Kujtim Dobruna, Founder and CEO of ECIKS
February 2021 – The global economic situation, the present and the future, which is the backdrop – the canvas so to speak – against which developments in Southeastern Europe and Kosovo play out, looks bleak. We find ourselves in the middle of one of the potentially most dramatic economic downturns of this century. And while most would argue that this decline is the result of a pandemic that we couldn’t foresee and we couldn’t prevent, I want to draw attention to the consequences of policy mistakes that are often overlooked of the previous global financial crisis of 2008.
This is a cautionary tale I am sharing and what we can do about it so that it becomes a lesson learned.
Let’s start by stating the obvious: the COVID-19 virus has not only caused one of the biggest pandemics in modern history; it has brought about a new global economic crisis that the world has not seen since The Great Depression. And the continuous lockdown of schools and universities is causing an educational crisis. The pandemic has created a gender disparity, potentially rolling back rights that were hard-won and from which the free market benefited greatly, both in terms of innovation and participation. And then there’s the questioning, the doubting of democracy and liberal values, which no doubt will create new political friction and draw new lines of separation.
Let’s get back to these developments in economic terms:
The current economic downturn hit the world when it was still recovering from the consequences of the 2008 financial crisis. Back then, the governments’ response to the financial crisis was not anchored on the need to address the structural problems that the financial collapse revealed. Instead, the governments and in particular the Central Banks, particularly in US and in Europe, focused on emergency measures such as fiscal stimulus and quantitative easing. As a result of such policies, billions of cheap dollars and euros were pushed into the market. This huge amount of money, that is still being created and circulated today, represents a time bomb for inflation.
The Central Banks are aware of this. But instead of fixing the situation by gradually withdrawing money from the market, they did the very opposite. Instead of letting the market mechanisms work, they issued even more money. They continued to buy bonds and securities not only from states, but also from private enterprises. Highly indebted countries received new loans, instead of repaying the old ones. Due to falling interest rates, revenues from savings fell, pension trusts were damaged, and capital was channeled into non-innovative sectors, such as construction. By buying bonds from private companies, the European Central Bank, for example, kept a significant number of European companies afloat artificially. The so-called “zombie firms” are active to this day. These policy approaches that preceded the pandemic created major risks that made another crisis certain.
So even without the Covid-19 pandemic, the situation in the European and world economy had already reached dramatic features. The virus only accelerated the eruption of the crisis and escalated its effect.
Today we are witnessing a deja-vu of the policies applied during the financial crisis. Because of the pandemic, many countries are forced to take on new debts to deal with their social time bombs: the health and economic consequences of Covid-19.
Central Banks are doing what they learned to do best during the financial crisis: they are continuing to print money but in much larger amounts, while states and private sector enterprises are increasingly buried in debt or are on the verge of bankruptcy. So now from the financial point of view we have an increased number of “zombie firms” but also of “zombie states.”
The monetary policy tools and fiscal stimulus packages currently applied to counter the economic downturn are nothing short of an excessive quantitative easing: offering free money that comes through a massive increase in liquidity and in stimulus. Trillions of dollars and euros will continue to flow into the financial market and the commodities market just like they have since the onset of the pandemic. The money stock has reached an all-time high level in history.
Today we keep on borrowing from the future, but we are investing very little, because this sort of stimulus is primarily a transfer of payments. Unemployment is soaring and once the stimulus ends, we will be experiencing massive bankruptcies in Europe and US, which will have an immense negative impact in the world economy.
So, the world economy is in a dire situation and the recovery seems too difficult for a lack of good solutions.
But what are the possible solutions to this extremely difficult situation?
One possible scenario would be for the Central Banks to do what they should have done after 2008, namely, to withdraw money from the market. But due to the new debts created during the pandemic, this – at least for the time being – does not seem like a good solution, because it would cause the interest rates to rise, trade to decrease, and eventually countries, businesses and households would go bankrupt.
There are some other ideas and solutions that are circulating and being discussed among economists, such as for example the idea of socializing the public debt. This is the case in the EU, namely with the idea of introducing Eurobonds. We also have the somewhat paradoxical recommendation of the representatives of the Modern Monetary Policy, who recommend printing more money to pay old debts. Another suggestion is to write-off all debts and start from scratch. In this case, the value of the destroyed capital would be enormous.
Another more realistic, though not innovative solution, which is currently being applied by some countries, is the issuance of long-term government bonds, for example for 50 or 100 years, but at the current interest rates. This could be a viable solution, if it gets linked for example to new fiscal rules that would set a cap on new budget deficits. It may lead to reduced public spending, the “zombie firms” would slowly disappear, the Central Banks would go back to their role as lenders of last resort, the giant sums of money would start to be withdrawn from the market and finally the focus could shift towards entrepreneurship and innovation. This solution also has its political and economic risks. But perhaps it has also some potential to create a new opportunity to build the future economy on a sounder basis.
