What will the world look like after #COVID-19?

| May 4, 2020

The COVID-19 pandemic seems to have peaked in some of the most severely affected countries in the EU and China (where it originated), and the preliminary signs exist that it would soon peak in the US and UK, writes Vidya S Sharma, Ph. D.*

Will it leave a deep impact on all countries whether poor or affluent? Will it change the nature of the relationship between countries? Will it make us re-think how what other factors we must take into when defining national security? Does it have the potential to redefine global trade patterns? Will it force us to focus on new kinds of security threats? Will it impact globalization as we know it today? Will in its aftermath some countries will find that the economic growth models they have been pursuing need to be substantially re-adjusted or rejected altogether? Does it have the potential to change the nature of the work for some of us?

What is certain is that uncertainty about the kind of future we face has increased. Therefore, it seems appropriate to explore these and related issues.

Some commentators have likened this crisis to climate change and have used this event to argue just how false our beliefs about markets are and that we use it as an opportunity to re-set our social values and do away with “pointless jobs”. In other words, build a “better capitalism” and if that is not possible then to ditch it.

My aims for this article are much less ambitious. I merely wish to discuss what changes are most likely to occur or can be brought within the existing economic, social and security architectures that we live in.

To cope with COVID-19 epidemic, the governments of the affected countries have been forced to mandate social distancing, severely restrict or ban altogether transport and travel, close their skies to airlines, and disallow public assembly. Consequently, we are now witnessing a COVID-19-induced shut down of the economy all over the world. COVID -19 pandemic, initially a health crisis, has now morphed into an economic crisis of great magnitude.

When devising a response, it is natural for policy-makers to determine if a similar event took place in the past. Professor John Oxford, a leading UK virologist, has compared it with the Spanish Flu pandemic of 1918. Matt Stoller of the Open Markets Institute has likened it to the Great Depression of 1932. Others have found parallels in natural disasters like Katerina Hurricane and climate change.

But the fact is that trying to understand the present through the mirror of the past is like looking at one’s image in a convex mirror: it always shows a distorted image.

Distressed community

In this moment of national emergency in democratic countries, the politicians on both sides of the aisle have shown considerable maturity, cooperated with each other so that the necessary legislation to financially assist most laid off and retrenched workers, small and big businesses, sole traders and unemployed people. In the same spirit, they have cooperated to enact laws that prohibit landlords from evicting tenants (both commercial and residential). All this has been achieved without getting bogged down in party political point-scoring.

The financial assistance packages announced are of mammoth proportions (for details see Figure 1 below).

This liquidity has been added to the global economy before any meaningful measures had been taken to soak up the liquidity injected into the financial system after the Global Financial Crisis (GFC).

This will further distort the prices of various asset classes (eg, equities, bonds, cash equivalent or money market instruments, property, tradeable collectables, etc.) and keep interest rates at historically low levels.

It is very likely that share prices on stock exchanges will continue to be volatile.

Figure 1: Discretionary fiscal measures adopted in response to COVID-19 by 16 April 2020 as % of 2019 GDP for selected EU members, the UK and USA

Country Immediate Deferred Other Liquidity/ TOTAL
Guarantees* as% GDP
Belgium 0.70% 1.20% 0.00% 1.90%
Denmark 2.10% 7.20% 2.90% 12.20%
France 2.40% 9.40% 14.00% 25.80%
Germany 6.90% 14.60% 38.60% 60.10%
Greece 1.10% 2.00% 0.50% 3.60%
Hungary 0.40% 8.30% 0.00% 8.70%
Italy 0.90% 13.20% 29.80% 43.90%
Netherlands 1.60% 3.20% 0.60% 5.40%
Spain 1.10% 1.50% 9.10% 11.70%
United Kingdom 4.50% 1.40% 14.90% 20.80%
United States 5.50% 2.60% 4.10% 12.20%

Source: Bruegel

*The category ‘Other liquidity/guarantees’ includes only (a) government-initiated measures (excludes central bank measures) and (b) the total volume of private sector loans/activities covered.

Since the above Figure 1 was compiled the US has announced a second relief package worth $500 billion and the European Central Bank has promised to pump in one trillion dollars to increase the liquidity of within the eurozone. The US Federal Reserve Chairman, Jeremy Powell, is on record that he would be prepared to provide an infinite amount of liquidity. Australia’s package is also approaching $300bn (nearly 10% of GDP).

As is evident from Figure-1 Germany’s relief package is the most generous when calculated as a % of GDP. It has the strongest balance sheet among the Western nations.

