By Bowen Qi

The second wave of COVID-19 is quietly approaching us as many countries are still struggling to reopen. This pandemic has already crippled the global economy and caused a worldwide economic recession, but the worst has yet to come. According to the International Monetary Fund, the global economy will shrink by 4.9 percent by the end of the year. This further contraction will contribute to an exponential increase in the poverty rate worldwide, especially in the Least Developed Countries of the global south. Within the same timeframe, the rate of extreme poverty is estimated to more than double and reach 1.5 percent, which accounts for 50 million to 70 million individuals from the global population. Additionally, the significant rise in unemployment that is already underway will further exacerbate  poverty and inequality globally. According to the International Labour Organization, an unfolding of the worst-case scenario could result in global unemployment numbers increasing by nearly five hundred percent, growing almost exponentially from 5.3 million to a staggering 24.7 million.

Poverty and income inequality are the two major causes of political instability for both autocracies and democracies. Our continuous decline in livelihood security will hurt the legitimacy of all regimes, increasing the probability of mass mobilization. On the one hand, for autocracies, inequality increases the popular incentive for demanding democratization because ordinary citizens assume that democratization increases the chance of redistribution. In this case, the demand for democratization is a rational response of the masses to their deteriorating standard of living. On the other hand, the current surge in popularity of populist parties is also a rational response for people to have, due to declining economic conditions as established political actors and democratic institutions fail to alleviate economic difficulties. For nascent democracies with a weak state that lack institutional capacity, their democratic institutions are more vulnerable to strategic manipulation by elected populist actors. Thus, they experience higher risks of democratic backsliding and even democratic breakdown, over the probabilities for becoming a  more established democracy.

Premier Li Keqiang answers media questions at the news conference after summit where the premier made proposals on boosting economic activities through street vendor markets. Beijing, March 16, 2016. Photo by Xu Jingxing, China Daily.

This pandemic has created huge pressure for the economic giants of the world like the United States, China, and the European Union. They do however, possess enough fiscal reserve and state capacity to enact short-term relief plans. For less developed countries that are unable to implement any effective emergency responses, the economic crisis may likely transform into a political crisis as well. 

“–as the global economy shrinks, FDI will decrease substantially, which might lead to the collapse of a great number of domestic economies.”

These problems will be even more visible in lower- and middle-income countries with dependent economies that rely heavily on Foreign Direct Investment. Such states are liable to face two major challenges. First of all, as the global economy shrinks, FDI will decrease substantially, which might lead to the collapse of a great number of domestic economies. Second, dependent economies often use low taxes and wages to attract large amounts of FDI at the cost of limited public services and low living standards. Under such circumstances, the COVID-19 induced economic crisis will lead to the collapse of livelihood security in these countries.

 What is worse is that lower- and middle-income economies were already internally divided to begin with, due to increasing income inequality and continuous stagnation over time, making it a systemic issue predating the pandemic. After Hungary completed its accession to the European Union, it has subsequently attracted a large amount of foreign direct investment, bolstering its  underdeveloped domestic industries. However, it has now led to Hungary become too dependent on FDI. Attracting substantial FDI required low wages and a low tax rate in the state, which inevitably led to shrinking in public services and a slow down of wage inflation. Accompanied by rising prices, the living standard of average Hungarian citizens has deteriorated over that time period. Increasingly, the economy of Hungary is becoming more dependent on the West, because its domestic industries have been largely eliminated due to lack of competitiveness in the consumer goods market. Hence, even though Hungary’s overall GDP  seems to be growing, the living standards of the majority of citizens did not improve at the same rate. Far from it, quality of life in Hungary for the average citizen has actually seen a decline after the country’s EU accession.

Including Hungary, other countries like Turkey have already experienced a democratic breakdown. Brazil, India, and Poland have also been dominated by populists and undergone democratic backsliding. Therefore, the pandemic triggered economic crisis will lead to further polarization in these countries and quite possibly even trigger severe domestic conflicts. To illustrate, the deteriorating standard of living in Hungary has led to the polarization of politics which had already acted as a breeding ground for radical populist actors. In the 2010 Hungary’s election, the right-wing populist Fidesz and the Christian Democratic People’s Party coalition received 68 percent of the seats in the unicameral parliament, which has given Fidesz enough power to make any constitutional change. Since then, the parliament has become a production line of legislation that could pass thirteen pieces of legislation in one day because Fidesz circumvented almost all standard legislative procedures. The Fidesz government has completed a series of reforms and institutional changes to curtail democratic accountability and civil freedom which eventually lead to the breakdown of democracy in Hungary. The case of Hungary is very likely to be repeated in countries that have been severely affected by the pandemic in the global south. 

“If China continues its investment in the projects, BRI will create even more employment opportunities as an example of transnational Keynesianism.”

