Originally published March 30, 2020.
This blog post was written by Lukas Kornher and Tekalign G. Sakketa who are both senior researchers at ZEF’s Department of Economic and Technological Change, University of Bonn.
As of March 26, the novel coronavirus (COVID-19) has been reported in 176 countries worldwide with a total of more than 500,000 reported cases and a global death toll of over 20,000 according to Johns Hopkins University. Meanwhile, many advanced and developing economies including India have put their economies and societies under a complete lockdown to slow the spread of the virus and protect their health care systems. These decisions come with harmful consequences for their national as well as for the global economy. The most important blue chip stock market indices, Dow Jones and DAX, have realized the largest weekly losses since the World Financial Crisis in 1929. China’s GDP, for the first time in 50 years, has dropped in Q1-2020 by about 10%. Morgan Stanley and the Goldman Sachs Group said the US GDP could plunge by up to 30% in Q2-2020.
Many industrialized countries, including Germany and the United States, have responded with large public investment programs to cushion the economic effects of the showdown on small businesses, large firms, and workers whose companies have closed. Developing countries do not have the budgetary means to implement similar programs. Instead, closed borders and limited export opportunities and supply constraints are slowing down economic activities. The ECA estimates that economic losses in Africa could tighten fiscal spaces of governments, creating a pressure on the provision of social safety nets that make an important livelihood for the poor in many countries. Lockdowns force governments to pause public works programs for those working outside. On top of that, living conditions in urban slum areas are an incubator of infections of thousands of people.
The IMF has responded by granting loans of 50 billion USD to developing countries. The World Bank has approved an emergency program of 14 billion USD to countries and companies to finance their efforts to prevent and respond to the rapid spread of COVID-19. In addition to that, both organizations called on bilateral donors to consider debt relief for the poorest countries. Nonetheless, markets are in turmoil. People fear running out of essential goods, most importantly food. Images of empty shelves in supermarkets are broadcasted from New York to Berlin. People fighting for food can be witnessed in markets in Mumbai, Kolkatta, and many other places. This erratic behavior and panic could lead to food price hikes all around the globe as has happened during other pandemics before. Could COVID-19 create yet another food crisis?
Global commodity markets are not immune to the global economic downturn and the uncertainty of how the crisis will evolve within the next months. The International Food Policy Research Institute (IFPRI) simulated the impact of a global economic slowdown on poverty (and food insecurity). The figures are alarming if the crisis persists for a longer period: a 1%-drop in global growth rates is associated with an increase in poverty by 2% affecting 14 million people worldwide. Certainly, the impacts on food insecurity are more severe if trade channels are disrupted.
So far most trade routes are still open. So far market data from the International Grains Council (IGC) show only a moderate increase in global wheat and maize prices of 5% since mid-March. The four big commodity traders Bunge, Louis-Dreyfous, Cargill, and ADM confirmed that supply chains are still functioning. Yet, it remains uncertain how lockdowns may affect supply in exporting countries, like Brazil. On March 25, Vietnam, the third largest rice exporter in the world, announced it would halt rice exports for a few days to assure domestic food supply is guaranteed. Rice quotes did not responded to the announcement immediately. The rice market is worth monitoring carefully as many large exporting countries, like India, Thailand, and Pakistan, carefully watch their domestic food security situation and may implement export restrictions to protect their consumers.
People all over the world already face massive challenges to make their living during the economic turmoil COVID-19 has created. Most international supply chains are still functioning and global commodity markets have not yet been infected. Hence, there is no reason to panic about global food security at the moment. Current levels of total supply and global stocks should not be a reason for price hikes. However, we need to carefully watch how governments respond to control the spread of the virus and to protect the well-being of their population. If export bans and trade restrictions are applied by exporting countries, as they have been during the global food crisis of 2008, there might be a risk that the COVID-19 crisis will trigger price hikes. More likely are subregional market disruptions within Africa and Asia, as a result of real logistics constraints and misguided national policies. A clear and present danger for huge numbers of vulnerable populations is this market malfunctioning, combined with a much-limited purchasing power due to labor market collapse, small farm production constraints, and the curtailment of the informal small business sectors on which the poor depend so much. This scenario would have a devastating impact on global poverty and hunger.
Governments must put urgent measures in place to keep markets functioning. In a globalized world, countries are advised to keep trade open and supply chains working. For this not nationalism but international coordination is of paramount importance to fight this global curse and return to normal as soon as possible. In this context, instead of restricting trade flows, governments in poor countries should mobilize resources to expand their social safety nets, specifically to mitigate the effect on the most vulnerable population in urban areas who are living hand-to-mouth.
This blog post was first published on the ZEF website here.