Indebted nations

The balance sheets of already heavily indebted countries (US, Italy, Spain, Portugal, Greece, France, UK, etc.) will become even weaker and will remain very weak for many years to come unless radical economic structural reforms were implemented.

The example of the US has shown that sustainable growth cannot be achieved by simply cutting corporate and wealthy citizens’ taxes. It only leads to more debt (read borrowing more and more from China and hollowing out of the middle class (see Figure 2). The US today has a smaller middle class in comparison to Northern European countries.

The US will have a budget deficit of four trillion dollars next year. If the rating agencies graded US debt using the same criteria as they apply to other countries, then US Treasury bonds will rate below investment grade.

Figure 2 Hollowing out of the middle class

Source: Forbes.com April 17, 2020

Conservatives will need a different darrative

It is worth noting that a number of countries listed in Figure 1 above have conservative parties or leaders in power, eg, the US, UK, Germany, Australia, Japan, India, Brazil, etc. The French president also likes to be counted as fiscally conservative.

Conservatives in the Western countries, especially in the Anglo-Saxon countries, generally see government as inhibiting their freedom. They often criticize it for wasting tax payer’s money. A great many of them also believe if anyone is not able to chalk out a decent living for himself/herself then it is his/her own fault. The way we have structured our society and institutions and our family background, etc. have nothing to do with it.

This hostility towards the government was immortally encapsulated when on August 12, 1986, he remarked: “I think you all know that I’ve always felt the nine most terrifying words in the English language are: I’m from the Government….”.

Addressing the Conservative Party’s conference in October 1987, the same attitude towards government was expressed by British PM Margaret Thatcher when she asserted that in our country most people think that if “I have a problem, it is the government’s job to cope with it! I am homeless, the government must house me!” She went on to proclaim, “There is no such thing as society.”

Conservative political leaders and intellectuals (more particularly the Republican Party elite in the US) have done their best to create hostility against and utter distrust of government in the mind of ordinary people by painting it as money-wasting machine interfering in their private lives, and curtailing their freedoms.

The Trump administration, noted for its anti-government streak, is now openly talking about taking equity stakes in aviation, defence, oil and other sectors.

Having presided over such an expansion of government’s role in people’s lives and private sector, they would have to find another narrative to criticize their political opponents and appeal to their vote bank.

Public health system

The 1918 Spanish flu was a catalyst in the development of public health systems across the developed countries.

For the last 25-30 years, governments in most developed countries have been cutting down on welfare and public health programmes. Any political party that runs on the agenda of reinvigorating public health systems in the Western world (or even in countries like India) will find many new voters. Perhaps ‘Obamacare’ would not be such a dirty word with Republican voters.

Dependent on China

Among other things, the COVID-19 pandemic has highlighted three things.

Unlike with Russia during the cold war, the West has allowed China’s economy to be thoroughly integrated with us (see Figure 3 below) in the hope that would see democratic and liberal values permeate its society. We now know it was a miscalculation.

Figure 3 below is self-explanatory. The last column shows China’s trade surplus/deficit with a given country.

What the break-down of China’s exports shows is that the West has become too dependent on China for manufactured items. In the beginning, it was for low technology items where cheap labour gave China a differential advantage. But increasingly China’s exports have comprised sophisticated medical and engineering equipment, chemicals, robots and other high technology items (as amply demonstrated by the predicament of Apple and other companies during US-China trade dispute and again when China closed its borders to tackle the COVID-19 pandemic) and the rise of companies like Huawei and Ali Baba.

China is a wealthy nation today because the companies in the West, obsessed with short term profitability, dismantled their local production units and took them off-shore to China.

Primarily, China has employed this wealth externally for five purposes: (a) to buy US Treasury and Eurozone bonds (thus taking advantage of low savings rates in these countries, (b) to quietly acquire companies in the West that fit its long term manufacturing and defence sector needs, (c) to isolate Taiwan diplomatically, (d) lately to buy influence in the third world countries using debt-trap diplomacy, and (e) provide aid to countries that fit in its strings of pearls defence strategy (eg, Pakistan, Sri Lanka, Myanmar, etc.).

