The Pandemic Alone Can’t Transform Capitalism

Ramaa Vasudevan

COVID-19 has caused unprecedented disruption to the world economy, shining a harsh light on the frailties of global capitalism. But there won’t be a progressive paradigm shift coming out of the crisis without a dramatic upsurge of collective action.

Latin America and the Caribbean experienced the worst economic contraction in the region’s history. (Santiago Sito / Flickr)

Interview by
Daniel Finn

The COVID-19 pandemic hasn’t just been an unprecedented global health crisis. It has also had profound implications for the world economy. Eighteen months of lockdowns and emergency support measures have transformed our understanding of what’s possible. But will the crisis have any lasting impact on the structures of power and privilege that underpin global capitalism?

Ramaa Vasudevan teaches economics at Colorado State University. She is the author of Things Fall Apart: From the Crash of 2008 to the Great Slump.

This is an edited transcript from an episode of Jacobin’s Long Reads podcast. You can listen to the episode here.

Daniel Finn

After more than a year of the COVID-19 pandemic, what have the direct consequences been for the world economy, and how would you compare it to the crash of 2008?

Ramaa Vasudevan

The pandemic was, in a sense, a kind of prism. It clarified the brutal dilemmas posed by the logic of capitalism. As businesses were forced to close, checking the spread of contagion, those whose lives and livelihoods depended on the capitalist economic engines were cut loose. With devastating clarity, the pandemic revealed how tenuous the access to even the most basic goods and services becomes when this access depends on precarious jobs.

The pandemic and its implications are distinct and different from those of the global financial crisis. The collapse of the economic engines in the context of the pandemic was because of the shock of the COVID-19 outbreak. However, during the financial crisis in 2008, it was the outcome and expression of the economic contradictions of capitalism itself. These contradictions are visible in the economic tendencies of falling profitability and lagging demand, which disrupted accumulation.

One should bear this in mind when comparing the pandemic to the crash of 2008. World GDP contracted by 3.3 percent during the pandemic, compared to the global financial crisis, when it fell by 1.7 percent in 2009. But it’s also important to note that GDP growth fell from around 4.3 percent in 2008 to 2.3 percent in 2020.

This means that the fault lines that led to the financial crisis have continued to widen after the recovery. The pandemic has struck a global economy that was already fragile. Looking at employment numbers, in 2020, as a result of the pandemic and the shutdowns, 9 percent of global working hours were lost, relative to the end of 2019. This is the equivalent of 255 million full-time jobs.

The fall in average working hours per week because of the pandemic was about 2.5 hours. This number is approximately four times greater than that which occurred in 2009. Weekly hours declined by just 0.6 hours between 2008 and 2009. These working-hour losses are particularly high in Latin America and the Caribbean, Southern Europe, and Southern Asia.

Employment losses are very high in the United States. They’ve been higher for women by about 5 percent, and for younger workers by 8.7 percent. In contrast to the financial crisis of 2008, most of the global employment loss because of the pandemic was caused by rising inactivity rather than unemployment. This led to an additional 81 million people shifting to nonactive status alongside the actual global unemployment of 33 million. These people were actively seeking jobs.

The proportion of people who entered the labor market fell by 2.2 percent. It became less than 60 percent of the labor force because of the COVID crisis. The fall during the financial crisis was about 0.2 percent. There’s a sharper fall in employment in terms of reduced working hours during the pandemic.

There’s also a greater fall in participation rates. This is because the pandemic was not just a drop in investments leading to a fall in jobs; it posed a choice between life and livelihood, because, for a large section of working people, holding onto a livelihood meant you put your life on the line.

That is one of the stark differences between the pandemic and other crises, and it shows why it has made working lives precarious. Another difference is that there were massive job losses in hard-hit sectors like accommodation, food services, arts and culture, retail, and construction. There was job growth in higher-skill sectors like information, communication, and financial and insurance activities.

