“The Pandemic Is Deepening the Divide"

Interview The effects of the Covid-19 pandemic and the global economy are dramatic. The virus is shaking all major economies simultaneously. Rescue packages are being adopted, billions are being spent. Capital is being diverted away from the emerging economies. At the same time, the fight against the pandemic is increasing the national debt of many countries enormously and the crisis is acting as an accelerator for the developing countries that were already highly in debt. An Interview with Barbara Unmüßig, President of the Heinrich Böll Foundation, on the latest developments.

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Barbara Unmüßig, we are sitting a safe distance apart in your well-ventilated office at the Foundation. The building is empty, there are no staff members around. They are almost all working from home. How are you coping with the situation?

My everyday work from home is highly compressed. I feel like I am working more intensively and struggle to organise my breaks. All of our staff in our offices around the world are also working from home. That is very difficult for some of them, particularly in countries with strict curfews in place, such as Chile and South Africa, and those with children and dependents to care for. However, our staff members are in a privileged position. We do not have to apply for short-time work and our jobs are safe. We are trying to properly equip all of our staff, take the pressure off them, advise them, to make sure working from home works for them.

The International Monetary Fund (IMF) has just published its annual World Economic Outlook, with a gloomy prognosis. What awaits us in the coming months and years?

This is a crisis on a historical scale. Former IMF chief economist Kenneth Rogoff said that there has never been such a sudden and deep crisis. It has hit all areas of life, the production sector, the services sector and every corner of the Earth. The IMF expects economic output to shrink by at least 3% on average this year – and everyone is describing that as a highly optimistic forecast. Average values tend to be of limited accuracy.

-3% economic growth worldwide – an optimistic forecast 

Italy is forecast to record negative economic growth of -9.1% and Brazil -5.3%. That is a lot for an emerging country. In the first quarter of 2020 alone, China saw negative growth of 6.8%. This has been unheard of in China for more than three decades. How this will affect political stability, which has always been based on high rates of growth, remains to be seen.

The vast majority of emerging and developing countries will take a massive hit to their economic development. Africa is seeing its first economic recession for 25 years. The consequences seem clear: more hunger, poverty, deepening inequality throughout the world. 

Whilst life is on pause over here and the shops are closed, including all the fashion chains – what does that mean for people in the countries of the global South, who work and sew for these chains? 

Hundreds of thousands of women are losing their jobs! In Bangladesh, India, Cambodia, Myanmar, because many textiles chains, such as Gap, Zara, Primark and C&A, are currently cancelling orders worth billions. 

Orders worth billions cancelled

In India alone, for instance in Bangalore, in the south of the country, around 400,000 people work in the textiles sector. At least 300,000 of them have lost their jobs. Many of them have returned to their home villages in the hope of support from their families. But they are being met by people who are also hungry, who also have no income. 

Many of them are no longer even allowed to leave the city because of lockdown. 

Yes. At least a hundred thousand workers, because they come from other Indian states. What happens to these people, who have no social network at all, no infrastructure and yet still have to pay for rent and medicine? It has become all about survival. There is no furlough pay, there is no social security system. 

This means that it is hitting the most vulnerable groups of the population twofold and threefold. When everything closes down and lockdown is in place, they lose their jobs – in the formal and the informal sector. At the same time, these are countries with limited or no public healthcare system. However necessary lockdown is, it is brutal and is going to cost human lives. 

How is the crisis affecting the countries that export raw materials? 

Countries that depend very heavily on a single economic sector or export products, such as Bangladesh and Cambodia in the textiles sector, or which export agricultural and mineral or fossil raw materials, are particularly vulnerable to external shocks. 

Dependency on a single raw material is fatal

Raw material prices have gone through the floor as global demand has collapsed. Oil- and gas-exporting countries are particularly suffering because of the tremendous chute in oil prices. Today, 21 April, the news broke that US oil companies were paying traders to take oil off their hands. Obviously, countries such as Nigeria and Algeria or Venezuela, which were already struggling, are also suffering from the oil price crash. Finally, all rentier economies – including those in Latin America – have also been hit hard by the worldwide slump.

Each of the economic consequences of the crisis affects the developing and emerging countries, where the effects are very quickly exacerbating each other. Serving external debt is becoming more expensive, as are urgently needed imports. This is topped off by risks to food supply, as prices are rising and crop failures are looming. Droughts and plagues of locusts in East Africa are worsening the consequences of lockdown. There will soon be far more hungry people than the 800 million there are already.

