A Virus in a Global World
by Govind Gupta
The global economy we have now is a lot akin to the one the world had successfully constructed more than a century back during the late nineteenth century. The gold standard ushered in an era of what can be called the world’s first financial globalization, yet it was short-lived as it was buffeted by the WW1 and afterwards, the Great Depression.
In the wake of the depression of 1930s, the world was mired in a crisis with rising debts, increasing defaults, and spiraling unemployment.
The pandemic offers an extremely uncertain vantage point when we are faced with a challenge of this scale in dealing with crises in the health sector and consequently in the economy. Yet, what demarcates this time is the intense interconnectedness we operate in, thus making the nature of reaction by countries essential, now more than ever.
After the Great Depression, widespread economic strifes clamored for protectionism from the government and the world moved away from the deep financial globalization and started raising national borders to trade and capital. While individual countries sought relief from the undue competition by imports from other countries, it was ‘collectively self-defeating for all the countries taken together.
The Covid19 crisis augurs a similar scenario. The world faces a mountain of debt in both the public and private sectors. A decade of low-interest rates since the 08’ recession had built up private debts higher than ever before and the enormous stimulus packages rolled out to weather the pandemic by virtually every country along with a contracted GDP has raised public debt to alarming levels. As investors flee with their capital from risky developing economies to the financial safe havens of the US, the dollar surges in value, concurrently the dollar-denominated debts balloon up, portending defaults.
Unemployment levels are at their worst, wiping away whatever recovery which took place after the recession. While the labour share of economies had been on a secular downward trajectory due to the information and technological revolution, the disruption has been expedited during this crisis as businesses scamper towards the digital. Most of these revamp in business operations is likely to stay in the foreseeable future.
Economic recessions are often the handmaiden of protectionism
In his book Capitalism and Freedom, Milton Friedman had written the famous words: “..When that crisis occurs, the actions that are taken depend on the ideas that are lying around.”
Amidst all the disruptions caused by the coronavirus-crisis, what hangs precariously is globalization. It would be tempting for countries to de-globalize and turn inwards, as popular
unrest shall demand. In historical experience, economic recessions are often the handmaiden of protectionism. Decades of constructed multilateral institutions and global trade structures risk being dismantled. Martin Wolf, editor of the Financial Times says that there are serious discussions going on for ending the World Trade organization. Across countries, the ideological lure of unfettered free markets is waning. To be fair the story of globalization has not been without its ills, and the scar tissues started being acutely felt after 2008. For many developing countries except for India and China (which were cautious not to give in headlong to financial globalization), opening up their finance to the world economy had made them more vulnerable to seismic activities in the financial landscape. Besides, there emerged a dualism in these developing economies wherein only the firms which were internationally integrated, prospered while the rest suffered.
Premature deindustrialization, a trend observed by Dani Rodrik, an economist at Harvard Kennedy School, wherein countries start to lose their manufacturing jobs without getting rich first, coupled with the slowing down of the export-oriented industries, make economic insecurities within countries acute. Eric Maskin, Nobel laureate and Harvard economist, posits that ‘while average income has been rising as a result of more trade and global production, so has inequality within countries.’
This crisis will be a “hinge in history” as it steers the world from an inflection point to an uncertain global-scape.
The coalescing of these issues has been nudging a move towards nationalism, away from globalism, as national governments find it convenient to appease citizens’ insecurities by erecting barriers and stoking foreign scepticism. Yet, these sentiments were already underway since the recession of 2008; what the Covid-19 crisis will likely do is propel these trends, which is what Larry Summers argues that this crisis will be a “hinge in history”.
But, globalization has also been synonymous with development and growth. The United Nations reports that globalization and increased economic interdependence among nations have helped world GDP to increase from $50 trillion in 2000 to $75 trillion in 2016. It has also raised employment opportunities across borders, lifting millions of people from poverty.
Globalization is not a unidirectional binary concept, where we can have only the pleasant scenario with more of it or the ugly scenario with less of it.
As Dani Rodrik would argue, Less globalization can in fact be better. An idea which might have been economic heresy fifteen years before finds relevance today. The idea is to sustain the essential aspects of globalization which works for a larger number of countries and not for just the exclusive few, even if that would entail a move away from hyper-globalist ideals.
In 1931, after suffering the batters of the economic depression, Britain stepped away from the stilt which propped globalization in the 20th century: the Gold standard; the United States followed suit soon in 1933. And it has been documented that the sooner the countries unhinged
themselves from the constraints of Gold standard, the quicker their domestic economy sprang into recovery.
After the current Covid19 crisis, domestic concerns of countries will take precedence. Given the dire straits likely to loom after the pandemic, if not already evident, it would be unreasonable to expect that countries will sacrifice their sovereign interests and policies to the lure of idealistic narratives of intense-globalization.
Moreover, the rules of globalization are not preordained either, the world can rewrite them, tweak its implicit and explicit workings to better serve the concerns.
A reformed globalization, one which is more inclusive and caters to the aspirations of different nations rather than few, will be a more resilient construct. Countries have institutional differences and need maneuvering space in terms of regulation suited to their nation’s economy while also operating under globalization norms. To keep the essential globalization structure in place, in a demanding time like this, a move away from the recent period of hyper-globalization can be beneficial if nations are given more space and liberty for contriving domestic policy, which accommodates their needs in restructuring their economies.
The world economy will find itself at a crucial crossroads soon. Giving in to protectionism and abrasive backslash against globalization can undo the desirable gains we have made by integrating ourselves. Eric Maskin suggests, “The right thing to do is not to try to stop globalization - that would be foolish - because globalization certainly does increase average income in all countries.”
