An exceptionally long period of ever-growing prosperity is seemingly drawing to an abrupt end. Is COVID-19 ending globalization as a model of wealth creation? A model already challenged by a trade war and growing national assertiveness. As a result, the world economy is grinding to a halt and growth is going into reverse. What we are seeing has the potential to become the “mother of all recessions”. Losses of 12 trillion USD are expected, 1/6th of which will fall on a financial industry that is much better capitalized than in 2008, but clearly not sufficiently strong to digest a crisis of such proportions.
COVID-19 is a crisis of a global dimension and responses have been mainly national ones. It’s the time to cooperate on a global response. A multilateral approach is needed for an economic response on a truly global scale. In this respect, five areas of global cooperation are necessary to be implemented:
- Global information system
- Global cooperation on tackling infections
- Stabilization of economic activity
- Medical provisions against “Black Swans”
- Maintaining global supply chains by alert and contain chains
The current Corona crisis makes us aware of the interconnectivity of our globe. The world needs a framework to learn as fast as possible from those that had to deal with it early on, medically, economically or financially. The world has collectively to become more agile to cope with COVID-19 and to be hopefully better prepared for the next virus certain to come, if that one is going to be defeated, as it sure will.
COVID-19 is a global crisis, don’t make it worse by making it a crisis of globalization.
An exceptionally long period of ever-growing prosperity is seemingly drawing to an abrupt end. Globalization since 1990s has lifted hundreds of millions from poverty and led the world to unique prosperity. This was made possible by lowering the barriers and opening the borders to multi-national enterprises. These enterprises have successfully been working for decades on optimizing their supply chain systems to reduce costs, minimize inventories, speed up deliveries and increase resource utilization. In their wake they created productive work around the globe and thus produced prosperity widely dispersed.
Emergency Brakes pulled
Is COVID-19 ending globalization as a model of wealth creation? A model already challenged by a trade war and growing national assertiveness? One could jump to this conclusion as the properties of the virus make its spread around the world the easier the more open the borders are.
These crucial properties are:
- A varying and a up to two weeks long incubation.
- Easy spreading like a flu.
- Asymptotic in an uncomfortable high number of cases.
- No vaccine yet.
- No proven treatment yet.
- A significant mortality rate; at the very least 5 times of a severe influenza, strongly rising if medical facilities are insufficient.
These properties are making the virus mortal for too many people to be socially acceptable to run its course, as severe cases of influenza usually do. And it is equally hard to contain and to isolate those effected, particularly in todays globalized world, where interconnectedness helps to spread a virus fast and wide.
The response was long to belittle or even deny the risks. Followed by public warnings with little or no sanctions attached to them. Policy responses such as expanding facilities to test, stockpiling crucial equipment to protect medical and otherwise systemically relevant staff, expand capacity of medical facilities and retrain medical staff, establish safeguards for the weakest were implemented – with some noteworthy exceptions – often too late. What followed didn’t come easy and again mostly too late: Disrupting the links through which the virus spreads such as mass gatherings or mass transport. Time, being so crucial, was waisted despite early and sufficient news came from the front line of the fight against the virus.
After all those measures didn’t slow the spread, major economies pulled the emergency brakes on individual life and economic activities. Ever more leaders effectively closed the borders to travelers directly or made a quarantine obligatory for travelers from ever more countries of origin. The EU and US were particularly slow to respond and now try to catch up, as medical services reach the limits in ever more countries. Hard to bear: Doctors are being forced in some places to prioritize medical treatments, a decision they are not equipped to make in peace times, least of all in such numbers.
Faced with such stark choices, country after country banned events, flights, tourism, restaurants, bars, clubs and even hairdressing. What usually starts with a fortnight of restrictions, already is or is likely to be extended, who knows how often and how long. In a way it’s a race and a bet. A race with human ingenuity to come up with a faster test, a vaccine and/or a treatment. It is also a bet that the virus follows seasonality patterns, much like influenza. Some characteristics point to that, but we can by no means be sure about it. But most of all, it is to flatten the curve of infections to maintain an infection rate more in line with medical capacity, which of course is being expanded at the same time, simply because beyond that capacity limit, lethality rates jump.
