Lessons we have learnt from ongoing economic collapse due to COVID-19

Dr Mayengbam Lalit Singh *

It is very interesting to acknowledge that every economic crisis in the world has taught us good economic lessons and helped in reshaping policies in future. When retrospection, there were two major economic collapses (depression).

The first one was the Economic Depression in 1929 where major manufacturing industries were shut down. The first reason behind the economic depression was high population increase in the USA that led to high increase in demand for manufactured goods.

In order to meet the demand, so many industrial units mushroomed. There were high speculations for profit motives which led to huge investments in manufacturing sectors. More and more workers were employed to produce in large scale.

All these created a deflated bubble for supply of manufactured goods which overcame volume of demand. As a result, the entire volume of manufactured goods could not be sold and hence the downturn of business motives of investors.

It affected synchronously on all industrial units, then economic collapse with shutting down of industries and investments along with mass unemployment. Classical economists with their theory “Supply creates its Own Demand” failed to explain the economic collapse.

This economic collapse taught us a good lesson that supply of goods and services should be exactly matched with demand. So it is very important to calculate the demand schedule of an economy.

The second economic collapse was the Great Depression that took place in 2008 in the financial sector in the USA. There was a huge boom in the housing sector in the USA before 2008 which led to financial sectors (both public and private banks) investing in the housing sector. There were reports of many citizens who could not build houses due to low earnings but they expected their own homes.

Pulled up by demand, the construction sector built apartments and started selling in coordination with these financial houses (banks). These banks lent their money to these low earning groups of people with elastic recovery periods at minimum or zero interest rates.

Default of repayment by loanee in the housing sector crashed the financial sector and other sectors too in chain form. So, the USA government learnt a good lesson that it should not be determined by the market and instead the government has to regulate it depending on situations.

When referring to the ongoing economic recession due to pandemic COVID-19, a paradigm shift may take place from economic globalisation to protectionism. The great economist, Adam Smith with his view on specialisation and globalised trading system has failed to explain the ongoing economic recession.

In a nutshell study, we can learn lessons from the economic collapses faced by three types of groups of countries in the world. Firstly, we can learn from the groups of developed and wealthy countries.

Developed countries are characterised by high per capita income along with the highest contribution of the service sector to the share of national income. These are popular G-7 countries (USA, Canada, UK, France, Germany, Italy and Japan) which have been fighting against COVID-19 at present.

Before the popular wave of economic globalisation during the 1970s, these countries were manufacturing and technological hubs. However, during the globalisation period, most of the manufacturing firms in these countries had shifted their production plants to developing countries in order to take advantage of cheap labour and factors of production (inputs) in these developing countries.

That’s why these countries face shortages of even basic medical equipments since manufacturing countries halt production during ongoing pandemic COVID-19. So, developed countries might learn a good lesson to maintain a portfolio of national income by increasing the share of manufacturing sectors.

Apart from developed countries, there are other wealthy countries which are characterised by either huge revenue from the export of oil & gas or tourism industry. They import agricultural products and manufactured goods from developing countries.

During this pandemic crisis, their economies have been crippled since demand for their oil and tourism had been shrunk. They also learn lessons to diversify their revenue generation not only from above mentioned sectors but also from agricultural and manufacturing sectors.

As mentioned in the above, developing countries are characterised by proportionate shares of agriculture, manufacturing and respectable tourism. Economic globalisation along with cheap factors of production enables them to produce agricultural goods and a wide range of manufactured commodities.

They produce not only to meet growing demand in their countries but also to meet demand from both developed and less developed countries. During the ongoing COVIC-19 crisis, their economies are least affected as compared to other two groups of countries. BRICS, Vietnam, Taiwan, Thailand, etc. are the examples of such countries.

Less or least developed countries are also affected in huge quantum due to an acute shortage of manufactured goods which had been imported from developed and developing countries. They also learn lessons which compel them to introduce basic manufacturing sectors rather than producing only agricultural products.

Finally, our state, Manipur has learnt good lessons which motivate us to produce basic manufactured goods such as clothing, foot wares, and other basic items domestically. Agricultural products in the state are hardly sufficient.

Hence, the state government needs to encourage both agricultural and basic manufactured products by injecting respectable funds in order to avoid of an acute shortage of basic goods during such pandemic COVID-19.