Job destruction has disproportionately affected low-paid, low-skilled informal jobs. This points not just to uneven recovery but to a kind of recovery that will lead to greater inequality. Without taking into account any of the income support measures launched by states in 2020, the share of wages in total income declined by 8.3 percent. This amounts to about $3.7 trillion. The greatest loss, about 12.3 percent, was experienced in lower-middle-income countries.

At the same time that workers lost $3.7 trillion, the world’s biggest billionaires — about two thousand of them — enjoyed a $3.9 trillion boost to their belts in 2020. They increased their fortunes by 54 percent, from about $8 trillion to $12 trillion. Just five billionaires in the United States — Jeff Bezos, Mark Zuckerberg, Warren Buffet, Elon Musk, and Bill Gates — saw an 85 percent increase in their combined wealth, which is now about $61 billion. In the absence of interventions or collective action, the impact of inequality during COVID-19 is definitely worse than that of the great financial crisis.

Daniel Finn

How would you assess the programs of emergency support and stimulus that were put into effect by the world’s leading capitalist states?

Ramaa Vasudevan

The advanced capitalist countries of the West, especially the United States, initially floundered and fumbled in their responses to the unfolding public-health crisis. But, in terms of economic response, intervention was on two fronts. One was to support finance and stem the collapse of the financial markets that was triggered by the pandemic. Second, there was the economic stimulus and extension of the social safety net to deal with the toll that the pandemic took on people’s lives and livelihoods.

The European Central Bank launched the Pandemic emergency purchase programme to shore things up. The US Federal Reserve also launched extraordinary interventions, which surpassed what it did during the financial crisis both in scope and in scale. It was ready to pump up to $4 trillion into the financial system through its range of programs. The United States has been more effective and proactive at bailing out finance, and its total stimulus spending has been much greater — nearly 20 percent of the GDP. It has surpassed the UK’s spending, which is around 15 percent or less, and Europe, which is in the range of 10 percent.

A key difference between the stimulus packages in Europe and the United States is that the United States has focused on direct stimulus checks and an expansion of unemployment insurance. When it has tried to protect jobs, it has done so by tying support to businesses to a commitment from firms to protect jobs, through the Paycheck Protection Program.

In contrast, the EU and UK focused on job-retention schemes to keep people at work, and directly supported between 70 to 90 percent of wages. This is a diametrically opposite approach compared to the United States. Europe gave greater support to preserving jobs and employment and to maintaining social systems. This remains true, even in the latest stimulus package where the focus is not on shoring up wages or pushing up wages but on providing some relief through unemployment insurance or stimulus checks.

Daniel Finn

What has the pandemic told us about the underlying frailties of the world economic system? Which countries have been worst affected in strictly economic terms?

Ramaa Vasudevan

As I said previously, the pandemic has been like a prism, making the fault lines of the global capitalist system visible. It has brought global asymmetries into sharp relief. China, the United States, and Europe were the original hot spots. Yet the global economic recovery is expected to occur on the basis of recoveries in the United States and China, and to a lesser degree Europe.

This is because of the greater space for fiscal stimulus in these countries and also the disproportionate access to vaccines, in particular for the United States. Latin America and the Caribbean experienced the worst economic contraction in the region’s history, dropping by about 6.7 percent in 2020. Sub-Saharan Africa experienced the first economic recession in twenty-five years. Its economy fell by about 2 percent in 2020.

Between the escalating fiscal demands of dealing with the toll of the pandemic, the balance of payment shortfalls that was set off by the collapse of global trade, and the sudden stop of capital inflows, developing countries have been on the brink of a perfect storm. The pandemic ignited severe debt crises. More than a hundred countries sought emergency support from the IMF.

To compound this, now that the vaccines are being rolled out, the constraints posed by pharma monopolies and the limits on production imposed by the TRIPS Agreement, which is based on protecting patents and intellectual property rights, have skewed access to the vaccines. This means that people in high-income countries have received about 47 percent of all vaccine doses, while people in low-income countries have got just 0.2 percent, even though the latter make up about 9 percent of the world’s population.

