Fifteen Eighty Four

The world economy is experiencing, because of the Covid-crisis and the associated lockdowns, its worst slump in peacetime since the great depression of the 1930s. A look at the main economic dislocations of the 100 years shows the disruptive effects of World War I, the hyperinflation of the 1920s in Central Europe and Soviet Russia, the great depression of the 1930s, World War II, the stagflation of the 1970s, the Latin American debt crisis of the 1980s, the post-socialist slump and the Asian crisis of the 1990s, the global financial crisis of 2008-2009, the austerity policies in Greece and Southern-Europe and other experiences.

History teaches that a variety of factors can lead to economic slumps: (i) armed conflict, (ii) a complex post-war settlement, as in the 1920s in which reparations and social conflict led to explosive inflation and the rise of intolerant nationalism and xenophobia, (iii) a financial crash; this was the case of the stock market in 1929 that preceded the great depression of the 1930s with massive bankruptcies of banks and firms, (iv) supply-side disturbances as the two oil price shocks in the 1970s that led to combined with the crisis of the international monetary system of Bretton Woods and geopolitical turbulence in Europe, Vietnam and Iran, leading to stagflation (a mix of stagnation and inflation), (v) high external debt; in fact, in the 1980s the combination of high external debt, inflation and distributive conflicts led to a lost decade in terms of economic growth and employment in Latin America and Turkey and the Philippines, (vi) changes in economic systems; in the 1990s, the collapse of soviet-style of socialism and the rush to re-establish capitalism through policies of shock-therapy was followed by very large cuts in output, investment and employment along with a rise in inequality in Russia and former soviet republics and also in countries of Eastern and Central Europe. The intensity of the contractions in GDP in several former socialist countries even surpassed those of the 1930s and resembled more those of WWII and WWI.

No doubt that financial deregulation and speculation have been important factors triggering economic crises and slumps. In the 1990s, rapid financial liberalization in East Asia led to economic crises in Indonesia, Korea, the Philippines, Malaysia and other countries of the Asian region. The 1990s also saw currency instability in Argentina, Mexico, Brazil, Ecuador and other emerging economies. The bursting of the high-tech price bubble in the USA also led to economic and financial volatility.

Financial speculation in the real estate market and bad loans by banks in the USA led to the financial crisis of 2008-09 that rapidly propagated to Spain, Portugal, Ireland and other European countries. In the aftermath, countries of the southern periphery such as Greece, Spain, Portugal and Italy suffered from the effects of austerity policies and debt overhangs. This was particularly serious in Greece that experienced near a decade of protracted slump. On the political realm, economic insecurity, sluggish growth and worsening inequality triggered a wave of populism, anti-immigrant sentiment, despair and confusion. Finally, the new realities of a global pandemic show that health crises such as the Spanish flu of 1918-19, the 1957-58 H2N2, the 1968 H3N2, the 2003 SARS and 2020 Covid -19, (not all leading to economy-wide recessions) show that the propagation of a pathogen when they have lethal features and of wide geographic reach can be a source of economic slumps as the great slump of Covid-19 is showing.