Shutdown: How Covid Shook the World's Economy

by Adam Tooze

In 2020, around 4 percent of the world’s entire published research output was devoted to coronavirus problems.23

Operation Warp Speed had a distinctly military flavor. High on the team’s reading list was Freedom’s Forge, a glowing account of how “American business produced victory in World War II.” Not for nothing the same book was also popular with the Green New Deal crowd.

Of the mRNA front-runners, it was Moderna that most needed help. It was a leader in research, but it had only 800 employees and had never run a Phase III clinical trial. The managerial assistance Moderna received from Warp Speed was as important as the $2.5 billion in funding from the U.S. government.

It was a revealing discussion. A sum of €500 million was either a lot of money or absurdly parsimonious. If it had chosen to do so, Germany could have borrowed the funds necessary to meet not just the immediate needs of COVAX, but the entire projected cost of vaccinating the world—estimated, as of May 2020, at $25 billion—and it could have done so at negative interest rates. Instead, it chipped in €500 million and waited for others to do their bit.41 The same logic, of course, applied to every other member of the G20. With the possible exception of Argentina and South Africa, any one of them could have justified the spending needed to end the pandemic and restart the world economy, on grounds of self-interest alone. In truth, even for the big drug companies, the vaccines were not a life-and-death issue. Pfizer had revenues in excess of $50 billion per annum prior to the crisis. The estimated coronavirus vaccine revenue of $14.6 billion it would split with BioNTech in 2021 was an important addition, but by no means decisive to the firm’s long-term future.42 Of greater long-term importance was the mRNA technology.

According to the IMF, rapid and well-targeted immunization of the entire world would add $9 trillion to global GDP by 2025.43

A more compelling constraint than money were the physical bottlenecks in vaccine production.

Russia too adopted a tried-and-tested technology. Rather than starting from scratch and using newfangled mRNA technology, it modified a vaccine type that had been successful against Ebola. This was a route similar to the Oxford-AstraZeneca vaccine, but Russia’s Gamaleya’s Sputnik V used different adenovirus vectors for the first and second shots, which apparently raised the overall effectiveness to 91.4 percent, well above its Western counterpart. In August, while still in Phase II trials, it became the first vaccine to be licensed anywhere in the world.

But the question was, could you trust a vaccine produced in a country where basic information about the seriousness of the epidemic was suppressed? Would you take a shot from a regime that was in the habit of depositing neurotoxins in the underpants of its political opponents, as the FSB did to Alexei Navalny in August 2020?

In China, the pandemic was so thoroughly suppressed that Chinese vaccines had to be tested abroad. For China’s leading contenders, Sinopharm and Sinovac, it was an opportunity for global expansion. In 2020 they ran trials in fourteen countries on five continents.

The big new bilateral lender on the development finance scene was not an established member of the Paris Club. It was China. The precise scale and nature of China’s lending under the banner of the One Belt One Road infrastructure program was much debated, but it was clearly huge. Between 2008 and 2019, according to one particularly meticulous compilation, the China Development Bank and the Export-Import Bank of China lent $462 billion to clients all over the world.22 That was only a hair short of the $467 billion lent by the World Bank over the same period. And the Chinese banks had greater “surge” capacity. At its peak in 2016, lending by the Chinese policy banks not only exceeded that of the World Bank but matched that of all the multilateral development banks—the World Bank, the Asian Development Bank, the Inter-American Development Bank, the European Investment Bank, the European Bank for Reconstruction and Development, and the African Development Bank—put together.23 Over 40 percent of the $30.5 billion of debt service payments due in 2021 from DSSI-eligible African nations was owed to either Chinese official creditors or China’s development banks.24 The forty-six debtor countries that had actually signed up to participate in DSSI owed China $5.76 billion in repayment, as compared to $1.99 billion owing to the Paris Club members.

Since 1959 the International Bank for Reconstruction and Development (IBRD), the part of the World Bank organization that makes loans to low- and middle-income countries, had enjoyed a triple-A credit rating. On April 15, 2020, the day of the G20 agreement on the DSSI, the IBRD was in the market raising $8 billion in five-year bonds, at a yield of 0.704 percent. It was the largest and cheapest fundraising exercise ever undertaken by an international financial institution.34 The reason the World Bank did not join the Debt Service Suspension Initiative was that making concessions to its borrowers, taking a loss on its balance sheet, however small, might have jeopardized the IBRD’s triple-A-plus rating and thus put in danger its ability to make low-cost loans to the poorest countries.35 The World Bank’s answer to the crisis was not to suspend or defer existing debt, but to offer $160 billion in new lending capacity through to the summer of 2021.