You mentioned debt. Is the coronavirus crisis now turning into a debt crisis for countries already highly in debt?

Yes. It is predominantly affecting countries that are already highly indebted and are unable to borrow in their own currency.

Take South Africa, for instance. The country has borrowed in dollars and must now borrow more in dollars. The South African rand has lost a third of its value against the dollar since the beginning of the year and the country is spending a third of its export income on servicing its debt.

The world has not yet really fully understood how quickly we are heading for a new debt crisis. In particular, countries have now got into debt with China, meaning that it will depend on China more than ever if political solutions for ways out of the debt trap are to be found. 

Yet China also has high levels of internal debt.

China’s indebtedness is growing dramatically. Its gross debt, in other words the debts of the state, private households and businesses put together, grew by 140% in relation to gross domestic product (GDP) in 2007 to 261% in the second quarter of 2019 and is now believed to stand at 310%. That is extraordinary, particularly in comparison to European countries. And that will continue, if the Chinese government fights the consequences of the global economic recession with stimulus packages at home. 

What do you think could be done to counter this global crisis?

We definitely need a broad, long-term moratorium or even to write off debt for the developing and emerging countries. We are seeing the first steps towards this. The G20 recently decided on a moratorium of this kind for 77 countries. 

But that is only a payment deferment, a deferment of repayments and interest – and will initially apply only until the end of 2020. At that point, these countries will have three years to pay back. I do not think that this is a working long-term-strategy.

Moratorium on debt, now!

Emerging countries also need a moratorium – to be supported by private lenders as well. Because the countries’ debts are not just public – to the IMF, the World Bank or public banks – but they have also taken out a lot of debt with private lenders. And the private lenders have not so far been on board with the debt moratoria. 

And there needs to be protection against lawsuits from private lenders such as hedge funds, which could take claims for their debt securities in front of British or US courts. 
It is needed all the more because of the crisis, which has no precedent in history. That would be a sign of universal solidarity.

Are you feeling more solidarity at the moment at political level globally?

Only to an extent. The G20’s moratorium is an excellent first step. An excellent second step – and also without historical precedent – is the fact that the IMF very quickly made it clear that it is prepared to put protective shields in place and is building up its reserves...

...so far, eight trillion has been paid into liquidity support and rescue packages.

That is, believe it or not, about 9.5% of global gross national product. That has never happened before, at that speed and to that degree. 103 countries have applied to the IMF for immediate assistance. The Fed, i.e. the Central Bank of the United States, seems to be functioning rationally, unlike the president, who is looking for scapegoats and shutting off funding to the WHO in the middle of a pandemic. 

But this crisis is so deep and so comprehensive that it will be on the agenda for a long time and what we need is more protection for the economy, particularly in the global South. 

What other instruments are there that the IMF could use? 

The IMF needs more money, it should exercise its special drawing rights. That is certainly under discussion, but has not yet been agreed, as the US and others are blocking the move. All member states of the IMF are entitled to it, along their economic performance. They are not loans, but something along the lines of access rights for IMF member states. This would benefit the wealthy G20 countries first and most of all. More than 70% of the resources would benefit the G20. They could in fact transfer those special drawing rights. That would allow for countries and emerging countries in the global South to organise money for themselves. African governments, and some European ones, are in favour of extending special drawing rights. What is fundamentally important here is that the funds end up in the healthcare and education systems.… 

But the severity of the crisis can only be overcome by far larger funding packages. The German government must change the (ideological) habit of a lifetime and agree to the so-called Coronabonds. And that could overlap with a European Green Deal, at least in part – an investment offensive in renewable energies, energy efficiency and CO2-free mobility.

What opportunities does this crisis have to offer from a climate policy perspective? What does the global economy need now?  

The future of the global economy needs a different trading and financial system, which also needs to be aligned with the Paris climate goals. This will call for fundamental reform. It is to be hoped that we do not return to business as usual. The ecological crises will continue. And the pandemic will continue to exacerbate social inequalities. This is why we need socio-ecological responses. 

I believe that we need to reverse the delocalisation of production, have more reserves, more supplies, and entirely different ways of securing the supply chains. Part of the reason we are so vulnerable is because we only buy our medicines from China and India these days – and always just in time. That needs to change. How do we strengthen the public services, the healthcare sector? How can we do business while generating less CO2 emissions, and using resources more sparingly? We as a Foundation have been asking these questions for a long time. Now we are pushing them even harder on the political agenda.

The articles has first been published on www.boell.de in German.