Case Study $(10$ marks$)$

Capital Flows and the COVID$-19$ Pandemic

Global economic shocks have $an$ impact $on$ global labor markets. The COVID$-19$ pandemic led $to$ a major slowdown $in$ global economic activity and millions faced the prospect $of$ job losses $as$ business activity stopped during the height $of$ the pandemic and the recovery was slow $to$ pick $up.$ During the financial crisis $of2007-2009,$ unemployment $in$ many countries rose. $In$ some countries this has $an$ important effect $on$ capital flows. $In$ particular, the effects can $be$ felt $in$ emerging markets. Emerging markets are those classified $as$ the economies $of$ developing countries which are experiencing a transition from a low income economy $to$ a full$-$fledged industrial economy. Part $of$ the development process involves a much greater degree $of$ integration with the global economy. Different organizations classify emerging markets $in$ different ways, but there are between $20$ and $23$ countries typically classified $as$ emerging markets, among them China, India, the UAE, Saudi Arabia, Mexico, Malaysia and Turkey.

One $of$ the characteristics $of$ emerging markets $in$ the Gulf region $is$ the relatively high number $of$ workers who originate from other countries. $In$ the UAE, for example, there are large numbers $of$ Indian and Filipino workers $in$ the labor force. $In$ many cases, these workers send part $of$ their wages back $to$ family $in$ their original country and, collectively, this can $be$ a considerable sum $of$ money. The flow $of$ money sent from one country $to$ another $by$ workers $is$ referred $toasremittances.$ Some estimates put the value $of$ remittances $at$ around $10$ percent $ofGDPin$ some countries. The Migration Policy Institute $(MPI)$ report that remittance flows have risen sharply since $2000in$ India, the Philippines and Egypt. Annual remittances were around $$80$ billion $in$ India $in2020,$ around $$35$ billion $in$ the Philippines and just under $$30$ billion $in$ Egypt.

Unemployment affects the ability $of$ workers $to$ send money home and this can reduce global capital flows. $It$ has been estimated that the financial crisis caused remittances $to$ fall $by$ around $5$ percent. The COVID$-19$ pandemic had a much more significant impact $on$ global remittances. $In$ April $2020,$ the World Bank estimated that remittances would fall $by$ around $20$ percent and did not expect the situation $to$ improve much $in2021$ and the effects $of$ the pandemic continued $tobe$ felt around the world. Later estimates put the fall $in$ remittances nearer $to30$ percent. $In$ addition $to$ the fall $in$ remittances from workers $inGCC$ countries $to$ Africa and Asia, workers $in$ the United States send money $to$ Latin American countries, and $in$ Europe, migrant workers send money back $to$ their homelands $in$ Eastern Europe. The pandemic impacted many migrant workers $inGCC$ countries who were employed $in$ construction, hospitality, tourism and retail. With businesses closed during lockdown and scaled back following lockdown, many people lost their jobs and there was $an$ increase $in$ the numbers returning $to$ their original countries $in$ addition $to$ the reduction $in$ the flow $of$ funds back home.

Questions:

Use the model developed $in$ this chapter $to$ show the impact $on$ the market for loanable funds and the market for foreign currency exchange $of$ India $of$ the rise $in$ remittances since $2000.$

Now use the model $to$ show the effect $on$ the two markets $of$ the UAE, assuming that there has been $an$ increase $in$ the number $of$ migrant workers $in$ the country and that these migrant workers send a proportion $of$ their wages back $to$ their home countries.

What would you predict would happen $to$ the market for loanable funds and the market for foreign currency exchange across the $GCCas$ a result $of$ the impact $of$ the COVID$-19$ pandemic?

How $do$ you think governments $in$ the $GCC$ might react $to$ the reduction $in$ remittances and the resulting effect $on$ their economies? $(Note,in$ your answer you will need $to$ take into account the fact that many $GCC$ countries peg their exchange rate $to$ the $US$ dollar$).$