Essay: The Economic Impact of COVID-19: How the Pandemic is Affecting the Modern Economy

The Earth has proven to be susceptible to many diseases over the years. Almost 17 years ago the world came face to face with SARS that took the lives of almost 800 people around the globe. Now 17 years later another pandemic known as COVID-19 has surfaced putting the world under a temporary lockdown and a total count of 248K deaths. The pandemic has had a major toll on the world, as well as the modern economy.
As years pass the world becomes more globalized. It now depends on world-wide trade, businesses and travelling however due to the current pandemic all such activities have come to a halt, so how much the pandemic has actually affected the modern economy?
Continents such as Australia, America, and Europe have all been wrestling with the after-effects of this pandemic. Just by taking a look at the stock market you can decipher how coronavirus had a volatile effect on the economy. The outbreak that started from China and had a huge impact on the disruption of the Global Supply Chain. “With Covid-19’s expansion around the world, it was only a matter of time before the stock markets reacted to the new danger. The crash finally occurred in the week ending February 28, when leading stock markets around the world faced their worst week since the 2008 financial crisis. U.S. stocks lost nearly 12% and $3.5 trillion was erased for U.S.-listed stocks. European shares ended the week down roughly 1.5 trillion US dollars in their worst weekly performance since the 2008 financial crisis. Furthermore the China’s Shenzhen stocks led losses among major markets regionally as they closed sharply lower.” (The impact of coronavirus on the financial markets, 2020)
Even if we keep the stock market crashes aside there is no denying that economies have gone into recession. IMF has declared that this can be the worst recession the world will see after the Great Depression in the 1930’s. Covid-19 brings about one of the most powerful economic shocks of the 21st century after the Financial Crisis of 2008 and 9/11. China alone faced a drop of 20% in its GDP only in the first few months of 2020. There are quite a few reasons for this drop.
Adam Smith in his book Wealth of Nations talked about the invisible hand, how free markets regulate themselves through supply and demand, competition and self-interest. In these conditions however supply and demand is not much help in regulating markets as consumer behavior changes. Due to coronavirus there has developed a large gaping hole in the links between buyers and sellers. Demand has increased as people are stocking up goods because of uncertainty about lockdowns. People are spending more on consumer goods rather than spending their hard-earned money on luxurious goods and outdoor experiences. All of a sudden supermarkets, grocery stores, medical stores and other essential stores saw an increased spending on their products, a demand shock. We can take the example of hand sanitizers and face masks, when coronavirus spread there was a drastic increase in the demand for both these products so much so that large supermarkets and even hospitals had run out of masks to provide. This also proves Smiths theory about self-interest. People who had savings and could afford to buy in bulk cleaned out stores and left nothing for the ones who could not bulk buy, they hoarded the essential goods in order to keep themselves satisfied.
Furthermore in our readings we read Adam Smith outline the basics of comparative advantage and how an economy could benefit from it, however in a pandemic comparative advantage is not so advantageous. Countries that specialized in certain products and imported other essential goods are now facing huge problems as borders have closed and world-wide trading has come to a halt. Countries mostly developing ones that depended on raw material and manufactured goods import are facing shortages as they cannot produce enough for the supply to meet the demand. “More to the point, “the extent of markets” will shrink, and the gains from the division of labor — one of the main drivers of the “wealth of nations” — will steadily be curtailed, because more resources will be needed to produce domestically what was previously imported more cheaply from elsewhere.” (Buiter, 2020) Since we live in a capitalistic world this might lead to increase in product prices since the cost of production will increase and can cause the aggregate demand to drop. “The decline in aggregate demand would start with those who are too ill to work or otherwise prevented from working, but it would be magnified by an uncertainty-driven increase in precautionary saving, as well as a fall in capital expenditures.” (Buiter, 2020). Moreover the world is now reconsidering the three basic economic questions, what to produce, how to produce and whom to produce for.
In Smiths theory of a modern economy an important factor was division of labor. He said that through division of tasks, the work would be done efficiently and more productively. Repetition of small tasks would open more employment opportunities, would cause the production of goods that members of every class could afford, that it would open more possibilities for the society and the people living in it.
However the pandemic has brought with it problems for laborers as well as high rates of unemployment. Many countries all around the world have initiated lock-down for months, this means that offices, shops, businesses everything is closed and no one is coming in for work, this situation is impacting daily wage earners the most. For example Pakistan is a developing third world country, it still has a large chunk of population that survives on daily wages such as maids, street vendors, delivery drivers etc and recently “The Ministry of Planning of Pakistan has estimated that 12.3 million to 18.5 million people in the country will lose their jobs and the economy will sustain Rs2 trillion to Rs2.5 trillion losses in just three months due to “moderate to severe shocks from the coronavirus outbreak”.” (Rana, 2020).
Moreover according to lock down laws, large gatherings have been banned that means shopping malls, cinemas, large retail stores have shut down and are now losing business thus letting people go, this is causing a large number of retail workers to lose jobs. “Businesses have put a ban on company travels. Families are afraid to fly in fear of getting infected. This all has a ripple effect. Airlines, aircraft manufacturers and their suppliers, resorts, hotels, restaurants, sporting events, cruise lines, conferences will be negatively impacted. With the sudden cessation of business, companies in these areas will be forced to downsize their employees or radically cut the hours that they work. Many businesses may not make it and close down.” (Kelly, 2020)
If governments want to stop the progression of Covid-19 they need to implement strict rules and policies in order to control the earth-shattering impacts on economies and the human life toll. The entire global economic and financial system is at a life threatening stage and up till now governments have only declared clumsy country specific responses which have only cushioned the blow only a tiny fraction. This is a high time were policy makers try to employ systematic, coherent and sustainable strategies that are liable at protecting the world and the people from what has proven itself to be a social calamity.