Imagining Post-COVID-19 Global Economy: What is Next?

By THO Contributor, Temmuz Yigit Bezmez

The most unprecedented crisis in 100 years has brought supply, demand, and financial shock to the global economy. It is leading us to the worst recession since the Great Depression in 1929, demonstrating a high degree of interdependence among nations and consistently changing the way we work, study, and interact.

First, we should take a glance at what was already on the agenda before the epidemic started. The keyword to understand the global economic outlook of 2019 was “political uncertainty”. It was a year of deepening US-China decoupling in tech and trade, border closures, tariffs and trade barriers, a vague of social movements around the globe based on the same demand of fair distribution of wealth, intensifying conflict in the Middle East in addition to uncertainties around Brexit, rising nationalism and protectionism. More broadly, we have been discussing the future of globalization, the retreat of U.S. leadership from the global stage, economically strengthening the Asia Pacific region, and the role of multilateralism to shape the 21st century.    

According to the evidence so far, the World has first met with the novel coronavirus (COVID19) in China in December 2019. As an immediate outcome of shutdown across the country, Chinese manufacturing PMI hit a record low by 35,7 points and the country experienced the first greatest contraction in its economy. In the following month, Europe has become the new epicentre of the epidemic. On March 11, World Health Organizations (WHO) finally declared that the COVID-19 epidemic is eventually a pandemic. After this date, we have entered a new chapter in the 21st century. French political scientist Dominique Moisi discusses that the COVID-19 played an accelerator role in the flow of history in many ways. While the near-future trends and geopolitical projections are approaching us faster than ever, identifying priorities and challenges should, therefore, be a top agenda for governments and businesses.  

As a result of lockdowns all over the globe, the World Trade Organization (WTO) stated that global trade would fall in 2020 by between 13 % and 32 %. In the IMF’s worst-case scenario, the global economy would shrink by around 11 % rather than 3 %. Fitch Ratings now expects world GDP to contract by 3.9% in 2020 that translates to a $2.8 trillion decline in global income levels relative to 2019. Projections show that 170 countries will experience negative per capita income growth this year.

In response to this crisis, many countries announced different bailout plans with supported monetary easing policies in much larger amounts than the 2008 financial crisis. To go through the numbers, so far, the IMF Fiscal Monitor showed that countries around the world have taken fiscal actions amounting to about $8 trillion. On March 23, the Federal Reserve Board (Fed) announced open-ended and unlimited quantitative easing and put itself in the position of direct lender of last resort not only for the financial system but also for the real economy. Following this “whatever it takes” moment many central banks pursued relevant monetary policies and measures.  Amid critics to the EU for its non-action at the beginning of the crisis, on April 9, Eurozone finance ministers agreed on a €540 billion coronavirus rescue package. Member states can also ask for credit of up to 2% of their GDP from the European Stability Mechanism (ESM), a bailout fund created after the 2008 economic crisis. Additionally, on April 9, FED announced a $2.3 trillion lending program to support the private sector.  In the week from April 15 to 21, emerging markets in Asia saw a further monetary easing in China, India, and the Philippines. On April 15, G20 nations have agreed to freeze bilateral government loan repayments for low-income countries until the end of the year and Kristalina Georgieva, managing director of IMF announced $1 trillion in lending capacity and are placing it at the service of our membership. Furthermore, some experts insist on a larger role of development banks. Griffith-Jones, Marodon and Ocampo in their Project Syndicate article emphasized the vital role that development banks could play in minimizing economic decline, supporting recovery, and financing structural transformation. Recently, UNCTAD called for a $2.5 trillion coronavirus aid package to help developing countries avoid worst-case scenarios and impacts. Beside all these policies and figures, plenty of scenarios about the recovery shape of the global economy are begun to be discussed by a large number of economists. Nonetheless, larger uncertainties as in the year 2019, damage the global demand and further affects the short-term projections. 

