University of Dhaka

Department of Development Studies

Course no: DS 201, Development Economics

Essay on-

“The Impact of COVID- 19 & the

Russia-Ukraine War on World Economy”

Submitted to:
Rounak Jahan
Associate Professor
Department of Development Studies
University of Dhaka

Submitted by:
Mehrin Morshed
Roll: SN-144-018
Department of Development Studies
University of Dhaka

Date of Submission: 08-04-2023

A World in Turmoil: Navigating the
Dual Economic Impacts of COVID-19
and the Russia-Ukraine War

 Introduction

The convergence of the COVID-19 pandemic and the Russia-Ukraine conflict has
unleashed a devastating wave of economic turbulence that has rippled across the
globe, transforming the world economy in profound and far-reaching ways. These
dual crises have disrupted the world's trade and financial systems, creating
economic recessions, and sowing widespread uncertainty about the future.

The pandemic has wreaked havoc on economic activity, as nations have been
forced to lock down and consumers have cut back on spending. Meanwhile, the
Russia-Ukraine conflict has created additional geopolitical risks, disrupting energy
supplies, and heightening economic instability.

Furthermore, both crises have led to significant increases in national debt and
budget deficits, impeding investment in long-term growth and development. The
world's ability to compete in the global economy has been hampered, with
implications that will likely last for years to come. As the world navigates the
complex terrain of these crises, it is crucial to understand their economic impacts
and potential long-term consequences for global growth and financial stability.
  Integrated Impacts of COVID-19 & the
Russia-Ukraine War on the World’s
Economy

This confluence has resulted in a multitude of interrelated economic impacts that

have reverberated across the global economy. From reductions in trade and
investment to disruptions in supply chains and transportation, the integrated
impacts of these two events have been far-reaching and complex such as leading to
unprecedented levels of uncertainty and volatility in financial markets, exposing
the vulnerability of the world economy to external shocks and emphasized the
importance of resilience in global economic systems, causing significant economic
distress for many countries, particularly those with weaker economies and limited
fiscal capacity. Some significant impacts are provided below:

 Reductions in Global Economic Integration &

Interdependence – Trade, Investment & Consumption:

These two events have triggered a notable decline in global economic integration
and interdependence, with discernible effects on trade, investment, and
consumption patterns. This confluence of events has generated a labyrinthine set of
challenges for global economic stability and growth.

The pandemic has engendered significant disruptions to global supply chains,

resulting in a marked reduction in global trade and investment. The World Trade
Organization reports a precipitous contraction of 5.3% in the volume of global
merchandise trade in 2020, representing the most substantial decline since the
financial crisis of 2008-2009. Moreover, foreign direct investment flows have
dwindled by 35% in 2020, primarily impacting developing economies. These
phenomena have brought to the fore the fragility of global supply chains and
underscored the exigency for more resilient risk management strategies.

Likewise, the Russia-Ukraine conflict has wielded a consequential impact on

global economic integration and interdependence. Economic sanctions imposed by
many Western countries on Russia in response to the conflict have disrupted trade
and investment flows between Russia and other nations. According to the
International Monetary Fund, these sanctions have caused a yearly contraction of
approximately 1.5% of Russia's GDP, leading to a decline in imports from other
countries. Furthermore, some EU countries that depended heavily on trade with
Russia, such as Germany and Italy, have been notably impacted.

 Impacts on Global Financial Stability & Systemic Risk:

Decreases in Gross Domestic Product (GDP) And
Labour Productivity:

The pandemic has induced significant reductions in global economic activity,

leading to decreases in gross domestic product (GDP) and labour productivity.
This has been compounded by the ongoing conflict, which has disrupted supply
chains and trade flows, exacerbating the adverse economic impacts of the
pandemic.

According to the International Monetary Fund (IMF), the global Gross Domestic
Product (GDP) declined by 4.4 percent in 2020, leading to a 5.2 percent reduction
in per capita income. This downturn has been predicted to be the worst economic
contraction since the Great Depression. The Organization for Economic
Cooperation and Development (OECD) also projected a global GDP decline of 4.5
percent, with a more severe contraction anticipated in developing economies.

These projections have materialized in actual economic outcomes, with major

economies like the United States and Europe experiencing record-breaking
declines in GDP and labor productivity. The pandemic has also exacerbated pre-
existing vulnerabilities in emerging markets, with capital outflows, currency
depreciations, and mounting debt distress posing significant risks to financial
stability.
 Figure: Global GDP has Lost Momentum

 Changes in Patterns of Capital Flows & Capital

Allocation: Decreases in Foreign Direct Investment
(FDI) & Portfolio Flows:

There have been significant changes in patterns of capital flows and capital
allocation., specifically, foreign direct investment (FDI) and portfolio flows have
experienced considerable decreases, resulting in a shift in the global investment
landscape.

