This transcript is taken from an interview conducted April 14, 2020.
There has been a lot of focus on the lockdown in the city of Wuhan, China, and in surrounding cities. What may not be as well known is that many other Chinese cities implemented the same lockdown policies. The first thing my coresearchers and I documented is that when you lock down a city, people can’t get to work, and businesses can’t engage in transactions. We put together lots of indicators of the extent of activities in the industrial and retail sectors of various affected cities, and what we saw is that immediately after a lockdown, all these indicators went way down.
Cities started to experiment. Take Hangzhou, for example, which looks to have ended its lockdown early, judging by the extent to which people were moving around in the city just a couple of weeks after the lockdown began.
Hangzhou happens to be where Alibaba is located. The little bit of evidence I have is that officials were able to harness the data provided by Alibaba—which is probably the largest web-based company in China, and is involved in everything—to track people and identify who was healthy and who was not. The technology has been slowly adopted by many other cities—as a system of green, yellow, and red lights that show up on your phone. You have to show that app in many places, when you want to go to the grocery store or back to work, for instance.
We haven’t seen all the consequences yet. Wuhan just ended its lockdown a few days ago. Beijing is still under lockdown. What we’re seeing so far is that manufacturing activity is coming back. The main problem these cities are facing, now that their workers have come back, is that the rest of the world has gone to hell during this period. Their major source of demand—their customers, their exports, all of that—has gone away because of what’s happened to the rest of the world.
What hasn’t come back yet is the nonmanufacturing structure, which in China, as in most countries around the world, is the largest source of employment. I’m keeping a close eye on what is going to happen to unemployment in China in the next one or two months. I’m fearful that what we’ll see soon is a massive wave of unemployment, similar to what we’ve seen in the United States.
The question is whether what’s happened in the past three months will just accelerate the shift away from manufacturing. The answer is yes.
The issue is less about loosening the lockdown restrictions, and more about the long-term consequences of freezing the economy for a couple of months, particularly for the millions and millions of small businesses that didn’t have the reserves and basically died during this time period. I’m fearful this is what we’ll see soon in China—that a lot of businesses have effectively died, and we just don’t know it yet.
The only precedent that we have for this in China is what happened from 1998 to 2012, when there was a restructuring and the closing of lots of state-owned companies. During that period, about 100 million workers lost their jobs, but that case is different from what we’re seeing now.
What happened then was geographically concentrated in some of the Chinese rust belt cities. It was also demographically concentrated, in that primarily older workers lost their jobs. The current situation is different because it’s widespread and likely affects most Chinese cities. It will also be concentrated among the young and the middle-aged, but perhaps more among the young.
There was an announcement last week that they [Chinese officials] are putting in place a rescue package, but the rescue package doesn’t really address this unemployment problem and is about more infrastructure spending on 5G infrastructure, roads, etc. But that doesn’t directly address the issue of massive unemployment, and I don’t have a sense that they have really thought about it.
I don’t think there’s going to be political instability, just because of the nature of the political system. But unemployment will potentially create a huge social problem.
China has moved away from being a manufacturing hub over the past few years, for several reasons. One is the trade war that has been going on. Second is the long-term structural changes that have been taking place in the Chinese economy. Some of the most important companies in China now are nonmanufacturing companies, and very few of the most important companies are in manufacturing. The question is whether what’s happened in the past three months will just accelerate this shift away from manufacturing. The answer is yes. In terms of being a global manufacturing hub, China will play a much smaller role in the future, at least for US companies.
There has been a lot of focus in the US on the two big rescue packages. The first was $1 trillion, and the second was $2 trillion. That is already 15 percent of US GDP. Now there are talks of a third rescue package.
All of the European countries have put in place, or will, their own rescue packages. The Danish government is going to subsidize 70 percent of the payroll of every single one of the small and midsize companies in Denmark. The United Kingdom is going to do something similar. Canada has done something similar. The details of the rescue packages differ, but they fundamentally involve borrowing huge sums of money. China is already starting to do exactly the same thing.
There are two questions to think about. Where exactly is that money going to come from? A country has to borrow money from somebody. Let’s put that question to the side for now.
The second thing to think about is: Who is affected by this crisis? It’s not just China, or Europe, Canada, and the US, but every country in the world. It’s Mexico, Argentina, Colombia, Indonesia, Malaysia, the Philippines, India. Every single country has exactly the same problem. It’s a shock that hits everybody equally.
If you think the US needs to put in place a rescue package, every other country needs to do the same thing. On the low side, India or Mexico should really be spending at least 5 percent of their GDP. If they don’t, people die. There’s no other way around it.
Now, this ties into my first question. What happens when everybody tries to borrow money at the same time? That is just an impossibility. We can only borrow money from each other. This is why what’s going on now is very different from what’s happened before.
In 2008, only some countries needed to borrow. The US needed to borrow, but China did not. At that time, China lent a lot of money to the US, but that’s not possible now.