Inequalities are increasing, and not just within countries. Even though the United States and Europe were initially hit worst by the pandemic, a year down the line, developing countries are seeing the worst impact economically, including bigger countries like Brazil and India.

Daniel Finn

You wrote for Catalyst last year about the role of the US Federal Reserve in managing the crisis and in extending dollar swap lines to other countries, building on the precedent of 2008. Can you explain, first of all, what the dollar swap lines actually are and how they work, and then talk about what the Fed has been doing over the last year?

Ramaa Vasudevan

The Fed plays a really important role in the global network of US-dominated finance and dollar hegemony. There’s a deep nexus between big banks, the titans of finance, and the US Fed. This was seen in the bank bailouts of 2008, and we see it again in the response to the pandemic.

This nexus between the titans of finance, which now include big asset managers like BlackRock, is also embedded in the privileged role the dollar has in the global financial system — the hegemony of the dollar. It is the leading means by which countries settle international payments. This privileged role is brought into sharp relief in any moment of crisis, because when there’s a crisis, global investors will rush to the safest asset, and that, in the current context, is the dollar.

When the pandemic was triggered in March 2020, investors across the group began scouring for dollars. There was a sharp spike in investor risk perceptions, and that always translates into a higher demand for dollars. The Fed had to step into the breach and extend a safety net in order to protect the mechanisms of dollar funding, not only within the United States but globally.

The Fed extended the special institutional arrangements, which were put in place during the global financial crisis of 2008. But even though the financial crisis began in the United States, it led perversely to a sharp rise in global demand for dollars. The special arrangement started by the US Fed at that time was the swap line.

These swap lines allow select foreign or central banks to borrow dollar against their own currency. It’s like a swap, but there is a charge. This began as a temporary arrangement, but at least with the five key central banks — Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and the Swiss National Bank — the swap lines have been given a permanent status as of 2013.

Between the financial crisis and the pandemic, the dollar hegemony strengthened the dollar; it continued to grow in importance in international systems and payment mechanisms. When the pandemic began to spread in March, causing panic among the financial investors, there was a spike in demand for dollars. This global upsurge in the demand for dollars threatened to jam the global financial markets.

In response, the Fed forced down the interest rates and increased the frequency at which the foreign central banks could swap the currencies for dollars through these swap lines. It widened the swap lines to include nine other central banks, which had been given temporary access in 2009. This ramping up of the swap lines could be seen as closing ranks around the dollar. It got key central banks to act in concert to protect dollar funding mechanisms.

This was a reprise of what the Fed did in 2008, but in 2020, it went even further. In order to reinforce the network of swap lines, which had been playing a key role in managing dollar flows in the global financial system, the Fed added a new arrangement, the repo facilities. It allowed central banks outside the network of swap lines to borrow dollars. The difference is that while the swap lines made it possible to borrow dollars against domestic currency, the repo facilities made it possible to borrow dollars against holdings of US Treasury bills.

The new repo facilities were a response to the changed geography of finance after the global financial crisis. European banks ceded the dominant role in global dollar operations to non-European banks. Chinese banks in particular have expanded their role in overseas dollar lending since 2010. The swap lines excluded the People’s Bank of China, with its huge stockpile of US treasuries. While China could not directly access the swap lines, it had a huge stockpile of Treasury bills, and the repo facilities offered a way to mobilize that.

The March tumult of the financial markets had seen unusually high sell-off of US treasuries by investors and asset managers, but equally by central banks. More than a hundred billion dollars’ worth of official holdings of US treasuries was sold in March. By borrowing against US treasuries, which is the repo transaction, you get dollars in exchange for your holdings of US treasuries. Since these kinds of transactions are a pivotal market channel for acquiring dollars, this is the way a lot of financial institutions get dollars at the market.

