No one knows how long the pandemic will last, how many people will fall ill, how many lives the coronavirus will claim. But the economic and political consequences of the outbreak are already emerging. Measures to contain the pandemic are disrupting public life around the world.
Starting with China, production has come to a standstill in one country after another. Global supply chains are broken. You don’t need a lot of imagination to see a wave of bankruptcies approaching in many industries, where every last cent counts.
Even before the full impact of the pandemic will be felt in countries across the Global South and the Asia-Pacific region, the economic effects are already devastating. Local lockdown policies have left millions of workers in Bangladesh, India, Indonesia, Pakistan and Thailand with no choice but to return to their village or country of origin and, by doing so, increasing the risk of spreading the virus into even the remotest and poorest corners.
At the same time, the collapse of consumer demand has caused global brands to cancel their orders, hitting major textile producers like Bangladesh and India. Local movement restrictions and the suspension of port and logistics networks in China are shoving ripple effects through the global supply chains. Cut off from their supplies, manufacturers in Malaysia or South Korea and Malaysia have had to halt production and lay off workers. Border trade, for instance between China and Myanmar, is taking a hit. The collapse of tourism is hitting hard on Indonesia, the Philippines and Thailand. The sudden slump in Chinese demand has shaken the commodity markets and hurting palm oil exporters like Indonesia and Malaysia. Commodity exporters like Mongolia, which are highly dependent on the Chinese market, already feel the pain resulting from the oil price war between Russia and Saudi Arabia.
The economic response
Some countries in the Asia-Pacific region, such as Japan, South Korea and Singapore, quickly launched unprecedented packages of measures to cushion the impending economic crisis. The emerging economies of India, Indonesia, Malaysia and Thailand have set up stimulus packages, too. Not all countries, let alone the least developed countries, will be in a fiscal position to install the kind of safety umbrella needed to protect their small and medium-sized businesses, freelancers and workers. Whether these and other potential immediate measures are sufficient to stop the economic downturn depends on how deeply the crisis eats through the system.
After past epidemics, a brief, sharp slump in the economy was usually followed by a quick return to growth. Whether this will also be the case with the corona crisis depends on many factors, not least how long the pandemic lasts.
Governments now must deliver. This is because the crisis is by no means limited to the economic sphere. The ability of States to protect the life and limb of their own citizens is also being put to the test—and the stakes are nothing less than the fundamental legitimacy of the Leviathan. Decades of austerity policies and of healthcare system cutbacks to the absolute minimum have hollowed out state structures. Many people worry whether their nation will still be able to cope with the major crises. And what does solidarity with others mean when the only thing we can do is to isolate ourselves?
Each nation on its own?
An international pandemic cries out for a coordinated global response. So far, however, many nations have pursued a solo effort. Even within Europe, there is a lack of solidarity. As in the euro crisis and the refugee crisis, Italy in particular feels that its partners have let it down. China cleverly took advantage of the lack of European solidarity and sent a plane loaded with medical supplies to Italy, its Belt and Road partner country. In the meantime, the German government has recognized the geopolitical dimension of the dual crises—coronavirus and refugees—and is concerned about the attempts by external powers to divide Europe. In the Asia-Pacific region, regional organizations are increasingly stepping up to help one another. ASEAN foreign ministers approved the establishment of a regional fund to respond to the COVID-19 pandemic. A similar emergency fund scheme was adopted by members of the South Asian Association for Regional Cooperation.
The crisis is also fuelling the US-China hegemony conflict. For some time now, there has been a bipartisan consensus in Washington to decouple the American economy from the Chinese economy so as not to strengthen the competitor’s global supremacy by supplying China with its money and technology. Globally positioned companies now need to reassemble their supply chains overnight. Will all of these corporations return to China when the immediate crisis is over? Corporate executives will then have to think twice on whether to willingly ignore the geopolitical marching orders from Washington. This may offer a major opportunity for emerging economies like India or Vietnam.
And how will Europe’s companies reposition themselves after the crisis, after the costs of being overly dependent on Chinese supply chains have become all too clear? In the debate over whether the Chinese company Huawei should be excluded from the expansion of the European 5G infrastructure, Europeans have had a taste of how great American pressure can be.
The corona crisis could accelerate a development that has been going on for some time: deglobalization. As a result, the global division of labour could disintegrate into competing economic blocs. Economies may gather around a regional hegemon to get rid of unwanted competitors through incompatible norms and standards, technology platforms and communication systems or exclusive connectivity infrastructure and market access barriers.