Italy with debt at 155 percent of GDP could still access markets at 0.2 percent for a five-year bond, courtesy of the support of the ECB, why should African borrowers with far better debt-to-GDP ratios face prohibitive interest rates? It was down to political backing and financial engineering.

The advocates of a rigorous and comprehensive debt restructuring spoke the language of “economic reality” and “debt sustainability,” but as the experience of the advanced economies themselves showed, if you borrowed in a currency you controlled, those were negotiable parameters, ultimately at the disposition of central banks. For advocates of a new Africa like Songwe, the governing imperative was the scale of their continent’s potential and the immensity of the challenges it faced. The economic reality that dominated UNECA’s vision was the drama of Africa’s population growth and its urgent need for infrastructure. By 2040, UNECA predicted, Africa would have the largest workforce in the world. It would account for 40 percent of the world’s young workers.52 According to the UN, to meet the Sustainable Development Goals, the continent needed to be spending $1.3 trillion per annum.53 Not for nothing was “from billions to trillions” the World Bank’s motto of 2015.54 To get there, what was needed was more credit, by practically any means and from any source.

In 2018, after first proposing to cancel funding for U.S. development finance altogether, the Trump administration threw its weight behind the Better Utilization of Investments Leading to Development Act (or BUILD Act), a bipartisan bill that established the U.S. International Development Finance Corporation (DFC).61 Subsuming America’s existing Overseas Private Investment Corporation, the new finance corporation raised the amount that could be put at risk in support of development lending from $29 billion to $60 billion and extended the terms on which the United States could provide support to include risk-bearing equity.62 In the summer of 2018, the U.S., Japan, and Australia announced plans to jointly support infrastructure in the Indo-Pacific region.63 To back that up, in 2019 Australia launched its Infrastructure Financing Facility for the Pacific with a capital of $2 billion.64 Together, the United States, Japan, and Australia underwrote the so-called Blue Dot Network to certify infrastructure projects. The aim was to transform the estimated $94 trillion in global infrastructure investments that were so urgently needed in the developing world into “an asset class underpinned by standard contracts,” in the manner of commercial real estate projects in the developed world.65

Some 670 million people might live in low-income countries, but they accounted for less than 1 percent of global GDP. Their plight was a humanitarian issue. But it did not pose a systemic risk to the centers of economic and political power in the global north—unless, that is, their misery spilled over into mass migration.

South Africa was even more vulnerable than Brazil. Its growth record was worse. Even before the 2020 crisis, unemployment was close to 30 percent. South Africa’s export potential was less dynamic than that of its Latin American counterparts. As the South African Reserve Bank admitted, the quantity of domestic public debt held by South Africa’s banks and pension funds created a dangerous link between public and private balance sheets.72 A downgrade of sovereign debt would hit the balance sheets of banks and pension funds. And the same logic operated in reverse. The South Africa government had backstopped the bonds of its bankrupt power utility Eskom.73 If those guarantees were called, it would raise South Africa’s public debt at a stroke from 2.62 trillion to close to 3 trillion rand. But South Africa had mastered the new EM toolkit. Though the public debts were substantial, they were not yet at worrying levels. The exchange rate fell in early 2020 but then rebounded. By the end of 2020, South Africa’s foreign exchange reserves were larger than they had been at the beginning of the year. Given the depressed state of the economy, the South African Reserve Bank held its line. It would not raise rates until absolutely necessary.

If 2020 started with foreign funds hemorrhaging out of the emerging markets, the year ended with a record inflow. In late November, weeks after Peru floated its century bond, Côte d’Ivoire issued a twelve-year EUR1 billion Eurobond. Despite offering a record-low yield of 5 percent, it was five times oversubscribed. In 2021, rating agency Fitch predicted that Namibia, Nigeria, and South Africa would roll over old debt. Côte d’Ivoire, Ghana, and Kenya might embark on new issues. Benin, 158 in 2019 out of 189 on the Human Development Index, was on the list of those expected to return to the market.84 The countries in question urgently needed the money and were willing to pay, but what was pushing money out even to the most impoverished corners of the world economy was the huge abundance of dollar liquidity. It was the stance of the U.S. Federal Reserve that gave the global credit system the extraordinary elasticity it exhibited in the face of the coronavirus crisis. The abundance of dollars underwrote the market-based system of global credit and deferred the kind of crisis that might force a general reckoning. Only a tightening of U.S. monetary policy would expose the real constraints on low-income borrowers.