The global economic recession might lead to a substantial rise in the number of weak and fragile states, further exacerbating instabilities and tension in certain regions. As the signs emerge for what is to come, the political consequences of the global economic recession must be recognized by the international community, especially international and regional organizations, and state actors with the ability to provide support for countries and regions that will be at the  highest risks of economic collapse. However, the recent tension and disputes between the U.S. and China pose a tremendous obstacle to international cooperation. For example, due to the pressure from the US, the UK was forced to scrap the agreement with Chinese telecommunications company HUAWEI, which not only created a huge economic cost to the UK but also triggered China’s threats of retaliation. The confrontation between the U.S. and China, two largest economies, has created a hostile environment for global economic cooperations and investment, leaving the rest of the world uncertain about their decisions moving forward. 

White Collar works in China participate in garage sale after works in response to Premiere Li Keqiang‘s proposal. March 8, 2020. Photo by Tencent News.
Formal vendor market set-up as the market format is moved into more mainstream, formal economy. March 8, 2020. Photo by Tencent News.

First and foremost, the recovery of the global economy and a system of global political assistance asks for the cooperation and mutual trust of major states and their continued support for essential international organizations. It thus appears that the cold war between China and the US is not only irresponsible but also childish. Therefore, the US and China need to initiate the next phase of trade negotiation and sign an agreement to temporarily lower retaliatory tariffs and make substantial compromises. 

Second, the transnational economic zone cannot connect previously isolated economies and also provide alternative sources of employment. For example, the China-led Belt and Road Initiative will not only increase trade activities in Eurasia, but will also increase employment opportunities as result of China’s increasing investment in infrastructure development in the region, they have already poured $200 billion into infrastructure ventures. According to the Chinese state council, from 2013 to 2018, the initial investment of China has already created 244,000 jobs. If China continues its investment in the projects, BRI will create even more employment opportunities as an example of transnational Keynesianism. However, the greatest concern is China’s intention behind the massive investment in the region. Most countries who have signed up for the BRI already face severe debt issues which means they don’t have repayment capacity. In this case, those countries will be vulnerable to China’s predatory actions that might violate those countries’ sovereignty. Hence, if the United States is willing to join the BRI, it can demand China for higher transparency and prevent unilateral domination by China and at the same time, expand the scale and radiation of the project to benefit more countries. 

“Transnational organizations […] should increase the transparency of their operations and allow multilateral cooperation and participation instead of serving as a tool of expansion or neocolonialism.”

In addition to the US-China relations, international organizations and state actors should focus on the strengthening of the social safety net to accommodate populations who have been severely affected by the pandemic which requires innovative approaches. This year, China’s premier Li Keqiang suggested the street vendors’ economy could relieve the pressure of unemployment. Even though his suggestions have been rebuffed by the top decision-makers such as president Xi Jinping and other core Politburo members, the informal economy would still be a pragmatic answer to unemployment in less developed countries. A study done by the United Nations suggests that around 2 billion people are currently engaged in informal economic activities, which consists of roughly 61percent of the world’s employed population. In this case, if state actors can formulate formal institutions that can regulate the informal economy and provide formal market order to the informal economy, then street vendors’ economy will not only be an essential part of the safety net but will also be an effective solution to alleviate economic pressure in the developing world. 

Furthermore, state actors, international organizations, and tech giants such as Amazon and Alibaba should form a tripartite cooperation mechanism to provide new channels for the informal economy to thrive and integrate it into the formal economy by providing online business platforms with the support of government policy incentives. When it comes to the substantial informal economy, such structures could mean that street vendors, for example, can move their shops to e-commerce platforms which would allow them to promote and sell their goods to a broader customer base directly, and enjoy the security and certainty of oversight provided by online platforms.  

In summary, the COVID-19 induced global economic recession will in turn trigger a global wave of political crises, which stands to threaten the survival of democracy, preceding subsequent security issues that will arise across the world. This requires higher transparency and mutual-trust between major economic powers. Transnational organizations or economic cooperative initiatives led by major economic powers should increase the transparency of their operations and allow multilateral cooperation and participation instead of serving as a tool of expansion or neocolonialism. The international community must be prepared to respond to these challenges with interstate cooperation and coordination to address that crucial issue of inequality, if they are to bring stability to their regimes. This requires mutual trust and the coherence of all the state actors involved. Blindly pursuing national interests or adopting unwise diplomatic decisions for domestic political support will be counterproductive to domestic economic recovery because state’s interests are interconnected through the globalized economy. Political economy and the resilience of democracy are intrinsically linked. 

Bowen Qi is a second year graduate student in the MA Democracy and Governance program at Georgetown University. His regional focus is Eastern Europe and the politics of post-soviet states. Qi’s interests also include post-communist political, economic reform and populism in the region.

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