JOHANNESBURG, SOUTH AFRICA
THERE are no solutions to our problems, there are only trade-offs, economist Thomas Sowell of the Hoover Institution once remarked.
Sowell was absolutely correct. What we believe to be a solution to any problem at any point in time will, on the other hand, present us with a variety of other problems. The key thing is to always find and embrace optimal solutions to the problems we face. No solution will be perfect.
Globalization, defined by the Peterson Institute as “the growing interdependence of the world’s economies, cultures, and populations, brought about by cross-border trade in goods and services, technology, and flows of investment, people, and information”, is one of those areas where we have not only seen the benefits, but have also seen and are now seeing the difficulties that come with it.
Advanced globalization has been the chief driver of the fast-paced economic and technological progress experienced after the end of the Cold War.
As a result of globalization, global poverty was, for the first time, reported to be 10% by World Bank in 2018. In contrast to where we come from on the subject of poverty – this was a huge achievement for mankind.
Globalization, along with its idea of a global village, means that any socioeconomic headwinds in world’s biggest economies such as the United States of America (USA), the European Union (EU) and China, will impact other regions around the globe.
With the coronavirus that has become a pandemic, we now face the downsides of globalization.
Were China a closed society with almost zero interaction with the rest of the world – the spread of the virus would have never reached the levels it’s reached globally. It would be spreading at a lower rate.
Over the past months, China shutdown business operations, schools and other institutions. This action will likely slow down the country’s economy in the first quarter of 2020.
The slowdown will surely affect its trading partners. South Africa is one of China’s trading partners. In fact South Africa’s biggest trading partner is China.
The harm to South Africa’s economy from China’s slowdown would be significant – as the economy is underperforming other major emerging markets and has already entered a recession.
Tito Mboweni’s budget speech last week did not go far enough to encourage economic growth – which means the country’s economy will remain in the doldrums for the foreseeable future.
According to the Wall Street Journal last week, the fears that the coronavirus will dent the global economy wiped out $3.6 trillion in global stocks. This is indicative of how bad the first quarter global economic indicators will be when reported in a few months’ time.
The misconception by many on the left-wing spectrum of our politics is the idea that with these stock market wipeouts – only the rich lose money. That is utterly wrong and misguided.
Ordinary peoples’ pensions and savings are also invested in all kinds of financial assets – including equities. This means last week’s losses in global stocks weren’t just billionaires’ business. It was also my business and yours.
Can central banks effectively respond to the coronavirus?
Central banks around the world are already looking into how they can boost their economies amid the coronavirus that is exerting pressures on the global economy. United States’ Wall Street is “increasingly betting on interest rate cuts from the Federal Reserve in the coming months to combat the negative economic impact from coronavirus”, according to CNBC International.
Not all central banks in the developed and developing world have a room to adjust interest rates in response to the pandemic. The developed countries – with the exception of the US – cannot really do anything significant as their post-2008 rates have been almost zero or below zero. So monetary options for these countries are very limited and won’t have much effect.
In Financial Times last week, Olivier Blanchard, former chief economist at International Monetary Fund (IMF), echoed that with the coronavirus, the disruption is on the supply side; that loose monetary policy will do very little to bolster economic productivity.
South Africa’s interest rate situation is different from most major emerging markets. Our rates remain very high – at above 6% at this point. The general consensus amongst economist is that the South African Reserve Bank (SARB) has room to cut rates this year – to boost growth – and – to respond to the coronavirus should it disrupt the economy. How the SARB handles interest rates this year remains to be seen.
Globalization is presenting us with its own unique challenges. At times, collaboration between nation states will be a necessity to overcome these challenges. The global interconnectedness means we will need new, speedy ways to confront and defeat pandemics such as the coronavirus.
Institutions such as central banks can do only so much to reboot the economies damaged by pandemics and other forms of societal disruptions. PM
© PHUMLANI M. MAJOZI