Populists love drama. They love drama so much that both leaders and led can find it difficult to distinguish what is real from what is not.1 The line between rhetoric and actually enacting political change blurs. Their outrages tempt their opponents to a response in kind, which risks its own loss of reality. The best way to respond may be simply to ignore the histrionics.

With its generous budget deficits, the U.S. pumped demand into the world economy. The overall effect was in sharp contrast to 2008–2009. Then too the government budget deficit had exploded, but under the impact of the financial crisis, both households and businesses had tightened their belts. The private savings rate shot up, and this substantially offset the government deficit. The U.S. current account deficit was cut in half, sucking purchasing power out of world markets. In 2020 too there was a huge surge in household saving, but thanks to the stabilization policies of March, the corporate sectoral balance sheet remained steady and the federal government deficit imparted a giant positive boost. At a time when trade all over the world was imploding, the U.S. current account widened slightly.

The Fed’s instruments were powerful, but they were blunt. The most powerful effect of quantitative easing was through asset markets. Big monetary policy interventions inflated the stock market, benefiting the small minority with substantial equity holdings. If in 2021 monetary policy was left unassisted by redistributive fiscal policy, it was a surefire recipe for progressively increasing inequality.

Whereas U.S. fiscal policy tended to stoke demand for imports, benefiting countries like Germany or China, a Fed with the throttle stuck open had a rather different effect. It weakened the dollar and eased monetary policy throughout the world economy, pushing down interest rates.

Whereas the commodity exports of Brazil tended to be priced in dollars and thus benefited from a devaluation, for Asian and European manufactured exports, the opposite was the case. If countries wanted to resist the appreciation of their currencies against the dollar, as several emerging market competitors did in 2020, they were forced to adopt countermeasures.

At the end of 2020 the odd couple of Switzerland and Vietnam were singled out by Washington as currency manipulators.

The shock suffered by the UK economy in 2020 was spectacular. The fastidiousness of British statisticians may somewhat exaggerate the impact of the downturn by painting the decline in the public service contribution to GDP in particularly grim terms.25 However, the fall in household consumption was real, and the prospects for 2021 were grim. It was, according to the Bank of England, the worst recession in three hundred years.26

Johnson and his crew appeared panic-stricken and opportunistic, a campaign team rather than a government. About the fiscal balance, however, there was little ambiguity. For the budget year 2020–2021, rather than the £55 billion in borrowing expected in March 2020, the final total came to a total of £300 billion. This was unprecedented in peacetime.

One of the ironies of the belligerent Brexiteer slogan “Take Back Control” was that it appeared at a moment when due to the giant liquidity of capital and money markets, advanced economies like the UK were under less external financial constraint than at any previous moment in modern history.

The EU’s fiscal effort was still far short of the U.S. government stimulus. And it showed. As the Organisation for Economic Co-operation and Development reviewed the growth record of 2020, the results were sobering. In 2020, euro area GDP fell by 7.6 percent. That was a far worse contraction than Europe had suffered in 2008–2009 or in the worst years of the eurozone crisis. It was also worse than in the United States, where GDP contracted in 2020 by 3.5 percent.

According to the OECD, at the end of 2021, euro area GDP would still be 3 percent down from where it had been at the end of 2019. By contrast, by the end of 2021, the United States was expected to have fully recovered. China would be 10 percent ahead of where it was at the end of 2019.45

Furthermore, recovery would be worryingly uneven. Whereas Germany, the European champion, was by 2022 expected to be 1.5 percent ahead of where it was at the end of 2019, the OECD expected Spain’s GDP to be 3 percent down on its pre-crisis level, even in 2022.

By the end of 2021, the ECB was on track to hold 40 percent or more of both German and Italian debt. That was enough to pin benchmark German ten-year rates safely in negative territory and create unprecedentedly easy funding conditions for the rest of Europe.

John Maynard Keynes’s emancipatory exclamation that we can afford anything we can actually do began to take on an increasingly bitter taste.