In 2020, there was a 35% decrease in global FDI flows compared to the previous
year, with a total of $1 trillion, which is lower than the $1.5 trillion recorded in
2019. Projections suggest that the decline in FDI is likely to persist in the
upcoming years, with estimations indicating that FDI levels will not surpass pre-
pandemic figures before 2022 at the earliest. Similarly, portfolio flows, which are
investments in stocks and bonds, experienced significant outflows in 2020,
amounting to $177 billion, compared to an inflow of $267 billion in 2019.

Several factors contribute to this shift in capital flows. The ongoing COVID-19
pandemic has led to global economic uncertainty, with businesses and investors
adopting a cautious approach to investment. The Russia-Ukraine conflict has also
increased geopolitical risks, resulting in investors withdrawing from the region.
Furthermore, changes in global economic policies and tensions between major
economies have contributed to the reduction in FDI and portfolio flows. The
disruption of global power transitions, with many countries re-evaluating their
positions and alliances, many countries have been reassessing their trading
relationships and investment strategies. For instance, according to recent data,
global foreign direct investment flows fell by 35% in 2020 due to the pandemic,
with some countries experiencing even greater declines.

 Effects on the Value of Currencies & the Global

Financial System:

The pandemic has engendered significant fluctuations in the value of currencies,

with reduced trade and investment flows, as well as shifts in consumer behaviour,
contributing to a decreased demand for some currencies. The ongoing conflict in
Ukraine has further intensified currency market volatility by introducing additional
geopolitical risks and the possibility of economic sanctions. The implications of
these developments for the global financial system are multi-faceted and intricate,
with far-reaching consequences for international trade and investment. Currency
devaluations, for instance, can undermine the purchasing power of consumers and
businesses, erode multinational corporations' profitability, and decrease the
demand for goods and services, thereby exacerbating supply chain disruptions and
inefficiencies.

Regarding currency valuation, the International Monetary Fund (IMF) reported

that the US dollar index, which measures the value of the dollar against a basket of
currencies, increased by 4.2% in 2020. This increase was attributed to a flight to
safety by investors seeking refuge from the economic uncertainty caused by the
pandemic. Meanwhile, other major currencies, such as the euro and the Japanese
yen, experienced declines in value against the dollar.
  Increases in National Debt & Budget Deficits:

This dual crisis resulted in a surge in national debt and budget deficits for many
countries worldwide, raising concerns about their ability to pay back the loans with
interest. A growing body of empirical evidence suggests that the debt-to-GDP
ratios of many countries have increased dramatically, with the United States and
Eurozone's aggregate public debt reaching historic highs of over 100% and 97.3%
of GDP, respectively. In Ukraine, the public debt has risen to 61.6% of GDP in
2020, representing a considerable increase from 2019. This mounting debt burden
may have far-reaching implications for the global economy. Countries may face
challenges in accessing credit and paying off their debts, leading to concerns of
credit rating downgrades and sovereign default. Moreover, the increasing debt
burden may hinder governments' ability to invest in long-term economic growth,
including infrastructure projects, education, and research and development. As a
result, countries may struggle to remain competitive in the global economy,
exacerbating the already significant economic impact of these crises.

Figure: Increased Debt Accumulation due to COVID-19

  Changes in Global Energy Markets & Oil Prices:

The pandemic has led to a sharp decrease in oil demand due to reduced economic
activity and mobility. The International Energy Agency (IEA) reported that
worldwide oil consumption witnessed an unprecedented decline of 8.6 million
barrels per day (bpd) in the year 2020, making it the most substantial annual
contraction on record. This decline has been especially prominent in
transportation-related oil consumption, such as aviation and shipping. In addition
to the pandemic, the Russia-Ukraine conflict has also disrupted gas supplies to
Europe, which relies heavily on Russian gas imports. This has caused volatility in
gas prices and increased uncertainty for gas-dependent countries. According to the
European Union (EU), Russia accounted for around 43% of the EU's gas imports
in 2020. Furthermore, geopolitical tensions between Russia and the West have
impacted energy markets and oil prices. The imposition of sanctions and the
emergence of geopolitical risks have created impediments for Russian energy firms
in accessing global markets, culminating in a reduction in their output levels. The
US Energy Information Administration (EIA) reported that Russian crude oil and
condensate production in the year 2020 witnessed an 8% decrease in comparison to
the preceding year contributing to a tighter global oil supply and demand balance
that has put upward pressure on oil prices.