Neither mindless anti-globalization nor selective globalization will work
In the 1930s as countries moved away fro the period of hyper-globalization, the scenario couldn’t have been more different from the situation now. Anti-globalization isn’t simply an option. Corporations have fishnet like supply chains and market operations flung across the globe and they operate trans-countries because of the efficiencies and not to mention the comparative-edge different places have developed mastering their work over the years. Businesses will lose out on comparative advantage and economies of scale by a forced re-shoring of supply chains. Corporations are driven by business executives who work in short term profit maximization concerns and it would be a delusion to think that jobs can be roped back into the native states which lack the comparative advantage, cost minimization traits, and efficiency. But, at the same time, the globalization’s skewed working for a few countries, leaving developing and emerging market economies exposed to financial fickleness of capital on one hand, and on the other hand, re-shoring numerous low skilled manufacturing work away from the developed economies, won’t hold the waters long.
Until the 1930s, the gold standard was a means to an end of integrating countries into financial inclusion and trade. The current scenario is different because globalization is scarcely the end; in fact, it is the means to shared stable prosperity for all.
There’s an increasing tug between globalist and nationalist concerns and multiple middle grounds are needed.
Under the stains of the COVID crisis, with their manufacturing severely disrupted as China got afflicted with lockdowns, corporations have realized the need to diversify their supply chains and move towards localization as well. Yet, companies realize that this will entail costs in terms of rocketing production costs. A balance between localization and having access to global markets is necessary for these firms’ need to be commercially open.
The narrative of ‘financial globalization’ has a similar dichotomy as well. In an IMF paper, Arvind Subramanian and Dani Rodrik argue that unrestrained financial integration has hurt developing economies by exacerbating their inadequate domestic private sector investment demand in tradables. Capital inflows appreciate their home currencies and reduce competitiveness. But at the same time, developing countries still need the funds for investment and infrastructure. A situation where emerging markets and developing countries do not have access to finance at all will be not at all desirable . “Depending on context and country, the appropriate role of policy will be as often to stem the tide of capital inflows as to encourage them.” Daron Acemoglu, Professor of Economics at MIT asserts the need to have a new paradigm of financial globalization where there is an international body to ensure the legitimacy of the structure by overseeing a new global framework of rules, norms, and standards of future financial engagements and monitoring financial malfeasance.
As nations went into lockdowns, the unavailability and shortage of necessities and medicinal equipments in many countries during the covid-crisis, have laid bare the vulnerabilities of interdependence. It has been realized that some degree of deglobalization is desirable for the purposes of stability and robustness in times of a pandemic like crisis. At the same time it needs to be considered that the problem was not with trade to begin with, but rather with a lack of supply. The pandemic has demonstrated that we need to have concerted efforts to absorb such worldwide crisis shocks. Export restrictions merely reallocate the shortages, by shifting them on to countries with the least capacity.
So what do we do to assuage the simmering dissatisfactions and backslash against globalization at the same time keep the beneficial structures of globalization intact and prevent it from teetering on brink of a global disintegration and collapse ?
The need of the hour is to resolve the dichotomy between globalist and nationalist concerns and build a more stable globalization with recalibrated priorities of global and domestic markets. For instance, it won’t be enough to invest and market in foreign countries and reap the benefits back home in the form of taxes and returns to shareholders only. Professor David Waldman and Mansour Javidan opine that “going forward, corporations could balance a global and nationalistic stance by either investing in domestic product development and manufacturing in addition to their foreign investments or adding a clause in contracts with foreign suppliers requiring a rapid increase in supply to the home country under certain circumstances (e.g. health crises).”
From fighting climate change to containing outbreaks of disease, we face common universal challenges, which need concerted and coalesced efforts by countries. Committing and ensuring compliance of countries to climate and environment norms is evidently becoming more necessary. To prevent “carbon-leakage” where companies skirt strict climate policies of one country by moving over to dump greenhouse gases in another country with laxer emission standards, international cooperation is a necessary condition.
Creating global and resilient interconnected structures which can supply medical equipments and vaccines and are adaptive during emergencies like this pandemic, is indispensable for ensuring our preparedness.
As the world wheels rapidly onto the digital and the ‘internet of things’, global consensus on the norms of intellectual property, cross border flows of information and data, and privacy rights will be critical to the new world order. Agreements on “arms-control treaties” for cyberspace, data governance, artificial intelligence, and bio-engineering are pressing. Such agreements are the only way to prevent catastrophic geopolitical tensions and conflicts. Coming together, we must prevent a dangerous race to weaponize new technologies, while also encouraging innovation that boosts human wellbeing and security.
The health crisis has awakened us to the realization that impending unprecedented challenges necessitate a global response. Right from procuring the personal protective equipments, to collating ideas, research and experiences to deal with the novel coronavirus and preparing a vaccine for the same, we have realized that efforts and supply need to be global for us to stand a chance. While we anxiously wait for a vaccine to be found, upending our lives meanwhile, it is befitting to think ahead about the nature of its manufacturing, distribution and administration : as one global entity pooling its resources across borders or as individuals fending for its own self.
Crises and pandemics make the ground fertile for dramatic change. There is a need to restore a positive meaning to the idea of internationalism of globalization which can work in practical modalities bearing the sovereign concerns of nations. Striking the arduous balance would be the key.
Govind is a second-year economics honors student at Hansraj College, University of Delhi.