Reforming the international financial system is no act of charity

Reforming the international financial system is no act of charity

Rolph van der Hoeven and Rob Vos are the authors of a chapter* of the recently published book ‘COVID-19 and International Development’. In this blog, they elaborate on their chapter, ...

What the war in Ukraine and the COVID-19 crisis teach us about our global interconnectedness and its implications for inequality

What the war in Ukraine and the COVID-19 crisis teach us about our global interconnectedness and its implications for inequality

Due to the war in Ukraine not only the country's inhabitants have come under fire, but also the granary of much of the world. If the war is not stopped, ...

COVID-19: the disease of inequality, not of globalization

Binyam Afewerk Demena is one of the authors of several chapters of the recently published book ‘COVID-19 and International Development’. In this blog, he and his colleagues elaborate on their contributions to this book. We welcome you to join us for the book launch on March 17 (3:30-5:00 CET) at Pakhuis de Zwijger. Registration is now open.

The COVID-19 outbreak has posed a threat to both lives and livelihood. Because of the strong and interdependent global production value and linkages, coupled with the closure of international borders, businesses, and factories, the economic expectations and forecasts in the early months of the pandemic were generally pessimistic.

The prospect of the world plunging into another major and long-term economic recession comparable to the Great Depression in 1930s and the Great Recession of 2008/9 was on the minds of many economists, governments, international organizations, and citizens worldwide. The attacks on supranational governance and international cooperation were a symptom of an underlying disease – inequality – that has been illuminated by the pandemic. The de-globalization process was driven by increasing inequality, and a dreary lack of trickle-down of the benefits of internationalization.

COVID-19 and globalization

Globalization is a multifaceted concept that describes the process of creating networks of connections among actors at intra- or multi-continental distances. This emphasizes that globalization captures the increased interdependence of national economies, and the trend towards greater integration of different varieties of flows such as information, goods, labour, and capital.

More recently, however, there has been growing discontent and increase in negative sentiments about the impact of globalization. These negative sentiments have manifested in different ways, including through the election of the former U.S. President Donald Trump in 2016, Brexit, and criticism of the World Trade Organization. For instance, Afesorgbor and Beaulieu (2021) argue that the Trump presidency strained diplomatic relationships with close allies, and undermined the rule-based global system, creating uncertainty for the global economic system.

These occurrences constitute a major setback to the pace of globalization, and have set the stage for growing protectionism and nationalism around the world. As van Bergeijk (2019) highlighted, these actors were political. More recently, the principal actor was a virus. The outbreak of the COVID-19 pandemic introduced new health threats to globalization (see van Bergeijk, 2021 for details), emanating from the health risk posed by the contagious nature of COVID-19. In a sense, the pandemic clearly reflects globalization — the virus went global in a few weeks’ time due to the high level of globalization and interconnectedness. COVID-19, however, also relates to de-globalization — the breakdown of international co-operation, and the re-emergence of zero-sum thinking and raw beggar-thy-neighbour polices on the markets for medical productive gear, medical machinery, and vaccines.

We* set out to explore the impact of COVID-19 on the global economic system by looking at three components of globalization: economic, social, and political globalization. The pandemic and the economic policy response to the crisis have impacted these three aspects to different degrees.

  1. Economic globalization

Economic globalization has been conceptualized by means of flows of goods, services, capital, and information in connection to long distance market transactions. Although the pandemic is global, regions and countries have experienced differential effects on various indicators of the economic dimension of globalization. For instance, merchandise trade contracted for the global economy, but the rate of decline was more pronounced in advanced economies  compared to in developing and emerging economies. Moreover, not only were trade flows hit, but the impact of COVID-19 on foreign direct investment (FDI) was also immediate, as global FDI flows declined by nearly half in 2020.

  1. Social globalization

COVID-19 was also impactful, in particular, on social globalization, an aspect which involves interaction with foreign nationals through events such as migration, or actions such as international phone calls and international remittances paid or received by citizens.

Linking COVID-19 to social globalization is important since the former reduced interpersonal globalization, as many countries imposed travel restriction on both residents and foreign travellers. Border closures hindered temporary migration, especially tourists’ and foreign students’ movements in and out of countries. Migrant remittances were also affected, not because of any formal restrictions on remittances, but mainly because of a negative labour market shock on immigrant employment. Demena et al. (2022) found that the pandemic, overall, negatively affected various labour market outcomes. The impact has been most pronounced, in particular, in developed countries, reducing the number of remittances that could be repatriated to developing countries.

  1. Political globalization

Political globalization captures the ability of countries to engage in international political co-operation, as well as the diffusion or implementation of government policies.

The initial outbreak of the COVID-19 pandemic negatively affected international co-operation, mainly because of the blame game between the two largest economies in the world, the US and China. Although global co-operation to fight the virus did not begin immediately with the outbreak of COVID-19, there were many efforts later by different countries to co-operate in fighting the pandemic. China, for example, supported countries like Italy, which became the epicentre of the COVID-19 pandemic in Europe in April 2020. Politically, the outbreak of the coronavirus could, therefore, be used as a building block in the future to reinforce international co-operation and strengthen the pillars of political globalization.