Beside financial stimulus packages, this discussion leads to another point of conversation whether the most prominent traditional international organizations are capable of responding to the crisis. Amid conversations on Chinese growing influence while the US retreats, Medhora and Owen assert that establishing the “rules of the game,” and designing an international institutional architecture for a new era is necessary to tackle new challenges. To do so, an update on Bretton Woods institutions that mitigates the negative implications of the digital revolution is necessary. Nevertheless, the 2030 Agenda for Sustainable Development with its 17 SDGs in various issues provide a decent framework to address 21st century’s challenges and for the prosperity of developing and under-developed nations. On the other hand, the UN's current structure is criticized a lot. A quick example to that is the UN, which was founded in 1945 with 5 permanent Security Council members and with 50 nations, still has 5 permanent SC members while the UN’s total member states reached 193. Yet, an old but an updated discussion question emerges: Can regionalization substitute globalization?  Author of  “Asian Century” Parag Khanna discusses that regionalisation could become the new globalisation.  Khanna and Khemka argue that the most optimistic scenario in the post COVID-19 world is the revival of regional organizations rather increasing trade nationalism in many sectors, notably food. Otorbaev claims that the latter will evolve toward a new, more established phase of international trade through the development of regional clusters: “Given the gap or major decrease in global value chains, regional associations such as the European Union, ASEAN, MERCOSUR will play an important role.” Apart from discussions focused on numbers and traditional problematic issues in international relations, for businesses, local and national governments, the question may be asked what will be the most urgent priorities in the next phase of the 21st century? In the context of acceleration of history, challenges and trends as explained below are most likely to be the priorities.

a) Digitalization and technology

“To adopt for rapid transformation” will be the main challenge of this section both for businesses and the public sector. Accelerating topics related to digitalization such as digital currency, surveillance systems, data privacy AI, big data, IoT, e-commerce, remote work and Chinese ambitions to lead the change in this topic will, therefore, be another topic by its digital silk road plans, 5G strategies, Made in China 2025 alongside with China Standards 2035 vision. Huawei who has been steering the debate in Munich Security Conference in February over US ‘concerns about its plans on building 5G manufacturing plans in Europe, has the highest number of patents related to 5G. Gary Cohn, a former director of the US National Economic Council, writes in his Op-ed at FT, “The slow rise of digital currency has been given a gigantic boost by the pandemic. The shift will be disruptive but is clearly a leap in the right direction.” And just recently, China’s central bank has introduced a digital currency across 4 cities[1] as part of a pilot program capable of tracking all money flows.

b) Inequalities and Unemployment

Many multinationals are avoiding massive amounts of tax payments by locating in tax havens are enlarging the gap between low-income citizens and the famous 1%, this on-going process is, therefore, no sustainable. Very broadly, rising inequalities have also been fuelling strong anti-globalization feelings and the rise of nationalism around the World. Brexit, the election of President Trump in 2016, or what has been happening from Hong Kong to Paris around the year of 2019 wasn’t just a simple frustration of people neither a reaction to the government’s undesired policies. Rana Foroohar wonderfully discusses in her book “Don’t Be Evil: The Case Against Big Tech” that big tech companies are the new “too big to fail” and if their corporate bonds suffer somehow that might mean another financial crush is on its way.  French economist Thomas Piketty, on the other hand, asserts that the tax progressivity at the top played an important role in reducing top-end inequality. However, this idea might need to be supported by various additional policies in different areas.

