How does politics effect economics and economics effect politics? What’s the impact of COVID-19 on international economics?
Politics affect an economy in several ways-
1)Regime type
2)Political stability or instability
3)Policy management
4) Corruption
Regime type:- is the form of government within a country. This includes whether a country is democratic, authoritarian, communist, or other. The regime type influences the policies that affect personal and public economic development. For example, in a democratic nation, people are able to obtain small business loans and start their own company. The business is able to expand exponentially and pay employees different rates depending on the work they are doing. However, in a communist nation, there are strict regulations such as paying all staff equally, which can impact how businesses operate and prevent growth that would increase economic development.
Political stability or instability:- refers to the reliability and durability of a government’s structures. The more stable a political system is, the less risk a business operating in that country will face. Nations where there is a high risk of terrorism or internal conflicts are less stable. This makes opening and operating a business expensive and risky in the region. When a country goes to war, this decreases business and it can harm the quality of the currency exchange rate, or the amount the country’s money is worth when compared to that of other nations.
Political management:- refers to how well the government monitors and enforces national and international policies or laws. Countries where copyright and piracy laws are not enforced are less desirable for businesses to operate in. Failure to enforce copyright or piracy laws means that a company may not make money and, in turn, this increases the risk of operating in the region. For example, a company that wants to sell music may change their mind because this won’t be profitable.
Level of corruption:- identifies the level of dishonest, unethical, and illegal practices that are imposed on people and businesses operating in a region. Corruption can include bribing politicians, bribing local companies for materials, or paying to prevent competitors from entering the market. Imagine that a company pays the government to keep a competitor out. This prevents further economic development and can cause a monopoly that makes services overly expensive.
COVID-19 impact: According to IMF, the global economy is expected to shrink by over 3 per cent in 2020 – the steepest slowdown since the Great Depression of the 1930s. In the US, COVID-19-related disruptions have led to millions filing for unemployment benefits. In April alone, the figures were at 20.5 million, and are expected to rise as the impact of the pandemic on the US labor market worsens. As per a Reuters report, since March 21, more than 36 million have filed for unemployment benefits, which is almost a quarter of the working-age population.The IMF’s estimate of the global economy growing at -3 per cent in 2020 is an outcome “far worse” than the 2009 global financial crises. Economies such as the US, Japan, the UK, Germany, France, Italy and Spain are expected to contract this year by 5.9, 5.2, 6.5, 7, 7.2, 9.1 and 8 per cent respectively.Advanced economies have been hit harder, and together they are expected to grow by -6 per cent in 2020. Emerging markets and developing economies are expected to contract by -1 per cent. If China is excluded from this pool of countries, the growth rate for 2020 is expected to be -2.2 per cent.China’s GDP dropped by 36.6 per cent in the first quarter of 2020, while South Korea’s output fell by 5.5 per cent, since the country didn’t impose a lock-down but followed a strategy of aggressive testing, contact tracing and quarantining.
In Europe, the GDPs of France, Spain and Italy fell by 21.3, 19.2 and 17.5 per cent respectively.Due to the fall in travel, global industrial activity has been affected. Oil prices fell further in March as the transportation section, which accounts for 60 per cent of the oil demand, was hit due to several countries imposing lock-downs. IMF projects a decrease in food prices by 2.6 per cent in 2020, caused by supply chain disruptions, border delays, food security concerns in regions affected by COVID-19 and export restrictions.Many advanced economies in the world have rolled out support packages. While India’s economic stimulus package is 10 per cent of its GDP, Japan’s is 21.1 per cent, followed by the US (13 per cent), Sweden (12 per cent), Germany (10.7 per cent), France (9.3 per cent), Spain (7.3 per cent) and Italy (5.7 per cent).Therefore, along with clear and effective communication, broad monetary and fiscal stimuli will be required to be coordinated on an international scale for maximum impact, and, “would be most effective to boost spending in the recovery phase.”