Optimistic outlook for the global economy

There are, in fact, reasons to be optimistic about the COVID-19 economic recovery, as well as about the future of globalization. The main reason for optimism is the noteworthy resilience of world merchandise trade and investment during previous global crises. Multinational enterprises have already had their stress test during the 2008 – 2009 collapse of world trade. That collapse kick-started the process of de-globalization. However, global merchandise trade and industrial production recovered to previous peaks quickly, and this recovery has occurred even quicker during the COVID-19 crisis.

This is the big and fundamental difference with the Great Depression of the 1930s, and it may be related to the fact that world trade is governed and supported by the multilateral trading system. The shock of the pandemic was sharp and immediate, but so has been the recovery. The so-called invisible flows (FDI, remittances, tourism, official development cooperation) have been hit harder compared to the two major historical economic crises during the Great Recession and the Great Depression, and a full recovery of these invisible flows is not to be expected before vaccination is ‘sufficiently global’ in scope. Yet, the expectation of a speedy recovery is realistic at the time of writing. For instance, global FDI has shown full recovery in the last quarter of 2021, although recovery has been highly uneven regionally, and was concentrated in developed economies. Recovery efforts, therefore, took hold early, compared to the two major historical episodes of economic crises. This suggests stronger resilience of the global economic system than anticipated.

The disease of inequality

The prediction and reports of the expected “death” of globalization, however, were, with hindsight, grossly exaggerated. Yet, the pandemic has taught us that inequalities are the breeding ground for the spread of disease and the suffering that follows. Reducing epidemic vulnerabilities, therefore, requires tackling those inequalities. The fight against next potential pandemics, however, implies that we cannot limit ourselves to domestic developments only. Inequalities around the world – within and between countries – provide the breeding grounds and disease pools from which new variants, viruses, and other contagious diseases emerge. Adhering to the United Nations Sustainable Development Goals (SDGs) is a high-return investment project, in particular SDG 10 (reduced inequalities). A recent study by Fantu et al. (2022) pointed out that the COVID-19 pandemic exacerbates the inequalities between migrants (in particular Eritrean and Ethiopian migrants) and ordinary citizens in the Netherlands. Likewise, Murshed (2022) highlighted that the COVID-19 pandemic is likely to accelerate the various forms of inequality.

And last but not least, the outlook for openness of the world economy is still much better than in the 1930s. Yes, de-globalization exists. Yes, overall globalization will probably be lower for the foreseeable future. Our societies will, however, remain much more open than at the start of the globalization wave in 1990. We are now connected via the internet with an intensity that has never been observed before in history. Even though the push towards de-globalization certainly still exists, economies are now digitally connected in ways they have never been before.

Conclusions and recommendations

In conclusion, the eradication of the spread of the virus will require international co-operation, and a global effort to make sure that no single country is left behind. A pool will be forged to prevent new variants and potential future outbreaks. Vaccines must be made available to all countries and must be affordable, something that has been reiterated by the promise of the leaders of the G7 nations as a ‘big step towards vaccinating the world’ – to supply one billion doses of vaccine to poorer nations. A global initiative recently called for urgent further funding to supply a minimum of 600 million additional doses.  Just as globalization has ramifications for all countries, the health of different nations is intertwined. The health of one nation affects the health of the other, as the pandemic has demonstrated. The implication, therefore, is that fighting a pandemic requires us to tackle inequalities, as the latter determine pandemic vulnerability to a large extent. Moreover, it requires a global approach to ensure equality for all the world’s citizens.


References:

*Afesorgbor, S.K., van Bergeijk, P. and Demena, B.A., 2022. COVID-19 and the Threat to Globalization: An optimistic note. In E. Papyrakis (Ed.) Covid-19 and International Development, Springer.

Demena, B.A., Floridi, A. and Wagner, N., 2022. The short-term impact of COVID-19 on labour market outcomes: Comparative systematic evidence. In E. Papyrakis (Ed.), Covid-19 and International Development, Springer.

Fantu, B., Haile, G., Tekle, Y.L., Sathi, S., Demen, B.A., and Shigute, Z., 2022. Experiences of Eritrean and Ethiopian Migrants during COVID-19 in the Netherlands. In E. Papyrakis (Ed.), Covid-19 and International Development, Springer.

Murshed, S.M., 2022. Consequences of the Covid-19 pandemic for economic inequality. In E. Papyrakis (Ed.), Covid-19 and International Development, Springer.

van Bergeijk, P.A.G., 2021. Pandemic Economics, Edward Elgar: Cheltenham.


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Opinions expressed in Bliss posts reflect solely the views of the author of the post in question.

About the contributors:

Binyam Afewerk Demena: International Institute of Social Studies, Erasmus University

Peter A.G. van Bergeijk: International Institute of Social Studies, Erasmus University

Sylvanus Kwaku Afesorgbor: Agri-Food Trade and Policy, University of Guelph

Are you looking for more content about Global Development and Social Justice? Subscribe to Bliss, the official blog of the International Institute of Social Studies, and stay updated about interesting topics our researchers are working on.

