By NetEase Economic Research Bureau (NERB), professional international economic think tank in China.
Interview with Graciela Chichilnisky, professor of economics at Columbia University, the co-founder and current CEO of the company Global Thermostat.
EDITOR: Zhaoyuan Li
NERB: How do you evaluate the influence of coronavirus on world economy?
Graciela Chichilnisky: The current global situation can be as destructive as the Great Depression, but this is different since that depresión was caused by economic factors and failure of economic policy. The economy is working fine here: we are living a response to extraordinary health issues - a pandemic - that are external to the economy. The sickness and death around the world and the need for social distancing are obviously different. Nevertheless many of the same economic problems can be observed mostly severe unemployment and disruption of production and supply chains, stock exchange drops and financial disruption, inevitably followed by losses and hunger from unemployment and economic dislocation and by disorganization of most economic activity. It is however expected that if a vaccine or cure is found the economy will recover. This means both the problem and the solution are external to the economy, and the solution has an uncertain but approximate time limit in the relatively near future.
NERB: The IMF forecasted that the global GDP growth rate will become -3% this year. How do you think about this forecast? How should major economies respond to economic recession?
Graciela Chichilnisky: The IMF forecast seems optimistic, as currently the stock exchange is about 8% lower than it was in January 2020, and there is above 20% unemployment in some cases 30%. However if the duration of the pandemic is shortened by medical findings of remedies for the COV 19 disease or by finding a vaccine, at the end the IMF may be right. At present there seems to be no return to normal until at least mid 2021.
NERB: How do you view the global demand for crude oil in the future?
Graciela Chichilnisky: The oil market is responding to three quite different but related factors: (1) a long-run structural response to the existential environmental threats caused by burning fossil fuels and emitting CO2, with the corresponding response in terms of the creation of the Kyoto Protocol carbon market (EUETS) and its relatives, which now govern about 25% of the world, 50 nations in the EU China California and Eastern US states. This decreased the gains from burning oil and led to law suits against oil companies as well as public desinvestment in the oil sector, (2) the recent short term price war between Saudi Arabia and Russia which inevitably will be won by the Saudi who have by far the largest oil deposits in the world and the least expensive oil to extract (3) the technological results from the Kyoto Protocol’s carbon market Clean Development Mechanism that provided hundreds of US$billions for clean technology projects in developing nations and facilitated huge scaling- up of photovolteic solar energy in China, with the result that in 2020 for the first time solar electricity is less costly to produce than electricity produced from fossil fuels. The global power sector exceeds US$55trillion and the use of electricity is in the process of doubling up in the next twenty years particularly in developing world, so the latter impact (3) is likely to be very important.
All these factors contribute to a drop in the demand and in the use of oil globally, and a corresponding drop in the price of oil. At the same time they cause turbulence in the international oil market. Both are likely to stay with us for a while.
NERB: Global manufacturing industries have been shrinking, how should we protect manufacturing companies in the world?
Graciela Chichilnisky: There is no simple way to resolve this problem since there is a historical secular movement towards decreasing use of labor - which is less needed - for production. This is in fact good for human beings rather than bad, but we need new economic institutions to provide income that is not immediately related to hours worked. We have not made sufficient progress on this.
There is already a trend against globalization and t is likely to continue. This need not create a food crisis but the current lack of political leadership and intelligent economic policies indeed have that effect.
NERB: How do you think of the world economy after the coronavirus? How long do you think it will last? What measures should we take to recover from the damage on global economy?
Graciela Chichilnisky: The horrific impacts of the Covid 19 pandemic should create better understanding of the need for public health policies and more generally for public services such as health insurance, health education, hospitals, emergency medical supplies, food supply policies and pandemic responses in nations such as the US which have fewer than 4% of the world population yet suffer at present about 30% of the COVID 19 cases worldwide. This may have the desired transformational effect - it will be seen for example in the coming US elections. Indeed COVID 19 could be a warning of much worse things to come: the virus acts by depriving the human body of the ability of transforming CO2 into oxygen through the alveoli in the lungs, and as such it is exactly the same as the problem of climate change which is a failure of the global transformation of CO2 into oxygen through the carbon cycle. The important question now is whether the social damage produced by COVID 19 will lead humans to understand the reality of global catastrophes and whether we will will take action on climate change as needed immediately to prevent the existential threat of destruction of the human species.
NERB: Do you have any suggestions for investors in the year of risk?
Graciela Chichilnisky: Keep in mind that the situation will reverse itself - even if slowly - once a vaccine or a medication is found. This is not just a cyclical market dip nor a malfunctioning of financial markets and policies as in 2008. A catastrophe plan should be however prepared for what comes next. As mentioned above climate change is a global version of COVID 19 in the sense that it interferes with the respiratory system of planet Earth - the exchange of CO2 for oxygen globally - as the virus interferes with the lungs that perform the human exchange of CO2 for oxygen. Climate change has already started. Investors should respond by trying to use their monetary power to continue transforming oil and commodity markets and invest in projects and firms that remove CO2 from the atmosphere transforming the CO2 thus obtained into useful products that stabilize the removed CO2 on earth, like food and beverages desalinated water synthetic fuels renewable polymers biofertilizers carbon fibers building materials, all of which can be done with new low cost technologies to remove CO2 directly from air. Blackrock’s founder Larry Fink made a similar admonition recently and investors the world over are starting to lead and to follow this model, with the goal of transforming the economic and financial landscape as needed for a sustainable future.