How deep will downturn in rich countries be?
April 16, 2020
Summary – The question this article tries to tackle is how this pandemic is going to affect countries differently. In good time both good and poor economics tend to perform good equally with just a difference of 5%, but in bad times that separation gets bigger. The main factors that differentiate the countries in difficult times is a country’s industrial structure, the composition of its corporate sector, and the amount of support that their respective government can provide. During the past global recession of 2008, the difference between the GDP growth of good and bad economies grew to 10% from what was 5% before. We can breakdown the performance of the countries on these 3 bases. First, the countries industrial structure, if the country is heavily based on labor intensive, or public activities then they will have more trouble recovering as they will be severely hit as compared to countries that have a mixed structure or a strong corporate structure. The article gives the example of how Switzerland is different from other European countries as its structure is mostly based on finance. Second, is the shape of the corporate sector, if there are more amount small amount of firms then they will have a hard time surviving as they don’t have much cash reserve, and as per research most small firms in USA don’t have enough cash to last a month. Thus, how the corporate structure is based will play an important role. Third, fiscal stimulus provided by government, the provide and amount of stimulus that the government will provide is also a crucial factor, as mentioned in the point before small companies will struggle and without government support it will be too tough for them. Countries like USA and Japan have provided extraordinary amount of support thanks to its government structure and support from its central banks. The last point, duration of how long this pandemic will last, if it ends soon some countries will recover easily
Opinion – In my opinion, I found the article’s points very accurate. It is true that countries with bad economies suffer differently from those with a better one. It was evident in the last recession we all saw. Coming to the three main points mentioned, a countries industrial sector is very important in my opinion it is good to have a mixed structure and not rely on one sector or business. In the current time countries having a corporate structure are not having as much trouble as they have various option to continuing their work as opposed to those based on construction, tourism etc. the composition of its corporate structure is also important, the point in the article is true small companies don’t have enough cash to last long enough, I feel big companies are having problem too as lots of shipment and inventory will be wasted for ex: fashion, clothing’s but they will survive, most small companies won’t be able to last thus affecting the economy. Third, government support as I mentioned in my previous economist article too that is very important as that will be the small contribution that will save many companies. Type of government support provided will vary country to country too. Based on their government structure and their central banks and savings will determine how much will they be able to save.