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Cryptocurrencies and cypherpunks: leading a scientific rebellion against the mainstream economy

Bitcoin and other cryptocurrencies are becoming increasingly popular, especially among young ‘digital natives’ who are living a significant part of their lives online. But besides helping smooth the transition to a physical-digital life, cryptocurrencies are also changing the world in a different way. This article, part of a two-article series on cryptocurrencies, shows how Bitcoin and blockchain technologies are rooted in a quest for social justice.

Bitcoin is increasingly seen as an alternative to fiat currencies owing to its ‘stable value’ (this can be refuted). At the start of this year, a single Bitcoin fetched more than $40,000, while it was worth $6,000 in March 2020, when the COVID-19 pandemic hit. In 2009, shortly after the currency was created, it was not worth a single dollar. This trend can be observed across the almost 5,000 cryptocurrencies that are flooding the market: in early January, total global trade in digital money reached one trillion USD, doubling since the start of the pandemic. 

It’s clear that cryptocurrencies are a big deal. Here’s why.

In his paper ‘A Peer-to-Peer Electronic Cash System’ (2008), Bitcoin’s founder, Satoshi Nakamoto, explained that the peer-to-peer version of purely digital money would allow online payments to be made directly from one party to another without going through a financial institution or a third party. As a system, Bitcoin is a type of software used for transacting objects of value (money), as well as for issuing forms of money with certain values. The digital currency, also called Bitcoin, is transacted via the Internet.

While Nakamoto did not link Bitcoin to blockchain technologies in his original paper, the term was coined by Hal Finney, a cryptographist from the United States who was also involved in providing input on the ‘Bitcoin system’ to Nakamoto, before the system was launched in early 2009. Blockchains are termed as such because collections of transactions are recorded in blocks that are linked or chained chronologically and secured cryptographically. They are considered very, very safe and very, very private.

The reasons for this financial tendency towards digitalised money include the uncertainty and depreciation of fiat money, high inflation, and high banking costs. But privacy was also a key concern driving the emergence of cryptocurrencies. Starting in 1992, hundreds of scholars with backgrounds in philosophy, mathematics, computer science, cryptography and political science have been joining hands with a multidisciplinary group of experts and activists calling themselves cypherpunks to seek alternatives to the mainstream economy and politics (Assange, 2016). Initial discussions were rooted in concerns about the increasing loss of privacy in the digital world, followed by other fundamental discussions that challenge both the establishment and the vulnerability of the financial system. One important question the discussion group sought an answer to, was how the epistemology of value is returned to each individual. Another was whether banks as custodians of valuable assets could be eliminated. After it was created in 2008, Bitcoin seemed to tick all of the boxes.

So here’s the good news about cryptocurrencies: they can be seen as one avenue of pursuing transformative change. We argue that blockchain, the ecosystem of cryptocurrencies, is essentially based on idealism, particularly the notion that individuals should not be subordinated and exploited by a system that does not work for them. Sovereignty is key. Moreover, the system is based on a sense of solidarity as opposed to individualism in the sense that those who buy and trade digital currencies are collectively opposing the mainstream economy and their position in it. 

Thus, cypherpunks – those seeking to enforce a return to greater privacy through digital technologies and cryptography – are leading a scientific rebellion. They are seeking the decentralisation of currencies, so that each individual becomes his or her own bank. They are seeking currencies where the exchange rate remains stable instead of depreciating. And they are seeking a fair world in which humans are not exploited by financial systems, but instead can participate freely in a financial system that promotes trust, stability, and accountability.

Are there real-world examples of how cryptocurrencies can be used for good? Intergovernmental organisations and INGOs are also interested in using cryptos for their transactions and donations. In October 2019, for example, UNICEF announced its Cryptocurrency Fund (CryptoFund) to enable donations worldwide through a singular digital currency. Save the Children was listed as the first NGO to receive and distribute digital money, and the Oxfam family and hundred of other NGOs across the world are following suit.

Yet blockchain technologies carry some risks, and its greatest benefit may also be its downfall. Bitcoin is not only being pursued by financial firms, corporations and hedge funds as yet another form of capital – cryptocurrencies have the potential to be misused by corrupt politicians, the mafia, and armed groups and terrorists because of the unrivaled privacy it enables to those using it (RAND, 2019).

It is also notable that countries with strong authoritarian tendencies are exploring cryptocurrencies. Zimbabwe recognised digital money as a possible alternative to fiat money following the collapse of the Zim dollar in 2008, and the collapse of the Venezuelan bolivar in 2018 led Venezuelan president Nicholas Maduro to create the Petro. Superpowers like Russia and China have created their own cryptocurrencies. These developments should be closely monitored to ensure that cryptocurrencies and blockchains do what they are intended to – serve individuals and promote fairness, freedom, and privacy.

Opinions do not necessarily reflect the views of the ISS or members of the Bliss team.

About the authors:

Saurlin Siagian holds an MA degree from the ISS (2007-2008) and is chairperson of HARI (The Institute for Forest and People Studies) in Indonesia.

Vinsensius Sitepu is chief editor of the website www.blockchainmedia.id

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