 Increases in Global Economic Nationalism &

Protectionism:

The pandemic has critically performed in shaping these developments, with

governments seeking to shield their domestic economies from the negative
consequences of the pandemic. The pandemic has particularly resulted in an
upsurge in the imposition of border closures and travel limitations, creating
hindrances in the global mobility of commodities, amenities, and individuals.
Similarly, the Russia-Ukraine conflict has propelled economic nationalism, with
governments imposing policies aimed at shielding their domestic industries from
the adverse effects of the conflict.
The volume of international trade has plummeted considerably since the advent of
the COVID-19 pandemic, while protectionist measures have been on the rise in
several countries. For instance, the World Trade Organization disclosed that G20
nations had implemented 154 new trade-restrictive measures between mid-October
2020 and mid-May 2021. Correspondingly, the Organization for Economic
Cooperation and Development noted that G20 nations had implemented 79 new
measures relating to investment since the outset of the pandemic.

These developments carry far-reaching implications for global economic growth

and productivity. The surge in economic nationalism and protectionism is
anticipated to result in a decline in global trade and investment, which may
constrain economic growth and depress productivity. This outcome may be
particularly pronounced in developing countries, which are reliant on international
trade and investment as pillars of their economies.

 Disruptions to Supply Chains, Transportation &

Logistics:

The impacts of the crises have been far-reaching, with one of the most prominent
being the significant disruptions to global supply chains. These disruptions have
created obstacles for the transportation of goods and services across continents and
borders, and are attributable to several factors, such as the closure of factories,
restrictions on transportation, border closures, and scarcity of labor. As a result,
companies have struggled to maintain their production levels, meet customer
demand, and ensure the smooth operation of their businesses.

In addition to these disruptions, the crises have also severely impacted

transportation and logistics systems. Governments have implemented restrictive
measures to control the spread of the pandemic with limited the mobility of goods
and people, leading to delays and cancellations of flights, ships, and other modes
of transportation. This has resulted in congestion and bottlenecks, exacerbating the
challenges faced by supply chains, making it difficult to transport goods from one
location to another in a timely and cost-efficient manner.
  Shifts in Global Economic Power Dynamics & Regional
Competition:

This dual crisis has brought about significant transformations in the global
economic power dynamics and regional competition. The pandemic has caused
disruptions to global supply chains, economic downturns, and changes in consumer
taste. Conversely, the Russia-Ukraine conflict has created geopolitical tensions,
trade disruptions, and escalated security risks.

There has been a notable shift in economic power dynamics, with emerging
economies such as China and India gaining more prominence in the global
economy. The World Bank data predicts that China will account for one-third of
global growth in 2021, while the United States and Europe will experience slower
growth rates. Additionally, the global pandemic has cause a reduction in
international trade and investment, with many countries adopting protectionist
policies and prioritizing domestic production.

The Russia-Ukraine conflict has also impacted global economic power dynamics,
with Russia striving to assert its influence in the region, while Ukraine aligns itself
with Western powers. The implementation of economic sanctions against Russia
by the United States and the European Union in response to the ongoing conflict
has resulted in decreased trade and investment between Russia and these regions.
Moreover, the conflict has intensified the competition between Russia and China,
with Russia endeavoring to strengthen its economic bonds with China amid
Western sanctions.

 Increases in Unemployment & Social Welfare Costs:

According to data from the International Labor Organization (ILO), the global
unemployment rate rose by 1.1% in 2020, resulting in an increase of over 33
million people without work. The youth unemployment rate has also seen a sharp
increase, rising to 13.1% in 2020, up from 12.3% in 2019. This trend has been
particularly pronounced in low-income countries, where the youth unemployment
rate has increased by 4.4% since 2019.

These job losses have hit low-skilled and vulnerable workers particularly hard,
exacerbating existing inequalities in the labor market. Women, for example, have
been disproportionately affected, with the ILO estimating that the pandemic has
resulted in a 5% decrease in female employment, compared to a 3.9% decrease for
men. The economic downturn has also had a cascading effect on the demand for
goods and services, leading to a decline in production and revenue for many
businesses, exacerbating the problem of unemployment.

