narrative and shift the conversation in their favour. The Koch family in the United States are a clear example of this and their political activities are very well documented. In South Africa, the likes of the Gupta family, Koos Becker, countless rent-seekers and “tenderpreneurs” and the beneficiaries of State Capture have a long history of corporate corruption. And it was arguably even worse under the Apartheid regime, where companies in the country had a massive stake in the fight to maintain a state of virtual slavery among black South Africans for decades. And, all around the world, corporate corruption exists in every arm of government. Bribery, cronyism, electoral fraud and slush funds are rife in India for example, and Qiu Xiaohua, in China, the nation’s chief statistician, was fired and arrested in connection with a pension-fund scandal back in 2007. President Xi Jinping has an extensive relationship with corruption, which resulted in his 2013 “Mass Line” campaign, disguised as an effort to bring the Party closer to the people, actually had other implications, such as a stamping out of criticism of the government and its corrupt nature.
A devastating consequence comes in the form of a whistleblower’s censorship after trying to warn the Chinese government about the outbreak of the coronavirus in the first place. Then, in the United States, Donald Trump deemed the coronavirus’ presence in his country an overreaction, that people were making a fuss over what he believed to be a non-event. That’s the main reason behind America being the number one affected country, with over 140,000 cases nationally, according to Johns Hopkins data. And, even as the coronavirus is acknowledged to be a national crisis, the US Senate has passed a massive stimulus package to the tune of $2 trillion, the majority of which is going to big businesses such as Boeing and other airlines who will be receiving roughly $25 billion in grants to make up for their shortfalls. At the same time, American workers will receive a maximum of a one-time $1,200 check to alleviate their household expenses, depending on means tests. This is part of a pattern of America’s long-standing history of focussing on business interests as opposed to the well-being of their citizens. The only senator who stood up for the best interests of the people, who will be more affected by the outbreak than anyone was Bernie Sanders, who gave a speech speech on the Senate floor, ripping into his colleagues for berating the possibility of workers being granted a check that might exceed their salaries.
Sanders mockery of the idea of the universe collapsing as a result of relief for low-income workers says it all. The simple truth is that, for people to be able to stay at home, they will need the money to put food on the table. Which brings us to the next point…
Government decision making
Aside from China and the USA’s actions in response to this pandemic, or lack thereof, the failures of governments to adequately address this is perhaps the biggest determining factor of the speed and magnitude at which COVID-19 has plagued the entire world. The most spectacular example of this is in Italy, where the government failed to recognise the crisis in its early stages and began only with partial measures to contain it. In the space of a month, Italy became the second worst affected country in the world after China, having locked down only “red zones” in the country, before enforcing restriction of movement everywhere. Because this outbreak is non-linear, and cases rise exponentially, what appears to be a minor issue at the start quickly turns into something beyond control in a heartbeat. Many countries have had to learn this lesson the hard way, and are now paying for their inaction. Other countries like Vietnam, South Korea, have been incredibly efficient in their responses and the numbers show it. Both countries made COVID testing kits, masks and other medical supplies free and widely available. In fact, until 6 March, Vietnam had only 16 cases and no deaths, among a population of 97 million people, despite being a neighbour to China. The bad news is that the virus is now beginning to spread and the government has confirmed that there are now nearly 200 cases in the country, as of Monday. And Prime Minister Nguyen Xuan Phu has already asked major cities to begin preparations for a lockdown to stop the virus. And in South Korea, they made testing kits free and widely available from the moment that they recorded their first case, including drive-through tests, where your results will be given to you the next day in most cases. Granted, this is largely thanks to the country’s advanced, well-organised universal healthcare system, but they demonstrated what a fast response can do with regards to containing the virus. To date, South Korea is still one of the worst affected regions, as it was from the start, with 9,661 confirmed cases, but its death toll stands at 158, recoveries at 5,228 and they have 4,275 active cases. So this means that more than 54% of the people that tested positive for COVID-19 have already made it out of hospital.
Meanwhile, in Rwanda, the first case of coronavirus was confirmed two weeks ago, but it has responded tremendously well and is implementing a support initiative aimed at vulnerable families adversely affected by the ongoing COVID-19 lockdown, including the door-to-door delivery of food parcels. This gives their most vulnerable people the freedom to stay indoors rather than go out to earn money and to buy food, putting themselves and others at risk. President Paul Kagame has since lauded the country’s compliance and unity in tackling the virus, stressing that the fight is not over, but that it seems to be well contained for now. With 70 cases and no deaths so far, his sentiments seem to be backed up by the numbers.
And make no mistake, Rwanda and Vietnam are both poor countries. Rwanda’s GDP per capita is $2,100, in comparison to America’s $59,500, while Vietnam’s is $2,567. And there’s no doubt that implementing government programs like free testing, masks and food parcels will cost their struggling economies a lot of money. Yet, they are acting in their people’s best interests, and this is the opposite to how other countries reacted, putting economic interests ahead of human health. They stalled taking the correct measures in the interest of staving divestment in their economies. They knew that taking measures and declaring a National Emergency would scare off investors and downplayed the crisis. Yet, there was always going to be an inevitable consequence. While shutting down the economy immediately would have caused the economy to suffer immensely, putting it off would only lead towards a less desirable state of affairs in the long-term. Now an economic shutdown that may have lasted for a few weeks or months could stretch into a halt in economic activity for months on end. Yet, they will still have you believe that half measures are a better alternative to a complete crackdown.
So while we find ourselves in a very uncomfortable position, economically, in every part of the world, it can be argued that because of the vastly complicated nature of the functions of macroeconomics, this was inevitable. Yet a lot of the wounds we now bear have been self-inflicted.
Governments dragging their feet, looking after corporate interests and price-gouging have left us all caught up in our homes like sitting ducks. Yet, governments around the world will use complex terminology, push down interest rates and use ostensibly wise measures to stop their economies from falling apart. People like Donald Trump will call this the “Chinese virus” and pass responsibility to someone else. In South Africa we hear narratives in the media and on social media that Cyril Ramaphosa’s leadership has been highly commendable. “I wouldn’t want to be in his position” or “he carries the weight of an entire nation on his shoulders” is what we hear. Guess what? He’s the president! This is the job he signed up for. This is why he lives in an enormous house, pulls in an enormous salary and gets all of the benefits that come with the job. Hold him accountable for doing what is his job – carrying the nation on his shoulders in a time of crisis. Being sworn in as president is like taking a marriage vow – you’re in it for better or worse. You have to be prepared for anomalies like war or economic meltdowns. And don’t allow anyone to mince their words over the simple fact that we are at war with a virus right now. We need a Winston Churchill-like figure, an FDR-type character to lead, not out of their convenience, but out of an obligation towards the people that elected them.
Elsewhere in the world, people will express sympathy towards their leaders and blame political opposition for the healthcare and economic crises that their countries are facing. And, of course, the corporate-owned media will reinforce this narrative. They’ll tell us presidents deserve a little empathy, that keeping businesses alive should be our top priority, but they’re wrong. Looking after our most vulnerable people, putting food on the table, self-isolation, making it easier for healthcare workers to do their jobs, finding a vaccine, enforcing a freeze on rent payments and loan repayments are what our priorities should be; even if it comes at the cost of collapsing an economy.
The global economy is not worth the lives of the 34,000 people who have succumbed to this outbreak, let alone the thousands more that will die before it’s over.
It’s time to dispel the myth that the economy needs to be prioritised. Hold your leaders to account when they fail to act, expose private businesses for their immoral response to increased demands for medical supplies and stop listening to the vitriol and lies spewed out by the media outlets that they own.