Economic Perils of Gargantuan Proportions – Invisible Webs of Economic Linkages

The International Labour Organization, or the I.L.O., recently stated that 1.20 billion people out of the 3.30 billion working population would lose their jobs due to the pandemic. Is it an exaggerated figure or closer to an impending reality? Let’s look at it based on what is happening around us.

I am working in the perfume industry. One of my friends, who works in the foodstuff sector, told me that he had shelved the plan to buy a house in India as his salary was cut down by 50% due to the pandemic. I told him, “Your decision will adversely affect my perfume sales.” He asked, “How will me abandoning the decision to buy a house in India affect your perfume sales? Another friend told me that he decided to give up his weekly routine of having coffee from Starbucks, for he was also facing the prospect of salary cut and job loss. I told him the same thing that I told to my other friend. He, too, asked, “How are Starbucks business and your perfume sales interconnected? So, how will their decisions create downward risks for my perfume sales? 

When a house is built, lots of metals and alloys like copper, aluminium, iron, steel etc. go into its make. The largest copper deposits in the world is in Chile, with Peru in the second position, and countries like the Democratic Republic of Congo and Zambia coming in the top 20-list. Zambia produces 70% of Africa’s copper which gives 60% of Zambia’s foreign exchange. The Republic de Guinea, a West African country of 12.50 million population, has the largest deposits of bauxite, the ore from which aluminum is separated  —  7.4 billion tonne bauxite reserve which is about 25% of the world’s total bauxite reserves. Bauxite is the top export earner for Guinea, clocking 1.70 billion USD annually as per the latest statistics.

I sell perfumes to Chile, Peru, Zambia, Guinea, the D.R. Congo, etc. When my friend and millions of people across the globe abandon or indefinitely postpone their plans to buy new houses, the construction industry will come to its knees, with demands for copper, aluminium, iron, steel, etc., going down, thus, bringing their prices down globally. So Zambia, whose main income is from the copper belts, will be adversely affected, with the government having less money to spend and people having less disposable income, thereby them avoiding discretionary goods like perfumes. A similar pattern of economic impacts and consequent change in consumer behavior can be expected in countries like Chile, Peru and Guinea. These downward spirals will have a dampening effect on my perfume sales to these countries.

The decisions of my friend and millions of people not to buy houses will also play out a different chain reaction having wider and deeper macroeconomic impacts. Mines in Zambia, Chile, Peru and Guinea use imported mining and earth-moving equipment from countries like Germany, and as mining activities go down, demand for these equipment will also go down. Hence, the German equipment-manufactures will have to produce less, possibly forcing them to reduce two shifts to one shift, leading to retrenchment of staff. The German mine-equipment manufactures, which depend on countries like India for engineering goods and machine spare parts, will consequently reduce their imports. 

In 2018-19, India’s export of engineering goods stood at USD 81.02 billion —  one fourth of the total merchandise exports — with the main export markets being the U.S.A., the U.A.E. and Germany. Lesser orders from countries like Germany will in turn make the Indian suppliers to downsize their operations and staff strength, initiating a chain reaction that will extend down up to the last supply chain shops of engineering goods. And the last shop in this value chain is the mines of metals and minerals in countries like Chile, Peru, Zambia, Guinea, etc. My friend’s decision made us to start from mines, travel through different economic sectors — including the perfume industry— seeing how billions of Dollar worth business are unfavorably affected and millions of people losing their jobs and livelihoods. And, finally, ending our journey at the same place — mines — from where we started the journey.

How are Starbucks business and my perfume sales connected? Ivory Coast — Côte d’Ivoire as called in French — a Francophone country in West Africa, is the largest producer-exporter of coffee beans, contributing 1.80 million tonnes, which is around 38% of the world’s supply. Another 1.55 million tonnes come from Ghana, Nigeria, Cameron and Togo. The two figures together form 2/3rd of the world’s cocoa production. Ivory Coast earns USD 4.60 billion annually from the export of Cocoa beans, which forms around 40% of the total export earnings. Similarly, the other four African nations earn significant greenbacks from the exports of coca beans. These four countries come under my main markets for perfume sales.

When my friend and millions across the world stop going to Starbucks and other coffee shops, coffee consumption goes down in large-scale, negatively impacting the economies of all these cocoa-exporting countries. Resultant reduction in disposable income across the households will bring down demands for consumer and semi-luxury goods like mass-market perfumes that I sell. So my sales will be affected badly.

What will happen to companies like suppliers of computer hardware and software that depend on the above companies that we discussed. Demand for computer hardware, software and all the accessories connected with running computers will go down, calamitously impacting the companies involved in this business. So downsizing of production and furloughing of staff will follow suit. There are many other economic linkages to show how the decision of my friend and millions like him will inimically impact many other industries in one way or other. I am convinced that the I.L.O.’s projection of job losses is real and has started to take its hold already.

The above examples show how different businesses are interlinked and that one break in the economic-chain can create domino effects of unimaginable proportions across the entire macroeconomic spectrum, including the industry where I work. What about you? Do you see such economic fault lines developing in relation to the industry you work?