It has become commonplace to note that the world will look different once the coronavirus pandemic is behind us. We’ve all learned the importance of washing our hands and how to jump on a video conference using Zoom or Skype, meaning we won’t need to go to the office ever again as face-to-face interaction is finally put to sleep. Sarcasm aside, most analyses focus on either micro interactions that will modify our daily urban lives or grand, macro conceptions of how the economic impact will dwarf the Great Depression. It is fairly simple to construct an argument that concludes decisively that the world is headed for one of its darkest hours. The Covid-19 outbreak hit humanity at a moment of extreme weakness, with deep conflicts among the global superpowers and a capitalist system that has proven its incapacity to generate generalised welfare for all citizens, concentrating riches at the highest echelons of society. Weak political leadership has tilted the scales toward authoritarianism and populism, as societies across the globe become more xenophobic and protectionist. More frequent and intense extreme weather events, a consequence of global warning, are accelerating just as the Paris Accord fell apart. And the Internet, once a force for good that accelerated the spread of information and connectedness, has become a tool for surveillance and mass deceit.
The doom-and-gloom scenario is definitely easier to construct given it is derived from a pessimist view of human nature in which societies are defined by individual egoism that is ultimately detrimental to overall welfare. Yet, that same conception of generalised greed underlies Adam Smith’s economic theory by which the collective selfishness of man generates greater good. “By directing that industry in such a manner as its produce may be of greatest value,” Smith wrote in The Wealth of Nations in 1759, “he intends only gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was in no part his intention.”
Whether we figure it out or not, the global society has the tools to quickly reverse the economic impacts of the coronavirus pandemic. In a recent webinar, former Federal Reserve chairman Ben Bernanke indicated the US economy could recover in the next 12 to 24 months, despite facing a potential 30 percent drop in GDP in the second quarter. Bernanke, who is credited with having developed the monetary playbook used to come out of the so-called ‘Global Financial Recession,’ said the return to full employment will be quicker than in the aftermath of the 2008 crisis, despite more than 30 million people filing for unemployment claims since the Covid-19 outbreak. The former Fed Chairman believes disinflation is more of a risk than inflation, given seriously depressed demand, while noting that “technically” the Federal Reserve can expand its balance sheet or provide monetary stimulus without limit. He is optimistic seeing the person in his former post, Jay Powell, reacting quickly by providing massive monetary stimulus in the form of quantitative easing while lowering interest rates to the zero bound, while the emergency fiscal response was not only fast but relatively large. More is probably needed, he said.
Argentina and the whole of the global economy would benefit from a swift recovery in the United States. With Donald Trump or without him, a vibrant US generates powerful global demand and an outflow of investment capital. The other major factor is China, where GDP contracted 6.8 percent in the first quarter – for the first time since the end of Mao Tse-Tung’s years. According to Bloomberg, activity has been quickly recovering as production capacity is being restored, which is positive for global supply. Xi Jinping has pledged to support the recovery through stimulus spending and increased liquidity. Yet, the global economy under lockdown means whatever return to growth will be slower than expected as China’s exports remain depressed. There can be no doubts, in the short-term, that China has the firepower to prop up its economy and the willingness to use it.
Assuming, then, that the fairly optimistic scenario plays out, which is also based on the continued success of the public health response and the eventual discovery of a vaccine, what lays ahead for Latin America, and Argentina? Global deflationary risks mean central banks from developed economies will continue to pump money into the system, which should be favourable for emerging markets looking to attract investment. A production glut will impact commodity prices, yet a major player in the agribusiness world recently explained to me that Argentina’s agricultural commodities weren’t hurt as badly hit as thought, given demand for foodstuffs remains relatively strong.
Thus, the exogenous factors could appear fairly favourable, given the circumstance, for Argentina’s future recovery. At least two major risks could derail a recovery, both self-inflicted. On the international front, while there is talk of a move away from globalisation, it would be a mistake for Argentina to embrace isolationism, as it did under Cristina Fernández de Kirchner’s leadership. Already there have been a series of clashes with Jair Bolsonaro’s Brazil — our major trading partner — to which would now be added to Argentina’s decision to not participate in Mercosur’s free-trade agreement negotiations with Canada, South Korea, Singapore and Lebanon. South America in general and Argentina specifically are among the world’s most unproductive regions given a lack of productive investment and extremely high costs, both which could be reduced through such agreements. At the same time, it’s a region with one of the lowest levels of international openness to commerce. The EU-Mercosur agreement was historic, and the Fernández administration has agreed to remain within it, yet it would be at a disadvantage if it doesn’t join Brazil, Uruguay, and Paraguay in continuing to integrate the region.
A second obstacle would be internal fragmentation. The coronavirus pandemic allowed President Fernández to show himself as a great unifier, not only bringing together a pan-Peronist coalition but also collaborating with the opposition, particularly Buenos Aires City Mayor Horacio Rodríguez Larreta. Governors and the opposition supported Fernández’s quarantine measures and Economy Minister Martín Guzmán’s sovereign debt restructuring proposal. A vast majority of society threw its support behind Alberto, despite the fact that the figure of Mrs. Fernández de Kirchner remained as unpopular as ever (as does Mauricio Macri’s). A series of unforced errors is beginning to strain the governing coalition, yet the most sensitive issue has been the societal response to the home imprisonment of petty criminals in the Province of Buenos Aires, with pots and pans out forming the traditional cacerolazo protest from balconies across major cities. Revolts broke out in federal prisons in the midst of the Covid-19 outbreak, which is reasonable, but they are also happening in a context of house arrest being granted to former Kirchnerite officials convicted of corruption including Amado Boudou, Julio De Vido, and Ricardo Jaime. Fernández has already said that the decision to free inmates was taken by the Judiciary, an independent power from the Executive Branch, while accusing the media and the opposition of a “campaign” against him. The takeaway here is that partisan politics will erode popular support for the government and lead us right back to the grieta.
There are reasons to believe the global economy could overcome this crisis relatively quickly, which should be positive for Argentina. If that were to happen, it would be a shame to waste another chance to come out of this cycle of stagnation.