Where will this leave the poorest countries that are struggling to climb up the global value chains? Has their moment for catch-up industrialization passed? How can countries like Bangladesh, Myanmar and Pakistan provide livelihoods to millions of workers if global brands decide to produce closer to their home markets? And how can middle-income countries like Malaysia and Thailand climb up the global value chain if this chain is cut for geopolitical reasons? Deprived of strategic options, they may end up being much more vulnerable to pressure from their regional patron.
The window to the future is wide open
The corona crisis amounts to an enormous field test. Millions of people are experimenting with new ways to organize their everyday lives. Business travellers are switching from flights to video conferences. University teachers are scheduling webinars. Employees are working from home. Some will return to their old patterns after the crisis. But many people now know from personal experience that the new way of operating not only works but is also more environment- and family-friendly. We must use this moment of disruption, the immediate experience of deceleration, to generate long-term behavioural changes in the fight against climate change.
People are experiencing a wave of solidarity in their neighbourhoods, at work and within their circle of friends. We can build on this experience of solidarity to make society as a whole more cohesive again. If we manage to overcome the crisis together, we are creating a symbol at the dawn of a new era: A community that stays together can meet any challenge.
However, reacting to the crisis also poses dangers. Borders are closed around the globe, visas are cancelled, and entry bans are imposed on foreigners. The record number of orders for industrial robots indicates that the production chains will be made more resilient to breakdowns through a decisive step towards greater automation. Digital automation may shatter the hopes of emerging economies ready to take advantage of the opening spots in the global supply chains. Already today, the factory floors of global manufacturers in India and Vietnam are populated by robots. Growing foreign direct investment seeking to diversify supply chains will drive growth, but it may be jobless growth.
Developing economies must not be left alone to cope with the devastating effects of the crisis and its social aftermath. It is in the very interest of European countries to assist them in their recovery. Last but not least, our planet cannot afford any more austerity. The investments in the social-ecological transformation necessary to mitigate global warming need to be made now and must not be out-crowded by the cost of the corona crisis. We are, indeed, all in this together.
Hyperglobalization is making us vulnerable
The global crisis has raised awareness of how vulnerable hyperglobalization has made us. In a globally networked world, pandemics can and do spread across borders at high speed. Global supply chains can all too easily be cut. The financial markets are vulnerable. And now, right-wing populists want to close the borders and isolate themselves from the world—but that is the wrong answer to the global challenges of epidemics, wars, migration, trade and climate change. Rather, our goal should be to address the root causes of these crises. To do this, the global economy must be placed on a more resilient foundation.
The global financial system, which is held together by not more than duct tape, urgently needs reordering. For more than a decade, central banks have not been able to counter deflationary trends through monetary policies. In the crisis, governments with expansionary fiscal policies are jumping aside. Politically, this means a return to the founding logic of parliamentarianism, the principle of “no taxation without representation”.
In other words, the financial systems must be put back under democratic control.
Conflicts are arising from excessive interdependence. These conflicts must be cushioned by international norms and multilateral cooperation. Unlike the 2008 financial crisis, however, this time there is no coordinated response from the 20 largest economies. The geopolitical rivalry of the great powers, on one hand, and the right-wing populist call for isolation, on the other hand, stand in the way of greater international cooperation. The existing elements of multilateral governance need to be strengthened with concrete contributions. This can begin by providing more solid funding to the World Health Organization and continuing with a G20 meeting to coordinate economic crisis management. Here, the Germany-led Alliance of Multilateralists can prove its value.
The desire for a fundamental reorganization of our economic activity and collective life has never been greater. Like a spotlight, the corona crisis is illuminating the geopolitical, economic, ideological and cultural fault lines of our time. Might this crack in the edifice even signal an epochal break? Does the age of turbo-globalization end with the decoupling of the major economic blocs? Are the oil price wars heralding the end of fossil-based industrial economies? Is the global financial system changing into a new regime? Is the system guarantor’s baton going from the United States to China, or are we experiencing the breakthrough of the multipolar world?
What is certain is that the coronavirus could lead to a number of trends that have long been hidden. All of these developments are mutually influencing each other at breathtaking speed. This complexity suggests that this crisis will go deeper than the 2008 recession. The pandemic could be the burning fuse on the powder keg of a global system crisis.
Marc Saxer is the Head of the Asia Department at FES Berlin. He previously served as director of the FES India and Thailand Offices and coordinated the regional programme Economy of Tomorrow in Asia.
The views expressed in this blog series are not necessarily those of FES.
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