Effects of Covid-19 on Global Markets and Economy Research Proposal

Answer

Theoretically, there are a lot of factors that could trigger and cause financial crises. This ranges from natural calamities to manmade factors such as poor corporate governance. The problem of financial crisis dates back to the past 50 years which have stimulated an interest among theorists and financial analysts to explore and understand the underlying factors (Madura, 2020). As a result, there have emerged a range of theories to explain financial crisis. Some of the prominent theorists include Jean Leonard de Sismondi, and Hyman Minisky among others, who have presented different points of view and angles of the causes of financial crisis.

Hyman Minisky presents a post-Keynesian argument backed by economic and financial principles. He analyses the concept of monetary weaknesses in domestic markets. Using the analysis, Minisky explains how monetary disasters are caused by unusual or surprising events as well as instances of debt deflation (Lavoie, 2020). The theory alludes that as economies grow and develop, investors’ confidence enlarges. As a result, they become more aggressive in their risk taking. This is evident in the way their attitude shifts towards more risk taking than taking precautions. In such cases, they tend to overlook the dangers while emphasizing potential profits to be made from investments. The ensuing events trigger an increase in the price of assets, commodities and monetary possessions. With the heightened appetite for risks, any shock in the markets is likely to trigger a financial crisis. This is the case with the current global economy, where different countries have been facing economic uncertainties. BLS (2019) reports that before COVID-19, the global economy was already exceedingly fragile. This is because most countries have experienced unfavourable economic cycles every 4-7 years for the past 300 years.

Learning models and herding models are part of the coordination games theory. The herding model describes a situation where the behaviour of individual investors or shareholders is determined by group thinking (Bohren, 2016). This model is applicable in explaining the impact of pandemics such as COVID-19 on global markets and economies. The herding model notes that profits acquired by a small number of investors could motivate other people to invest in the portfolios because the later investors believe that their profit margins will increase when they figure out how the other investors are maximizing their wealth (Kononovicius and Gontis, 2013; Cayon, Thorp & Wu, 2018). This model works on the assumption that the few successful investors have logical and reasonable knowledge about the economy. It further assumes that investors that make profits have good information on certain asset types and that is why they make high value returns. As much as these assumptions are right, using the herding model could lead to wrong decisions. This is mostly in cases where the first investors made the wrong choice, or the market became saturated thus lowering the returns while maximizing the risks. This is the case with the COVID-19 where because of the resulting fear that markets will collapse, people made herd decisions to withdraw their investment from certain types of assets (Gunay, 2020). This led to a gloom in the stock markets. On the other hand, the same investors were led by herd psychology to invest in the sectors providing essential services in the hope that they will continue to make a profit.

The other model is adaptive expectations or adaptive learning. This model argues that decision making among shareholders is dependent on the newest or latest incidences in the economy and markets (Berardi & Galimberti, 2017). For instance, when the value of certain assets or capital increase spontaneously over a prolonged period of time, then investors will easily be convinced that the market is profitable (Madura, 2020). On the contrary, when newest instances disrupt the market and cause uncertainty, investors will shy away from investing. In such a case, investors begin to doubt the prospects of realizing profits (Berardi & Galimberti, 2017). Adaptive learning model therefore explains how some decisions by investors come about especially after the corona virus shock on the global markets and economy.

The theory of financial contagion describes how a small financial crisis in one country, could trigger a simultaneous spread of a financial turmoil across countries. According to Russian psychologists, financial contagion could be caused by behaviour, attitude and psychology (Erken, 2020). The spread of a financial crisis could be caused by external investors who either withdraw their investments in a country with a stable economy as they are afraid that the financial situations in their country would destabilize the whole global economy. On the other hand, it could be triggered by the behaviour of the local investors. This is often a result of panic among investors who begin to withdraw their money from banks and stock markets leading to bank runs and instability. Backed by the herding model, the harmful corrupting influence of a small group of investors could lead to massive panic locally and globally. Such scenarios have been noted with the East Asian financial crisis and the 2008 Global Economic Crisis which begun in the USA and spread to most of the global economies (Claessens and Forbes, 2014). In fact, the effect of the crisis was felt more in countries like Greece which are many miles apart. This example illustrates how the COVID-19 pandemic could either trigger multiple financial crises across countries with weak economies, or one weak economy creating a contagion effect across the globe.

The article titled “Infectious disease and economics” by Smith et al., (2019) assess the effect of zoonotic disease events on multiple sectors. The authors explain that for every pandemic and adverse public health event, there is a resultant socioeconomic impact. With the extensive globalization of modern economies, and extensive international trade and travels, pandemics are likely to cause economic shockwaves. Smith et al., (2019) explain that the private sector is impacted indirectly by such events. However, because of the effectiveness of decision making in the private sector, it is possible for the management to react effectively and work collaboratively with the stakeholders in private and public health systems to respond to the health crisis. The aim of such coordinated efforts is often to reduce the negative socioeconomic impact of the pandemics. This is the case with the Ebola Virus and the Middle East Respiratory Syndrome (MERS) which apart from causing massive economic impact on the economies of the affected regions, stimulated investments in regional and global health security. Smith et al., (2019) further illustrate that outbreak of infectious diseases such as coronavirus has a different impact on different sectors. Collectively, the impacts affect the local, regional and global economies.

The article emphasizes the cost of pandemics on the healthcare system. Pandemics are costly to the health sector since it creates rapid increase in demand for healthcare services than the system can typically accommodate (Smith et al., 2019). The global travel has been acutely impacted due to the missed summer seasons. Forward bookings for the months of March and April were cancelled leading to 40% losses in 2020 compared to a similar period in 2019 (Baldwin & di Mauro, 2020).  The consumer products sector is also affected. The consumer products sector has reported moderate decline in consumption. This is because of the limited export of services around the globe. Regardless, the demand for food has increased as people engage in panic buying. Similarly, the demand for online food services surged during the initial periods of self-quarantine and lockdowns instituted by the government (Carlsson-Szlezak et al., 2020). Online demand grew considerably across sites such as Amazon. However, the shortage of labor hampered efficient servicing and delivery of the orders for consumer products.

As much as some sectors were negatively affected, gold trading registered the highest ever price since 2013 (Ambrose, 2020). On the contrary, oil prices declined during the same period. The industries that are currently working from home include financial service, education, and corporate jobs. On the other hand, health professionals, low skilled workers such as cleaners, retail workers, distributor supply chain, deliveries and drivers are considered as essential service providers.

To curb the spread of COVID-19, countries introduced a range of policies to protect their economies and citizens against potential contagion. According to Anderson, Heesterbeek, Klinkenberg and Hollingsworth (2020) these policies have had a significant impact on global markets and economy. In general, the policies taken by countries can be classified into four groups, namely; fiscal measures, human control measures, monetary measures and public health measures as summarized in table 1 below.

This section introduces theories and current literature on the effects of COVID-19 on global economies and markets. These theories are applicable in grounding the discussions on the expected impacts of a pandemic on the global economic system. Discussions on the impact of the viral outbreak on multiple sectors and industries is equally presented to further justify the need for research that connects theories and realities creased by the pandemic. The policies response section further highlights how governments, in reaction to COVID-19 have fuelled the impacts of the pandemic on economies and markets.