Stemming the free fall in the market for US treasuries is imperative if these mechanisms of dollar funding are to be kept moving. The repo arrangements provided a way for foreign central banks to acquire donors without selling US treasuries. These central bank holdings of treasuries formed a credit line extended to the United States. They would lend to the United States by holding US treasuries. Now, with the repo facility, they could borrow US dollars — the monetary liability of the United States — but putting up the US debt in the form of a treasury as collateral.

You’re borrowing US dollars by putting up US debt as collateral. This new facility would amplify the credit line that central banks of surplus countries with dollar reserves extend to the United States. It adds another tier to the mechanisms that reinforce the hierarchy of the dollar, but these swap lines, or repo facilities, don’t provide access to dollar funds for the central banks of debtor countries because they don’t have huge holdings of US treasuries. They have also been rendered more vulnerable by the crisis.

For these countries, there has been a tightening of screws. They’ve had to go to the IMF and borrow. The asymmetry of debtor countries already existed before the crisis. These countries face conditionalities every time they need to borrow in order to meet the balance-of-payments crisis. Those screws continue to be tightened. The Fed’s interventions have been significant because they’ve restored the fortunes of finance, but they’ve also reinforced the mechanisms of dollar funding and the global dominance of the dollar.

Daniel Finn

You’ve referred more than once to asymmetries in the world economy. What implications do you think the pandemic has in the long run for the balance of economic power between China and the United States?

Ramaa Vasudevan

Since China entered the global markets with the signing of the WTO agreement in 2000, it has grown to dominate the critical hubs of trade and production networks. It has exploited cost advantages, not simply on the basis of undervalued exchange rates, but more importantly on the base of low-wage labor.

However, despite this Chinese dominance in creating production, the United States continued to dominate global financial networks. The US managed to retain this position even though it was the leading trade-deficit country and was engaged in largescale borrowing from China to finance its deficit, thanks to the unparalleled global sway of US big banks and the hegemony of the dollar.

China was a leading exporter, yet the capital controls that insulated the country from global financial markets and limited convertibility of renminbi meant that the renminbi was less attractive on the global markets. China was the leading creditor of the United States, but it was still constrained in the global markets to lend in dollars, not in renminbi.

It was also constrained to stock US Treasury bills, in effect helping the United States finance its deficit and extending an unlimited credit line to the United States. This ability to borrow from China is an important part of the mechanisms that help perpetuate the dominance of US-led finance and dollar hegemony.

China became invested in the stability of the dollar, since a collapse would wipe out its huge dollar asset base, but since the global financial crisis, China has been carving out a more independent space in the world economy under US hegemony. But the approach it has taken, especially since 2010, has been very pragmatic. It calls this approach “crossing the river by feeling the pebbles.”

On one hand, it has been moving to internationalize the renminbi in a calibrated manner, which means opening up its financial markets and creating greater space for financial markets to develop within China. It has also been pushing forward on technological frontiers: IT, solar energy, etc. There have been recent tensions around Huawei, 5G, and the acceleration of China’s plans to launch a digital currency, even as it opened the doors of its asset-management sector to foreign asset-management groups like BlackRock in April, while the pandemic was unfolding.

This reflects contradictory impulses that have been triggered by the escalation of geopolitical tensions with the United States. There was an element of theater in the diplomatic tensions and the accusations of currency manipulation. There was a kind of awkward dance — the waltz with the dragon and the eagle — but both were invested in keeping that dance going. This already awkward waltz is losing step, because the dragon is increasingly loath to be led, and the eagle is finding it harder to find new ways to continue to lead.

The financial crisis has already exposed some of the tensions which have been growing since then. This has only increased after the pandemic. In recent years, there has been a rise of protectionist rhetoric about the fractures and the mechanisms of global governance through which the United States exercises its imperial power, perhaps rewriting the rules of Pax Americana in the aftermath of the pandemic.

But I think it’s too early to map how it’s going to play out. The Fed has been successful in its efforts to preserve dollar hegemony and to restore the fortunes of US finance for the time being. After sticking to an “America first” doctrine under Trump, the United States under Biden is stepping forward to play a kind of imperial role in stewarding or forging a consensus among the core of advanced capitalist countries to circumscribe China’s claims. The tensions are definitely accelerating, but how it’s going to play out is an open question.