As a result, the world economy is grinding to a halt and growth is going into reverse. What we are seeing has the potential to become the “mother of all recessions”. Economists more or less only differ in their view whether the economic shock by COVID-19 will become the biggest slump since the Great Depression or even exceed this around 90 years old traumatic experience. The International Monetary Fund casts doubt on traditional views of a V-shaped recovery and shows that all types of recessions — including those arising from external shocks and small domestic macroeconomic policy mistakes — lead to permanent losses in output and welfare.
Losses will exceed 12 trillion USD, which is the estimated loss in the Global Financial Crisis 2008/09. Applying same proportions as in 2008/09, 1/6th of the losses will fall directly on a financial industry that is much better capitalized than in 2008, but clearly not sufficiently strong to digest a crisis of such proportions. Losses will be very unequally distributed. The weakest will suffer the most and existentially. Food shortages, a loss in education and health provision will take a hard to measure toll. Potential political disruptions as a result should not be underestimated.
However, Philip Thomas, professor of risk management at Bristol University, already warns that measures could “do more harm than good”. There is indeed a clear link between GDP and life expectancy, not least due to being able to spend more on healthcare and safety. The measures taken, leading to massive losses of GDP, will clearly impact live expectancy for many in yet unknown but substantial proportions.
How long can the world sustain a near close down? One, two, three months? Most certainly not much longer. And what is the path like, when it becomes evident that relaxing leads to an increased number of infections whilst eventually the losses to human lives due to closures exceed the those caused by the virus? Navigating between a rock and a hard stone has never been harder and politicians have to gain nothing but the blame for whatever evil they choose.
Rapidly spread around the globe
COVID-19 is a crisis of global dimension and responses have been mainly national ones. Risks are high that we are making it worse now by making it a crisis of globalization.
Traditional measures to cope with major disruptions to supply chains or monetary transmission won’t work. How are monetary or fiscal policy going to translate into economic activity in an economy shut down? The remedies of the past, such as sourcing widely to avoid supply chain disruptions, such as after the Fukushima Nuclear Disaster in 2011, or central banks opening the taps, which worked wonders, following the financial crisis in 2008, are obviously insufficient.
In contrast to previous pandemics COVID-19 has spread around the globe within a few weeks. But there is another side of the coin, and that one is positive: Never before in history, scientists from all over the world have identified crucial elements of the disease in a coordinated or competing manner. Knowledge on the pandemic begins to spread like the virus itself from those on the front line of being affected and seeing some success coping with it. They are namely China, Japan and Singapore, lately joined by South Korea.
So, doctors and politicians around the world already know a lot on ways to reduce the risk of an infection, on incubation times, on risks for specific – especially elder – people, and on how to take care of the sick. This definitely will save the life of a large number of infected despite the fact that an effective immunization will only be available in a hopefully not too distant future.
Interconnection is not only cause but cure as well
COVID-19 shows both the risks and the chances of an interconnected world. Even though Governments clearly have to act by restricting free movement to protect human lives, but at the same time better interconnectedness holds the key to a long-term solution. In an ideal world Europe and the U.S. would have had more than two months of time to prepare, if, and that is a big if, there were proper systems and processes in place. Those precious weeks used to stockpile testing material, expand treatment facilities, retrain medical staff, enabling quick testing at the borders, isolate those infected fast and efficiently, would result in a lot of pain, lives and economic damage being avoided.
Now is neither the time for if’s and but’s nor for trading accusations. It’s rather the time to cooperate on a global response. A multilateral approach is needed for a medical and an economic response on a truly global scale. It is time for the G 20 to revive its leadership by providing a framework to share best practice and medical resources in the short term, and to put in place a future alert and containment framework.
Five steps for international cooperation
In this respect, five areas of global cooperation are necessary to be implemented.
1) Global information System
Comprehensive, resilient and comparable information is key for decision makers. In the current crisis, numbers differ among countries that are hard to reconcile. The world wonders e.g. how rates of spreading or mortality rates can vary so widely. Do these deviations hint at solutions (e.g. effectiveness of measures or social norms) or are they only due to differences in the methodology? Information on a pandemic should therefore be standardized. Data origin, time lags, intensity and respective triggers of testing or the attribution of a lethal case to a cause all play a big role in understanding the very numbers.
All those factors can be working either way. Data can mislead people and either create a panic or a delusion of safety, neither of which is desirable. Only a unification of definitions would create a data base that would enable proper decision making. In addition, clear criteria have to be met when an infection should be declared a pandemic.
