The rapid spread of coronavirus is a major blow to a global economy that is on the cusp of a modest renaissance. The extent of the damage depends, of course, on how quickly and effectively the disease is spreading. Whatever the course of the epidemic, this is the moment for the serious calculation of China’s economy.
It is hard to imagine that the world’s second largest economy is nearing a dead end. Infection and deaths are escalating. Many of my acquaintances and friends in China tell me that they are increasingly concerned about the government’s ability to control the epidemic and its economic implications. The major industrial centers and financial centers are still at least partially closed, and migrant workers cannot return to work, and factories cannot obtain raw materials or ship their goods reliably.
Consumption has also been reduced significantly, as most people stay in their homes. Service industries such as tourism and restaurants were particularly affected. Companies in this sector, as well as small businesses, are driving employment growth in China, but they tend to have little financial cushion.
Beijing has room to increase public spending, cut taxes and provide cheap credit to support growth. Central Bank of China Measures have already been taken to ease monetary policy. Flooding the economy with cheap credit will increase the risks to the banking system, which are recognized by the government, but these are desperate times.
However, none of these measures will have much impact until the business improves. Moreover, China’s traditional banking system was much better at converting loans to large state-owned companies rather than smaller, struggling private firms.
The sheer size of China, along with its roles as a driver of global economic growth and a dominant player in commodity markets, means that a strong blow to China will have major repercussions around the world. Oil prices fell With weak growth prospects in China and decreased international travel, especially to and from China.
This episode will also add momentum to some of the changes in global supply chains that were already underway. Coupled with rising Chinese workers ’wages and the potential for further trade tensions between the United States and China, the epidemic is likely to cause multinationals to reevaluate their supply chains and reduce the effects of production in China.
The coronavirus may have only a limited immediate impact on the US economy, but by creating more uncertainty and disrupting supply chains in Asia, it will add to a long list of factors that are likely to hinder US and global growth in 2020. Temporary boost in sentiment The business and investments that were expected from the US-China trade deal last month, will be offset by this new cloud of global trade uncertainty. Recession around the world is not yet on cards but, at least, added uncertainty will restrict investment and productivity, which Anemia already appeared In all major economies.
Another possible long-term effect on Chinese citizens’ confidence in their government is likely. The state and its people seem to have made an implicit deal: good economic performance, higher standards of living and a form of social stability in exchange for restrictions on freedom of expression, democratic rights, and the free flow of information.
However, even in an environment where it is accepted that the authorities will control the information that is released, the general public is skeptical of the efficiency of the government that regularly conceals bad news. This issue is especially important in the context of the Chinese government’s initial attempts to reduce the swine flu outbreak last year. By the time the government acknowledged the scale of the problem, Pigs have been eliminated in China, and the price of pork has doubled.
Now, the Corona virus is spreading rapidly in a country that was already suffering from a slowdown of swine flu Bird flu outbreak It can reduce chicken flocks. Trust in the information provided by the government and its competence to manage these problems is questioned, both domestically and abroad.
The way the coronavirus is spreading may have lessons not only for the government of China but perhaps for the United States as well. Once trust in government and a free press is eroded by the government’s desire to manipulate information, costs may be prohibitive – especially in difficult times, when this trust becomes crucial to maintaining confidence and stability.
If history is any clue, the Corona virus will eventually be brought under control and the Chinese and world economy will return to the right track, perhaps after a painful period. It is the influences on how individuals and businesses see their governments that may prove to last longer.
Eswar Prasad is a professor at Cornell University and a senior fellow at the Brookings Institution.
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