A decade after the 2008-2009 global financial crisis, the vulnerability of the world’s economic architecture has once again been demonstrated by the coronavirus (Covid-19) pandemic hitting the global economy through supply and demand shocks as a result of the severe disruption of main supply chains in China, the world’s largest factory as well as the source of the coronavirus outbreak.
This has halted almost all economic activities around the world and led to an acceleration of the global recession in an already fragile world that has been mainly sustained by debt, both public and private, reaching over $245 trillion as of early 2019, according to International Monetary Fund (IMF) estimates.
The ongoing crisis has not only crippled economies and social lives across the globe but may also have ignited a paradigm shift that is altering our expectations about the world economic landscape as we have known it for years. Specifically, the pandemic is expected to trigger a rethinking of free-market economic policies, hence driving transformational change within borders and across nations to re-adjust priorities and to correct for market failures that have long been unaddressed by governments in both the developed and developing countries.
Over the past few weeks, the world has witnessed the almost total shutdown of whole nations coming under lockdown, starting with China and followed by others including Italy, Spain, France, and Belgium. Meanwhile, other countries have opted for a more gradual approach, partially or fully closing down their schools, airports, and some of their businesses, as in the case of the United States, the United Kingdom, and Egypt. The latter’s efforts to contain the pandemic have been praised by the World Health Organisation (WHO).
The shutdowns have brought economic activities to a sudden stop in some countries, halting production systems and processes elsewhere, as has been the case, for instance, in some Asian and European countries where the electronics manufacturing industries have been paralysed by shortages of imports from China that ordinarily account for more than 30 per cent of imported parts. Such dynamic interactions have begged several questions, some of which are concerned with these economies’ future priorities after the pandemic, while others shed light on issues associated with entangled interests across the globe.
Specifically, will priorities be reconsidered at both the individual and the national levels? Individually, will people behave more rationally regarding their future consumption and saving patterns? Will they make better investment decisions in the future? And how could these shifts in their consumption, saving, and investment patterns alter the relative importance of the various sectors in each economy and their contributions to national gross domestic product?
At the national level, a number of questions may also come to mind: will some sectors take priority in the allocation of national budgetary resources over the coming few years? Will the rehabilitation of the public healthcare system and investment in preventive healthcare and scientific research take the lead over other sectors or will business remain as usual? These are issues that policymakers will have to deal with in order to revise their priorities in the light of the ongoing events that are affecting almost everyone around the globe.
One might expect higher investment flows into innovation and technological upgrades in almost all sectors of the globe. Healthcare and telecommunications would likely be among the top target industries, as well as the financial, trade, entertainment and education sectors whose services have been accessible online over the quarantine period. Such rapid technological advances will likely impose new challenges, calling for major changes to legal and regulatory frameworks, an issue that policymakers have been working on over the past few years. They may now need to expedite their efforts given the mounting pressures to increase dependence on the digital world.
Large economic and financial losses estimated at $3 trillion and wiping off about four per cent of annual global output have shown that globalisation comes at a huge cost as strong interlinkages between almost all countries have sped up supply and demand shock transmission from one part of the world to another. This has significantly undermined any one country’s ability to self-isolate to mitigate against ensuing losses and has thus underlined the importance of self-reliance for producing goods and services.
In response to the pandemic, the European Commission has imposed border restrictions and export bans on some goods, namely medical supplies and equipment, while ensuring the flow of goods within the European common market. Recently, demands to reduce the West’s dependence on supplies from the developing world have also become more pronounced. Interestingly, this has not been totally new, as some calls for “protectionism” have been coming to the forefront of the global scene amid Chinese and US trade tensions going back for several years now.
As a result, some countries may start to consider decoupling from others that have been long-term trading partners in order to reduce their own vulnerabilities to external shocks, hence breaking the global trade chain estimated at more than $20 trillion as of 2018. Such policy re-orientations would gradually reduce countries’ dependence on others by establishing alternative, stronger, and more reliable local supply chains through import-substitution processes to avoid any sudden stoppages of their economic activities in the future.
Considering the potentially increased reliance on national resources, a surge in domestic investment can be expected worldwide to correct market failures and strengthen institutional capacities to better tackle future crises. In this respect, public-private partnerships could be instrumental in addressing local gaps by re-organising production and supply lines, moving production closer to end consumers, and restoring or expanding domestic production, at least for strategically important industries such as food and pharmaceuticals, a paradigm shift that may gain popularity in the near future.
This may have implications on global foreign direct investment (FDI) flows, estimated at $1.39 trillion in 2019, as a result of the expected increase in the localisation of supply chains, and it remains to be seen how this could impact FDI total magnitude, direction, and distribution worldwide. Repercussions on FDI trends and dynamics may be huge, given that China is the world’s second-largest recipient of FDI inflows at $140 billion, followed by the United States with FDI inflows of $251 billion, according to the United Nations Conference on Trade and Development.
Such repercussions could slow down or reshape the current globalisation model as its future sustainability has become questionable, and the balance of power may be redefined in favour of self-sustaining countries with limited dependence on others. The global community ought to work on establishing a better balance between national priorities and global development, an effort that needs solidarity, full cooperation, and coordination.
Meanwhile, this may be an opportune time for the developing world to adapt swiftly to changing market conditions and to forge new regional alliances as well as strengthen existing ones, while re-examining the costs and benefits of staying open to the rest of the world.
The writer is a former economic advisor at the Ministry of Investment and is currently an independent consultant.
*A version of this article appears in print in the 26 March, 2020 edition of Al-Ahram Weekly