At the end of the day, let’s not forget that it is either through hyperinflation or the taxpayers’ money or both, that we are going to pay in the future for the debts we have been creating in the last two decades. So, the solutions presented are quite difficult. It is like having to choose between the plague and the cholera, in the times of COVID-19.
And while economists keep looking for viable solutions out of this difficult macroeconomic situation, we need to remember that every crisis can also be an opportunity. Max Frisch, the Swiss author, wrote that crises are a productive condition, if you only take away the taste of disaster.
Let’s now turn to Southeastern Europe and try to take away that taste of disaster.
Let’s focus a bit on the opportunities this crisis can bring about, especially for countries like Kosovo.
Obviously, there will be losers from this crisis, because all the regional countries have been strongly affected by the pandemic. There is a sharp economic contraction across the region, varying between -2 and -12 percent. Remittances, private investment and FDI have steadily declined, consumption is falling, small and medium enterprises are fighting with liquidity and cash-flow problems. Despite the support measures introduced, a vast majority of enterprises in the region reported loses during 2020 and are continuing to make losses in 2021. The vaccination process is delayed, and the virus mutations are likely to add to an already dire situation. Unemployment rates and poverty rates are on the rise again, and education is disrupted.
Not a very promising backdrop, you’ll agree.
But in a crisis, there can also be winners.
For a number of reasons, I believe that Kosovo and most of the countries in Southeast Europe have the chance to be among the winners.
Let me share three reasons for this optimistic view.
The first reason is the reduced pace of globalization, or the so called slowbalization, which might lead to re-shoring.
As we have witnessed during the pandemic, global production chains were dismantled. The manufacturing of many products, which depended on raw materials and semi-finished products purchased mainly in international markets, stopped. The “just in time” method, which is meant to keep production costs low and increase manufacturing efficiency, was declared clinically dead. The impact was felt in almost all industries, especially in the automotive and manufacturing sectors.
Under these pressures, many multinationals – began to draw plans to shift their production lines from large international markets to those in their geographic proximity. This process, known as re-shoring, which is the opposite of near-shoring or outsourcing, if it is really going to take place, could have a tectonic effect both in terms of production, global supply chains, and the further development of a number of countries and regions. Such a development is a chance for the countries in Southeast Europe to benefit from this shift. Many of these countries offer cheap labor, low taxes and a number of attractive incentives for foreign investors. They are also located in a geographical area, which thanks to the numerous investments in infrastructure over the last decades, has further reduced the distance with Western Europe.
The second reason is the so-called Tech-celeration.
We all agree today that the pandemic sped up existing technological and digitalization trends.
But even before Covid-19, the world was entering a new era, which is changing the way we do business. The change is probably going to be greater than that of the Industrial Revolution of the nineteenth century. I am talking about automation and Artificial Intelligence, in combination with globalization and robotics, which today are known by the notion of “globotics”.
At the heart of this change are the “telemigrants.” Thanks to technological advances, especially the stunning accuracy of translation machines, professionals from around the world are able to offer their services remotely, without the need for classic translators. This way these telemigrants are opening a new phase of globalization centered no longer in the manufacturing sector but in services. What started with the development of websites and the provision of some basic “back office” services from a distance for which not much knowledge of foreign languages was required, is now moving to another, much more unpredictable dimension.
Because the change that the Digital Revolution and globotics will bring seems inevitable and radical, the question arises as to how can we adapt to this new world and how can we develop the right skills that will help us deal with it and also benefit from it. To start this process, especially in SEE, it is essential to agree on a complete reform of the education systems, to enable and facilitate education in accordance with the needs of economy. In particular the reforms need to focus on skill development in digitalization, automation, artificial intelligence and robotics, but also in stimulating critical and innovative thinking.
The third reason of optimism for Southeast Europe is the opportunities that are coming from the green recovery.
Governments, especially in the EU, are spearheading large fiscal measures to help and accelerate green investments. Green finance is gaining traction, while investment in renewable energies, digitalization and electric mobility are expected to boost economic and employment recovery. Hundreds of thousands of unemployed in SEE, especially young people, who do not have the opportunity to participate in the market, could be included and integrated into the labor market as result of investment coming from the green recovery. This would help to address the fact that a large number of young people in particular, lack access to the markets, lack access to education and to capital.
I’d like to conclude with five takeaways:
- Economic recovery remains unpredictable, because of many structural problems of world economy. Many factors play a role, including virus mutation and vaccination.
- Economic crisis will most certainly lead to increasing political tensions and new lines of separation.
- Tech-celeration – is here to stay and the pandemic has sped up the trends.
- There are new opportunities arising in the market, with Green recovery being among those.
- We need new skills, especially in terms of meeting the market needs in globotics, digitalization and green recovery.
Let’s hope that we can generate a vision that will help us grab the opportunities that are coming in the market.
This is a keynote speech held by Mr. Kujtim Dobruna in the online event “Rotary means business”, organized by Rotary Club Prishtina on 11 Feb 2021