After four years of frantic firefighting on both sides of the Atlantic, there was a brief period of stabilization between 2012 and 2014, demarcated by Draghi’s “whatever it takes,” Obama’s reelection, and the run-up to the Paris climate accords. But this stabilization proved short-lived. Between 2014 and 2016 the status quo was rocked by the Ukraine crisis, the commodity price collapse, the Syrian refugee crisis, Greece’s near default, China’s near-miss financial meltdown, Bernie Sanders’s unexpectedly strong challenge to Hillary Clinton, Brexit, Trump’s victory, and the Gilets Jaunes explosion in France. Given the extraordinary relief of the arrival of the vaccines and the departure of the Trump presidency, it was tempting to think of January 2021 as a moment of culmination. The Biden team themselves knew different. They had not just inherited a train wreck but were in the middle of one.

Through May 2021, until vaccines were freely available for all Americans, the United States exported virtually no vaccines to the rest of the world. Moderna and Pfizer supported this policy because they wanted to avoid liability for any safety issues that might arise with the newfangled mRNA vaccines outside the U.S. It was a policy of “America First,” to make Donald Trump proud, all the more effective for the fact that the Biden administration avoided nationalist bluster.

It was hard to credit, but it seemed that finally, after decades of quiescence in the labor market, the Fed was wakening up to the implications of the historic defeat of organized labor in the 1980s and the dawning of a new era of globalization. This meant that it could afford to run the economy hot without fear of a runaway wage-price spiral. Of course, if the economy picked up steam, so too would prices, but that was nothing to fear. When asked at a press conference on January 27, 2021, whether he considered inflation a risk, Powell gave a remarkable answer. “Frankly, we welcome slightly higher inflation. . . . The kind of troubling inflation that people like me grew up with seems, seems far away and unlikely in both domestic and global context that we’ve been in for some time.”

Like it or not, we are in what Ulrich Beck already in the 1980s dubbed “second modernity,” a world comprehensively convulsed and transformed by our own activities.

What has made central bankers into the exemplar of modern crisis-fighting is the vacuum created by the evisceration of organized labor, the absence of inflationary pressure, and more broadly, the lack of antisystemic challenge. The interventions can be as large as they are because though they have huge material consequences, and though the bond market itself has a real-world presence in the form of traders and computers and legal documents, central bank asset purchases are the equivalent of waving a digital wand.

Today the global economy is stabilized at many points. Increasingly, it is decentered from the West. This creates a problem of perspective. What to observers in the West may seem like fundamental roadblocks to further globalization—the increasing difficulty of brokering trade deals, for instance—may have no more than local significance. In the most important growth nodes, trade and investment are continuing apace.

Others dismissed the Sino-EU agreement as a last hurrah of an era of China appeasement that, with Angela Merkel, was fading from the scene.

The Biden presidency’s first order of business is to attempt to restore coherence. That is a tall order, and, given the lack of guardrails, the precarious balance of party politics, and the uncertain future of the GOP, it is a gamble. With Trump as president, pluralism and incoherence were a saving grace. In light of the experience of 2020, it is not obvious whether America and the world have more to fear from a unified American government subject to risk of capture by the nationalist right, or a more incoherent American regime in which key levers of power remain the purview of functional elites, globalized interests, and modernizing coalitions in key centers like New York and Silicon Valley. The polite way of framing this, for instance when conversation turns to the latest impasse in American climate policy, is to argue that a progressive future for the United States depends on the dynamism of “subnational actors.”38 For all the enthusiasm surrounding the early months of the Biden administration, the haunting question remains: Is the United States as a nation-state capable of responding in a coherent and long-term fashion to the challenges of the great acceleration?

Europe’s failure in the years after 2010 was of historic dimensions. The year 2020 could have been the same. It was not. In a conscious determination to avoid a disastrous repetition, Europe’s political class defined the 2020 crisis as new. The least that you can say for them is that they found new ways to fail. They took on the task of a common vaccine policy and turned its launch into a legitimation crisis. They constructed a new fiscal capacity that was undersized for the job.

I graduated from college in 1989. You could feel the Iron Curtain shaking. It was the summer of Fukuyama and of Tiananmen.

I stumbled on the analysis of the “six effects” by one of Xi Jinping’s closest advisors. This book begins by referencing Chen Yixin’s pronouncements not simply for the sake of their inherent interest, but to make a larger point. The fact that Chen’s map of convergent crises was so apt, that it was more illuminating than the EU’s talk of polycrisis or America’s solipsistic preoccupation with its national narrative, should give us pause. The intellectuals of the Chinese regime are loyal to their party’s political project. They are at work on their own version of history.

If our first reaction to 2020 was disbelief, our watchword in facing the future should be: “We ain’t seen nothing yet.”

P. Tucker, Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State (Princeton University Press, 2018).