It is now an undeniable fact that AI-driven sectors will or about to be the new now powerhouse of national economies. While it has been facilitating the complex nature of supply chains, bringing more connectivity and even enabling efficient energy use; the flipside of the coin, due to crisis’ harsh impact mostly on informal but also on low income and low qualified workforce, ILO’s latest research indicates that nearly half of the global workforce is in immediate danger of having their livelihoods destroyed. Fitch Ratings also reports that the impact of the coronavirus crisis on jobs could be larger than implied by the contraction in individual countries’ GDP.  Xiao and Fan in their WEF article also demonstrate that digitization and pandemics have accelerated changes to jobs available to humans.

c) Restructuring Supply Chains

COVID19 crisis has created vigorous disruptions to the global supply chain. Yet, it revealed the increasing need for the use of digital technologies as well as to reduce tracking costs making long-term projections. Paul Brody, Principal & Global Innovation Leader, Blockchain Technology at EY states that: “With blockchain technology, companies can rebuild their approach to supply chain management at the ecosystem level and go from islands of insight to an integrated global view.” The term “geo-economics” was already on return to the international scene with power politics. This crisis has speeded up this process. We have witnessed that even some countries have implemented various export bans on items that are highly essential for another. Deepening US-China decoupling will only trigger the phenomenon. Additionally, the crisis has shown to many businesses and countries that monopolizing all of the manufacturing in one country generate much vulnerability. Many mid-power states might come out as winners from the transforming dynamics of the post-COVID-19 world.   

d) Climate Crisis and Energy Efficiency

Climate change is the most urgent issue facing humanity today. WMO data shows that since 1980, each decade was warmer than the previous one. “Point of no return” as UN SG Guterres explains had already arrived. Commitment to the Paris Agreement’s goal of reducing carbon emissions and limit global average temperature rise to 1.5C is becoming pivotal in the 21st century. In the current “Asian Century” of the global economy, ADB reports that at least 60% of the population of Asia Pacific region sectors’ is most at risk from climate crisis related impact. The COVID-19 crisis demonstrated that a high level of connectivity and interdependence bring some challenges for humankind.  Forced displacement of millions of people due to climate change impact, the surge in food prices, more people to be pushed to poverty, disruption in trade activities are among many ominous issues highly related to climate crisis threatens the progress of economies and living standards of billions. Vocal and committed leadership from national and local governments, international organizations, and corporations will be expected in a post-COVID-19 world in order to improve ecological and disaster resilience with sustainable energy and finance tools.

e) Citizens’ Involvement in Democratic Processes

Representative democracies are having problems with decreasing sentiment of citizens’ representation in decision-making processes. “Post-truth” – a strong component of our postmodern world – with its major tool; social media, is polarizing our societies in two camps. It has been taking advantage of the lack of representation and participation in democracies. However, democracy is a system of governance that assumes that the public is fully and transparently informed about everything that needs to be decided. COVID-19 crisis proved that governments who cooperate with their citizens and demonstrate full transparency with an inclusive approach got ahead and gained a lot of time. At this point, Archon Fung of Harvard Kennedy School by pointing out the importance of participative democracy argues that: “Democratic public deliberation and citizen engagement can help correct the errors of experts and get closer to the whole truth of this pandemic.” Within the strengthened states in the world of post-COVID-19, on the other hand, Acemoglu insists that new democratic institutions need to be established in order to counterbalance with putting the power of society ahead with NGOs.

To conclude, an enlarged public sector in the post-COVID-19 world and in the next phase of globalization will need to address inequalities, unemployment, social cohesion, digitalization, supply-chains, climate crisis and the most convenient governance models. Although, many questions remain still unanswered:

            ·        Will the upcoming reforms in international organizations meet the expectations?
            ·       Will the populists and nationalists gain power in the next elections around the world?
            ·       Will the public sector around the world ease access to healthcare and education?
            ·       How will companies increase the level of resilience of their supply-chains after the crisis?
            ·       Will the blame-game between the US and China be minimized?
            ·       Will the upcoming business bailouts be framed to address sustainable growth and green job creation?
            ·       Will the economic policies only focus on strong growth rates?

This crisis has displayed that the “old” dynamics of the global system were mainly fragile and unequal. Is the international community able to restore the old or initiate the new?  
Temmuz Yigit BEZMEZ

[1] Shenzhen, Chengdu, Suzhou, Xiong’an