 Impacts on the Gig Economy & Informal Labour

Markets:

The gig economy, characterized by short-term, freelance or contract work, has

experienced a sharp contraction due to mobility restrictions and social distancing
measures. Similarly, the informal labor market, consisting of unregulated or non-
contractual work, has been severely impacted by these events.
The pandemic has considerably decreased the demand for gig work, leading to
massive layoffs and salary cuts for gig workers. As per a report by the International
Labor Organization, 75% of gig workers faced an income decline during the
pandemic. Moreover, informal workers often lack coverage under social protection
schemes or access to healthcare, leaving them vulnerable to economic shocks and
health hazards.

Furthermore, the ongoing conflict between Russia and Ukraine has significantly
affected the gig economy and informal labor markets in the region. The conflict
has negatively impacted the demand for gig work and causing a contraction in
economic activity. Additionally, the conflict has created an atmosphere of
uncertainty and insecurity, making it challenging for informal workers to secure
employment or operate their businesses.
  Global Responses to the Economic Impacts of
the Russia-Ukraine Conflict & COVID-19:
Mitigation Strategies & Policy
Implementation

These two events have caused significant economic disruptions worldwide,

affecting trade, investment, and consumption, among other areas. As a result, many
countries have implemented mitigation strategies and policies aimed at alleviating
the impacts of these crises on their economies. These responses have taken
different forms, ranging from fiscal and monetary measures to regulatory reforms
and international cooperation. Some of the key mitigation strategies and policies
implemented by different countries to address these challenges are provided below:

 Enacted an array of diverse policies aimed at promoting economic

integration and interdependence. For instance, some countries have
implemented measures to promote domestic production and reduce reliance
on imports, while others have worked to increase their exports to other
countries. Additionally, many countries have entered into new trade
agreements and sought to strengthen existing ones.
 Implemented a multifaceted set of policies to boost economic growth and
support financial stability. For instance, some countries have implemented
monetary and fiscal policies aimed at stimulating economic growth, while
others have introduced regulations to promote financial stability and reduce
systemic risk.

 Deployed a multifaceted approach with distinct policy measures to promote

investment and encourage capital flows. For instance, some countries have
introduced tax incentives to encourage investment, while others have
implemented policies to reduce barriers to foreign investment.
  Enforced various policies intended to foster currency stability and
supporting the global financial system. For instance, some countries have
introduced policies to stabilize their currencies, while others have
implemented measures to support international financial institutions.

 Adopted a wide-ranging set of measures in order to reduce debt and

balancing budgets. For instance, some countries have implemented austerity
measures to reduce spending, while others have introduced policies to
increase revenue.

 Employed a combination of initiative oriented towards promoting energy

security and reducing reliance on oil. For instance, some countries have
implemented policies to promote renewable energy, while others have
sought to reduce their dependence on oil imports.

 Implemented various policies aimed at promoting economic openness and

reducing trade barriers. For instance, some countries have entered into new
trade agreements, while others have implemented measures to reduce trade
barriers and increase trade liberalization.

 Enacted a range of measures in order to stimulate supply chain resilience

and reducing disruptions. For instance, some countries have implemented
measures to improve supply chain visibility and coordination, while others
have worked to increase the flexibility of transportation and logistics
networks.

 Supported the development of social safety nets and labour protections for
workers in these sectors & encouraged the formalization of informal labour
markets through measures such as taxation and regulation.

 Conclusion:

To sum up the economic impacts of both the Russia-Ukraine conflict and the
COVID-19 pandemic have been complex and far-reaching, affecting the global
economy in multiple ways. The consequences have been widespread, ranging from
disruptions in global supply chains to changes in patterns of capital flows and
allocation. Countries across the world have responded with a range of policies and
strategies aimed at mitigating the negative effects of these crises which include
fiscal and monetary stimulus packages, investment in healthcare and vaccine
development, economic diversification, and employment support and social
welfare measures.

However, the effectiveness of these policies has varied, and the need for greater
international cooperation and coordination has become more apparent than ever
before. These challenges posed by these crises underscore the importance of global
solidarity and collaborative solutions to address complex, interrelated problems
that transcend national borders. Nevertheless, it is crucial to note that the global
nature of these crises demands coordinated international efforts. Unilateral actions
and protectionist policies can have unintended negative consequences and
exacerbate the problems. Thus, promoting multilateralism and strengthening
international institutions, such as WHO, IMF, and WTO is essential to address
global challenges.

As the world continues to grapple with the impacts of these crises, policymakers
and leaders must prioritize sustainable and equitable economic recovery. This can
only be achieved through bold and innovative policies that foster inclusive growth
and address systemic inequalities. In this way, the lessons learned from these crises
can pave the way for a more resilient, inclusive, and sustainable global economy.

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