Not available
Not available
Not available
Not available
Then you have to ask yourself this about the people who have the resources to take on that debt: Where will they put their money? What will they invest in? We’ve already started to see that they’re putting their money into what I’ll call the safe-haven countries, the ones that are able to issue relatively risk-free debt. They’re going to buy up debt issued by the treasuries of the US, Denmark, Germany, Canada, and China.
The money will come from US investors deciding, “I no longer want to keep Mexican or Argentinian debt in my portfolio. I’m going to put my money somewhere else.” They’ll liquidate their holdings of Mexican and Indonesian debt, and they’ll shift their portfolio toward US Treasuries. Wealthy Mexicans, Colombians, and Indians will take their money and invest it in assets that are safer.
A country such as Mexico won’t be able to raise the money that it needs. It may need to borrow 5 percent of GDP just to be on the low side, but it won’t be able to, because nobody’s going to buy that debt. Also, because of what the US and Europe are doing, regardless of whether Mexico tries to borrow money, its money is leaving the country. The best estimate we have is that there has been a flight of about $100 billion coming out of the middle-income countries in the world just in the past three or four weeks.
You’re going to have a situation where these countries can’t spend money. They can’t raise more money, which is leaving, and millions of people are dying while millions of others are losing their jobs. What do you do as a government? You either let your people die on the streets, let them starve to death, or grab whatever resources you have. For a lot of countries, one of the biggest things that they spend on is debt service. They are faced with essentially the situation, “Do I not pay my landlord or do I not buy food?”
Many countries—not all, but many—will think, “If I don’t pay my landlord, I can still live in a house for another few months. But if I don’t eat now, I’ll starve.”
It’s a larger version of the choice that many people and businesses in the US are making. Other countries will try to buy ventilators and personal protective equipment. You’ll try to do something to provide your millions of workers who have lost their jobs with something so that they don’t starve.
We don’t have the option of borrowing money from Mars. We’ve got to think of something else.
Then the question is, if a default is coming, can we do that in an orderly way, or will we just have this chaotic, massive sovereign-debt default?
Unless we do something, I fear the latter will happen. Many governments will make the decision that they’ll just take the billions of dollars that they would otherwise pay to service their debt and spend it on these urgent social needs. If we organize all the lenders of the world, and they all agree to stop these payments because of the worldwide emergency, and we let countries use these resources to provide emergency resources for the health system and for their people, hopefully their economies and the health of their people will recover. Once they recover, they can continue their schedule of payments.
This is the proposal that I am making. I don’t see any other way in which countries can get the kind of resources that are necessary, because otherwise we are looking at a humanitarian and economic catastrophe that will be much larger than anything we’ve seen in our lifetimes. These—the Mexicos and the Colombias—are normally well-functioning countries.
Something I read symbolizes for me how bad this whole situation is. Over the past three or four years, there has been a flood of refugees, at least several million people, from Venezuela to Colombia. But what I’ve seen in the Colombian press is that things have gotten so bad in Colombia because of the lockdown that the Venezuelan refugees are going back to Venezuela.
What I’m calling for is not a default but a plan precisely to avoid a default: a one-year moratorium on debt payments so that we can provide resources to the health systems. Give these economies a chance to recover. Once they do, then lift the moratorium, and they can go on servicing their payments. There never needs to be any restructuring of the debt.
Again, we’re talking about economies that are normally strong and have a lot of resilience, economic activity, and social capital—places such as Indonesia and Malaysia that just happened to be hit with this big shock. We’re not talking about the Venezuelas of the world, or Argentina, where it’s a completely different story, or the poorest countries. We are talking about countries that are big and have the ability to become the next Chinas.
Before, we used to be able to borrow from China. Mexico in 1994 turned to the US for help. But that’s not an option anymore. We don’t have the option of borrowing money from Mars. We’ve got to think of something else.
It really depends on whether we find a vaccine. If we don’t find a vaccine, or the one we find is not very effective, it will change how cities work. Places such as New York or Mumbai, India, will no longer be feasible because they will be cesspools of infestation.
If we do find a vaccine—and I hope we do—for cities, this will just be a footnote, like influenza or cholera or bubonic plague. These were all pandemics that hit the world at different points in time. We found a vaccine, and they’re no longer an issue.
I can see how people might think, “This time it’s COVID-19, maybe in five years it’ll be something else, and these things will be increasing in their frequency.” I don’t know enough about where COVID-19 came from to know whether this is likely, but it’s possible.
There are huge benefits of interacting with other people, and sometimes we forget that there are also huge costs of interacting with other people, in the sense that we also get their diseases. That’s the trade-off.
Pulitzer Prize-winning reporter Brody Mullins explains how corporations use lobbying to generate political influence.
Capitalisn’t: How Lobbying Led to Crony Capitalism
Journalist David Leonhardt joins hosts Bethany McLean and Luigi Zingales to discuss what made the United States the land of opportunity, and whether it still is.
Capitalisn’t: What Happened to the American Dream?
The problem for drugmakers is that the value could benefit a competitor.
Why New Drugs Are Worth Pursuing—Even When They FailYour Privacy
We want to demonstrate our commitment to your privacy. Please review Chicago Booth's privacy notice, which provides information explaining how and why we collect particular information when you visit our website.