Daniel Finn

How would you compare the handling of this crisis by the European Union with the previous experience of the Eurozone crisis back in 2008 and after? Would you say that there’s been a meaningful break with austerity this time around, or with the policies that were often referred to as the Berlin Consensus?

Ramaa Vasudevan

In 2009, the fiscal stimulus in the EU fell behind that of the United States, and its recovery also lagged behind that of the United States. Whatever momentum was there when the crisis began was stalled by the Eurozone debt crisis. There was a resurgence of austerity policies.

The stimulus and response to the pandemic has been greater, at around 7 percent of GDP compared to less than 2 percent during the financial crisis. It comes out to roughly €2.3 trillion. In that sense, there has been some break, but the most significant break with the response to the Eurozone crisis has been the launch of the €800 billion next-generation EU fund. This marks recovery based on large-scale spending on priorities like a just energy transition and digitalization, but this large-scale spending is going to be financed by common European debt.

This is a significant step toward a collective guarantee of EU debt. This has been anathema so far for the EU; it’s been called a Hamiltonian moment for EU central banking. The centerpiece of this is the recovery and resilience facility, which provides loans and grants to fund national plans. This is an important milestone in European integration because the absence of a euro-denominated debt instrument collectively guaranteed by the Eurozone states was an important obstacle for the euro. It was also a critical hurdle in the response of the European Central Bank to the Eurozone crisis.

There’s ultimately greater flexibility in the European Central Bank approach to bond purchases. Most significantly, there is a waiver that allows the purchase of Greek sovereign debt bonds, which are below investment grade. All of this does not mean a death knell to austerity politics, but in contrast to the financial crisis, including the Eurozone crisis, which unleashed both fascist and progressive movements in Europe, there is now a greater space for pushing a social-democratic project and pushing back against austerity.

Daniel Finn

Coming out of the pandemic, even in a best-case scenario, with vaccines proving to be effective and also widely available outside of Europe and North America, how will the world economy have been transformed by this experience?

Ramaa Vasudevan

The global financial crisis had turned the spotlight on the dominance of finance and its implications for rising inequality, as well as the falling share of workers’ income. The accumulation paradigm allowed a small, globally connected corporate elite to corner the bulk of the gains of both income and productivity.

Even as workers faced increasing precarity in informal, fragmented labor markets, in the aftermath of the crisis the dominance of finance became more entrenched. The trends of increasing inequality and falling shares of wages continue to be exacerbated. This is, in a sense, the unfinished business of the global financial crisis. Inequality depressed economic growth, leading to the beginning of secular stagnation. The financial system has continued to accumulate risks while fueling further inequalities.

But after the pandemic, for those who come out of it in one piece and vaccinated, what can’t be forgotten is how the pandemic made glaringly obvious the failure of public policy and the market system to bring about the scope and scale of coordination and mobilization that was needed to face the challenge of COVID-19 and its economic fallout. There was scope for the stranglehold of the TINA [There Is No Alternative] doctrine to be thrown off.

I’m hopeful because there are signs of some momentum picking up on issues like workers’ rights, wages, and working conditions, including those of the gig-economy workers here in the United States and informal migrant workers in developing countries such as India, whose conditions were one of the most visible aspects of the COVID experience.

The balance is also shifting to put the monopoly of big tech companies like Amazon and Facebook under the spotlight. There’s more focus on the coordination of wealth taxes and a global minimum wealth tax — however meager that may seem — and on corporate responsibility for climate change.

These are all hopeful signs, and they signal an opening. The world after the pandemic has to be different from the world before, but it’s going to take social movements and collective action to have a progressive paradigm shift. The pandemic will lead to a profound transformation of the social order. Even if you don’t know what lies ahead, what we know is that the pandemic struck a system that was failing, and one that has to change.