Figure 3 China’s trade with selected OECD countries
and India and Vietnam (US$ bill)*

Country

Exports from
China

Imports
to China

Trade Balance
Surplus (Deficit)

United States

481.00

156

325.00

Japan

143.00

180

(37.00)

S Korea

111.00

203

(92.00)

Vietnam

84.00

64

20.00

Germany

78.00

106

(28.00)

India

75.00

19

56.00

The Netherlands

74.00

12

62.00

UK

62.00

24

38.00

Singapore

55.00

34

21.00

Taiwan

55.00

177

(122.00)

Australia

48.00

105

(57.00)

Canada

36.00

28

8.00

Italy

34

21

13.00

Brazil

34.00

77

(43.00)

France

33.00

32

* All figures are for 2019

Source: IMF

China is now is the biggest holder of US Treasury bonds when Hong Kong’s bond holding is taken into consideration (see Figure 4).

For the last 30 years, it has been undermining/sabotaging the West’s technological edge by forcing the companies that set up offshore production units to transfer their technical know-how to their local Chinese partner and by engaging in corporate espionage and/or cyber theft.

The export and import trade profile of China (see Figure 3 above), gives us a very good picture of co-dependency between China and other Western nations. Stephen Roach of Yale University has discussed this strategic weakness of the US in his excellent book, “Unbalanced: The Codependency of America and China”.

Figure 4 Major foreign holders of U.S. Treasury securities
as of December 2019 (in US$ bill)
Country

Bond Holdings

Japan

1154.99

China

1069.9

UK

332.6

Brazil

281.9

Ireland

281.8

Luxembourg

254.6

Switzerland

2237.5

Caymen Islands

230.5

Hong Kong

233.3

Belgium

210.2

Taiwan

193.1

India

162

Singapore

147.9

Source: Statista 2020

Security threat

Our dependence on China to buy our sovereign (and high-quality corporate debt) is of such magnitude now China has the capacity to destablize our debt markets thus bring about a crisis similar to the GFC in 2008. It has developed into a security threat.

We have all heard the news of how every country found itself not having enough COVID-19 test kits, swabs, personal protection equipment, chemical reagents necessary to conduct COVID-19 tests, masks, gloves, ventilators, etc. Why? Because the production of all these items (in fact of most items we use daily and many medicines) had been off-shored to China.

The COVID-19 pandemic has shown that by allowing China to become the manufacturing hub for everything the West has created a security threat for itself. China can weaponise the supply of medicines, medical and engineering equipment, and numerous other items in case of a conflict.

The Chinese economy is intimately integrated into the Western countries’ economies yet China does not share any of our political and cultural values: our system of democratic governance, freedom of speech and movement, artistic freedom, strict privacy laws, independent judiciary and other civic institutions, rule of law, our concepts of human rights and private property ownership, etc.

Further, in the international arena, China also does not behave within the accepted norms. For example, in 2016 an international tribunal excoriated China’s behavior in the South China Sea, including its construction of artificial islands, and found that its claim to sovereignty over the waters had no basis in international law. But China rejected its judgement.

It has shares borders with 19 countries (land borders with 14 and maritime boundaries with five). It has border disputes with 18 of them. The only country it does not have a disputed border is Pakistan. This is because Pakistan ceded some territory belonging to Kashmir to China to gain an advantage over India.

Similarly, China does not keep formal promises made to other nations as we see from its increasingly more intrusive interference in Hong Kong’s affairs.

We all know the extent to which China engages cyberattacks. China’s cyber thefts are not just confined to government departments, defence and intelligence establishments, but also to steal intellectual property from companies – big and small and personal information about people so that they can be compromised.

The COVID-19 pandemic has also shown how it is possible to cripple a country’s economy without firing a single bullet. Just send one or two intelligence agents disguised as tourists with some perfume bottles in their vanity cases containing a deadly virus or bacterium.

We are not prepared for such a security threat.

Strengthening international institutions

We not only need to strengthen various multi-lateral institutions (international tribunals, WTO, UN, etc.) that we have created since World War II. The same is true about the security architectures we have fashioned. Presently, there is an alarming trend to weaken such institutions.

We also need to encourage China to formally join them. Consider such a scenario: suppose coronavirus was accidentally released from a virology lab. in China (we know there are microbiologists in Wuhan who were studying bat viruses) then civilians all over the world would be able to sue China for compensation for the death of their loved ones and loss of income, etc..

There is one simple way his aim can be achieved: If the citizens in the West boycott Chinese imports that would put great pressure Chinese political elite to come to the table. Admittedly, this would cause some inconvenience to people and may have to buy higher-priced items but it would be nothing in comparison to what we have been through in containing COVID-19 pandemic.

Hospitality, tourism and working remotely

The restrictions on one’s social movement and public gathering, social distancing in factories and offices will have to remain in place until a vaccine is found and 90% of the population is inoculated or develops herd immunity.