2) Global cooperation on tackling infections
Epidemiologists, like the Imperial College London in its recent study, expect that “more intensive interventions could interrupt transmission and reduce case numbers to low levels. However, once these interventions are relaxed, case numbers are predicted to rise. This gives rise to lower case numbers, but the risk of a later epidemic in the winter months unless the interventions can be sustained.” The same is true, if there are still undetected cases in places that lack a health sector able to cope.
The decades of struggling for the eradication of smallpox and measles around the globe show how difficult and long lasting this approach will be. Some countries will need practical and financial support to cope with these challenges.
3) Stabilization of economic activity
Like any system in intensive care, the world now faces a severe threat to stability that needs immediate attention. The key challenge now is business continuity, otherwise insolvencies will rise, and lasting damage is done to the productive stock and hence to prosperity and live expectancy as a result. When COVID-19 started in a central part of the global manufacturing ecosystem, it posed right away a challenge to supply chains. This certainly put a lot of pressure onto authorities to delay action. This reluctance was basically repeated in every location the virus spread to. Supply Chains need to be more resilient, to allow fast shut- downs, that are likely to have milder consequences.
Authorities were however quick to respond to the wider economic fall-out of their measures. First and foremost, the global financial system is affected, the canary in the coalmine. It must be ensured that the financial system will be able to maintain to productive stock through the shut-down and then provide the liquidity needed to restart the economies thereafter. Monetary policy, widely applied by almost all central banks, has however already shown that it is a painful inappropriate tool in the wake of the current pandemic, at least yet and left on its own. It is not enough to having central banks lowering rates, buying bonds or otherwise pumping money into the system. Financial Institutions are needed to disburse and allocate the money to those with a fair chance to survive the storm. To enable them to fulfill this scope, a government backed special risk absorption mechanism – call it for the sake of convenience simply “state guarantee” is needed. Otherwise every loan risk assessment in todays’ world can only lead to calling loans, rather than giving new ones.
That instrument should mainly aim at SME’s and key industries. This can realistically only bridge a limited period of time, such as the famed German Kurzarbeitergeld, that allows a temporary lay-off of staff, subsidized by social insurance’ unemployment benefits.
In that respect institutions like AFCA and others have a new role to play. They should research on the impact of fiscal and monetary policy responses, advise on how to allocate the money to those companies which are not fatally wounded and to individuals losing their income. The findings should allow the international community of states to come up with a proven set of measures to avoid structural disruptions and thus maintain economic, social and financial stability on a global basis.
4) Medical provisions against “Black Swans”
Many countries have been overrun by the virus – lacking capacities in hospitals, ventilators, masks and medicine. Pandemics are “Black swans” that need a coordinated response. Hence it is important that the community of states provides for a sufficient stock of critical equipment and establish a dedicated fund which allows affected countries – based on the principles of an insurance – to get additional help within a short period of time. Very much like stocks for oil and other strategically important resources.
5) Maintaining global supply chains by alert and contain chains
Business continuity can only work if the global supply chains are stress resistant. Any supply chain is only as good as its weakest link. Any alert chain is only as good as the willingness and ability to listen. Therefore, COVID-19 calls for the global supply chain being supported by an equally global alert, contain and coordinate mechanism for such a crisis.
Not even the lessons of Fukushima, with its impact on global supply chains, were fully implemented. For some mass medicines the active pharmaceutical ingredients were only produced in one or a few near-by places, with COVID-19 induced disruptions leading to production shortages in a lot of generic medicaments.
The community of states has to find solutions for a sustainable supply system flagging essential products that need more than one source, ideally as independent from each other as possible. The decisions should be based not only on pure geographical aspects but also on aspects such as covering specific risk like natural disasters, civil unrest or pandemics.
A wake-up call for global coordination
The current Corona crisis makes us aware of the interconnectivity of our globe. The world needs a framework to learn as fast as possible from those that had to deal with it early on, medically, economically or financially. This will become important in the coming weeks, as we all need to have a plan on how the economies get back to work, rather sooner than later. A lack of coordination will expose those who go it alone and create a dilemma leading to inaction or resource absorbing off and on decisions.
Getting back to work will only happen as and when the risks to human live are under control. Younger and elder people, younger and elder nations will differ in their views on when that is. But a debate is unavoidable, the choices will be stark. The world has collectively to become more agile to cope with COVID-19 and to be hopefully better prepared for the next virus certain to come, if that one is going to be defeated, as it surely will.
Failure to cooperate however should not be an Option.