Will COVID-19 Reinforce the Dominance of Large Economies at the Expense of the Small?
President Trump was not shy about claiming the credit for giving every American citizen USD 1,200 as part of the stimulus package to "wage a total war" on COVID-19. While the letter, awkwardly sent weeks after the actual USD 1,200 was paid out through bank transfer or personal checks, was clearly intended to boost Trump's upcoming reelection campaign against Joe Biden, the point implicitly made in the letter goes beyond his simply reiterating his supposed care for the American people; it speaks to the financial capacity of the United States as a nation that goes beyond the will of an individual president to bankroll his way back into the White House for another four years.
Indeed, the ability of the US to dispense a one-time payment of USD 1,200 to an estimated 328 million citizens would mean nearly 400 billion USD in the budget, an amount that is larger than the size of the entire economy of all but 30 countries in the world. For many other countries to make the same amount of payment to all citizens would lead to a significant budget deficit, piling up extra debt that they would have trouble servicing, much less payback, during the recession that the countries are highly likely to fall into in the aftermath of the COVID-19 instigated lockdowns.
Indeed, large countries like the US may suffer much less than their smaller counterparts from the detrimental economic impact of the COVID-19 lockdowns. High-flying small open economies like South Korea and Singapore accumulate wealth through trade, servicing vast foreign markets across the world with the products and services they produce. As fears of global contagion spread, the extra barriers tossed up by governments to stem the free flow of people and goods put their economic models in jeopardy. Without relatively free access to foreign markets, they see precipitous incomes from foreign clients that are the backbones of their prosperity.
Worse still are small economies lacking globally competitive products and services that can be sold around the world. While Singapore and South Korea grids on as domestic demands across the world pick up slightly, three types of small economies continue to suffer. The first is those reliant on foreign tourists, like Greece and Thailand, deprived of hard currencies tourists bring and spend. The second is the likes of Nepal and the Philippines that will see drops in remittances as citizens working abroad lose their jobs. And the third is commodity exporters like Qatar and Angola that find few buyers for exports as foreign demand declines.
Yet, for all types of vulnerable small economies, a fundamental commonality among all points to the root cause of their vulnerability. That is, without a better word, a lack of a sufficiently large domestic market that producers of goods and services can fall back on when there are disruptions to foreign markets, as is clearly the case now. Even when borders close and output cannot be shipped abroad, at least some of the producers, out of innovation or desperation, can turn to drum up domestic demand to keep order books filled and keep employees occupied.
The airline industry is perhaps the most iconic of the differences between small and large economies in this regard. As international borders close and demand for foreign travel evaporates, airlines domiciled in small countries, relying mostly on ferrying passengers and goods between their home country and other countries, are facing financial ruin and a highway to bankruptcy. But national airlines in the US and China, while also suffering, have held up comparatively well, relying on the continued need to keep people and goods moving among cities across vast national territories.
With closures or at least a significant delay for international movements of people and goods becoming a new normal in the COVID-19 era, the economic fortunes of small and large economies are expected to further diverge. Firms from large countries may work closely with the government to ensure restrictions within national borders are removed so that they can sell to a national audience. The ability of firms to cater to a vibrant domestic economy, then, in turn, reinforces the belief that the massive spending programs akin to Trump's stimulus payments are not for naught.
As COVID-19 prolongs the suffering of economies around the world, recovery will be unevenly felt. Companies and individuals lucky enough to be based in a large country will see surprising resilience as domestic markets, sometimes armed with stimulus payments, prop up demands that could at least partially replace lost foreign incomes. But smaller countries will not have such luck. Hence, the closure of borders and prolonged retreat of globalization may well speed up the increasing dominance of a few big countries in the global economy.
Worse still are small economies lacking globally competitive products and services that can be sold around the world. While Singapore and South Korea grids on as domestic demands across the world pick up slightly, three types of small economies continue to suffer. The first is those reliant on foreign tourists, like Greece and Thailand, deprived of hard currencies tourists bring and spend. The second is the likes of Nepal and the Philippines that will see drops in remittances as citizens working abroad lose their jobs. And the third is commodity exporters like Qatar and Angola that find few buyers for exports as foreign demand declines.
Yet, for all types of vulnerable small economies, a fundamental commonality among all points to the root cause of their vulnerability. That is, without a better word, a lack of a sufficiently large domestic market that producers of goods and services can fall back on when there are disruptions to foreign markets, as is clearly the case now. Even when borders close and output cannot be shipped abroad, at least some of the producers, out of innovation or desperation, can turn to drum up domestic demand to keep order books filled and keep employees occupied.
The airline industry is perhaps the most iconic of the differences between small and large economies in this regard. As international borders close and demand for foreign travel evaporates, airlines domiciled in small countries, relying mostly on ferrying passengers and goods between their home country and other countries, are facing financial ruin and a highway to bankruptcy. But national airlines in the US and China, while also suffering, have held up comparatively well, relying on the continued need to keep people and goods moving among cities across vast national territories.
With closures or at least a significant delay for international movements of people and goods becoming a new normal in the COVID-19 era, the economic fortunes of small and large economies are expected to further diverge. Firms from large countries may work closely with the government to ensure restrictions within national borders are removed so that they can sell to a national audience. The ability of firms to cater to a vibrant domestic economy, then, in turn, reinforces the belief that the massive spending programs akin to Trump's stimulus payments are not for naught.
As COVID-19 prolongs the suffering of economies around the world, recovery will be unevenly felt. Companies and individuals lucky enough to be based in a large country will see surprising resilience as domestic markets, sometimes armed with stimulus payments, prop up demands that could at least partially replace lost foreign incomes. But smaller countries will not have such luck. Hence, the closure of borders and prolonged retreat of globalization may well speed up the increasing dominance of a few big countries in the global economy.
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