Similarly, all businesses comprising hospitality and tourist sector, if they wish to attract visitors, will need to offer social distancing, sanitizers and very clean bathroom facilities.

A great many office workers have been working from home. So some corporations have become used not having all employees physically under one roof. This would encourage remote-working.

The airline and tourist accommodation industries will be in doldrums for quite a while mainly for three reasons: (a) countries will not open their borders to international travellers until they are confident that the pandemic has been contained to such an extent that any new cases will easily be controlled; (b) workers who have lost jobs or found their working hours considerably reduced will first concentrate on repairing their own personal balance sheets and bring their mortgage, rent payment and children’s school fees up-to-date than think of taking holidays in a faraway destination; and (c) corporations and government departments and agencies, due to social distancing remaining in place will prefer video conferencing rather than take on inter-state or inter-country travel.

The restaurants and cafes will not be able to seat even half as many people as they do presently. They will need to be innovative in generating extra revenue.

Similarly, the airlines may set up contactless checking but they would need to be certain that every passenger is coronavirus free.

US$ and international capital flows in the COVID-19 crisis

Figure 5: US$ and international capital flows in the COVID-19 crisis

Note: Vertical solid black line denotes the end date of the 2006-2007 US yield curve inversion on the 5th June 2007, where yield curve slope defined as the 10 minus 1-year yield zero-coupon yield. Exchange rates normalised relative to this date. USDEM7 a PPP-weighted average of 7 EM currencies: Brazil, India, Indonesia, Mexico, Russia, South Africa, Turkey. Dates: 1st January 2007 to 30th November 2008

Source: Giancarlo Corsetti, Emile Marin, 03 April 2020

Figure 5 above shows US$’s appreciation during COVID-19 crisis. It also compares the present appreciation with its appreciation during the GFC.

Giancarlo Corsetti and Emile Marin of Cambridge University have demonstrated in their paper that while US$ has not appreciated as much as in 2007, but the capital outflows from emerging markets (EMs) week on week, are many times larger than at the peak of the GFC.

This would make the post-COVID-19 recovery in EMs more difficult.

EMs will also be hit in other ways. For example, the World Bank is predicting the sharpest decline of remittances in recent history. This will affect the living conditions of millions of families in the Third World. For example, Indians working overseas (mainly in the Middle East) remit home about $800 million.

Manufacturing

As mentioned above, COVID-19 pandemic has brought into sharp focus the security risks inherent in sourcing most manufactured things (some food items as well) we consume largely from one country.

Naturally, China will do its utmost to ensure that the supply chain to companies in the West is restored as soon as possible.

One of the aftermaths of the GFC was that it saw the beginning of the end of the pursuit of globalization (offshoring production). According to World Bank (see its Global Value Chains Report 2020): “The growth of trade has been sluggish and the expansion of GVCs has stalled. In fact, it is on a very slow decline since.”

The reversal in trend has been caused by two variables: (a) continued increase in uncertainty in the world, and (b) to manufacture a lot of products using robots is now cheaper than the manufacturing cost in China plus transport and other related costs.

Figure 6 World Uncertainty Index (WUI)

Source: Hites Ahir, Nicholas Bloom, Davide Furceri 29 November 2018

The trend to re-shore of manufacturing production facilities back home will accelerate.

This, by definition, means the countries that have tried to emulate export-model for growth (incl. China) at home will need to modify their models and encourage consumption at home. Their annual rate of growth will slow down.

China began driving its economic resources (ie, to encourage consumption at home) in that direction soon after the GFC as the demand for its products fell in the Wes due Great Recession.

It is worth recalling here the trend of re-shoring industries and using robots in place of human labour has not gone unnoticed among the Chinese political elite.

China is very keen to reduce its dependence on high technology-based imports from the West.

Its 2025 plan prioritizes ten areas. Robots and robotics is one of those areas. Presently it imports robots from Japan (62%), Germany (18%) and South Korea (5%). It has set itself 3 goals in this area: (a) to supply 70% of the domestic market, (b) own intellectual property rights for key parts, (c) develop next-generation robots, and (d) to one or two companies rank in the top 5 companies in the world.

*Vidya Sharma advises clients on country risks and technology-based joint ventures. He has contributed many articles for such prestigious newspapers as: The Australian, The Canberra Times, The Sydney Morning Herald, The Age (Melbourne), The Australian Financial Review, The Economic Times (India), The Business Standard (India), The Business Line (Chennai, India), The Hindustan Times (India), The Financial Express (India), The Daily Caller (US). He can be contacted at: [email protected]

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