Hubertus Väth: COVID-19 is a global crisis, don’t make it worse by making it a crisis of globalization

An exceptionally long period of growing prosperity seems to be abruptly drawing to an end. Since the 1990s, globalization has lifted hundreds of millions from poverty and led the world to unique prosperity. This was made possible by lowering barriers and opening borders to multi-national enterprises. These enterprises have successfully worked for decades to optimize their supply chains, reduce costs, minimize inventories, expedite deliveries and improve resource utilization. In their wake, they increased productivity around the globe resulting in widely dispersed prosperity.

Emergency Brakes Pulled

Is COVID-19 ending globalization as a model for wealth creation, a model already challenged by a trade war and growing national assertiveness? One could jump to this conclusion as the virus’s properties make its spread around the world easier when borders are more open.

These properties are:

  • A varied incubation period, up to even two weeks
  • Easy transmission similar to a seasonal flu
  • Asymptotic in an uncomfortably high number of cases
  • No existing vaccine
  • No proven treatments
  • A significant mortality rate; at least 5 times that of severe influenza and rising sharply if medical facilities are insufficient.

These properties create mortal danger for too many people for it to be socially acceptable to allow the virus to simply run its course, as severe cases of influenza usually would. It is also equally difficult to contain and isolate those affected, particularly in today’s globalized world, where interconnectedness has helped quickly spread the virus far and wide.

For too long, the response was to downplay or even deny the risks. The public warnings which followed had little or no sanctions attached. Policy responses such as expanding testing facilities, stockpiling critical equipment and personal protective equipment, increasing capacity at medical facilities, retraining medical staff, and establishing safeguards for vulnerable populations were often implemented too late, with some noteworthy exceptions. What followed did not 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 coming from the front lines in the fight against the virus.

When these modest measures and urging the public to practice social distancing did not slow the spread, countries and cities have pulled the emergency brakes on individual life and economic activities. Increasingly, leaders effectively closed the borders to travellers directly or mandated strict quarantines for those arriving from an ever-growing list of countries. The EU was particularly slow to respond and now struggles to catch up, as medical services are pushed to their limits in several countries. Difficult to imagine, but in some places, doctors are forced to prioritize medical treatments, a decision they are not prepared to make in peacetime, least of all in such numbers.

Faced with such stark choices, country after country banned events, flights, tourism, restaurants, bars, clubs and even haircuts. What usually starts with a fortnight of restrictions, already is or is likely to be extended, and no one knows how often or for how long. In a way, it’s a race and a bet. A race of human ingenuity to develop a vaccine and/or a treatment and a bet that the virus will follow seasonal patterns, much like seasonal influenza. Some characteristics point to that, but we can by no means be certain. Most importantly, is to flatten the curve, i.e. the rate and volume of infections, so that the number of patients does not exceed medical systems’ capacity. At the same time, medical infrastructure is being rapidly expanded, because mortality rates would surge if capacity were to be breached.

As a result, the world economy is grinding to a halt, reversing decades-long growth trends. What we are seeing has the potential to become the mother of all recessions. Economists generally 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 traumatic experience from over 90 years ago. 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.[i]

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 strong enough to handle a crisis of such proportions.[ii] Losses will be unequally distributed, with the weakest suffering the most and existentially[iii]. The toll from food shortages, loss in education and health provisions will be hard to measure. The potential for political disruptions, as a result, should not be underestimated.

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 the ability to spend more on healthcare and safety. The measures taken, leading to massive losses in GDP, could impact life expectancy for many.

How long can the world sustain a near economic shutdown? One, two, three months? Most certainly not much longer. And how will we react if it becomes evident that relaxing restrictions leads to an increased number of infections? Or the potential loss of human life due to shrinking GDP exceeding that caused by the virus? Navigating between a rock and a hard place has never been harder and politicians have nothing win but blame for whichever direction they choose.

Rapidly spread around the globe

COVID-19 is a crisis of global dimensions but responses have mainly been national. Now the risks are high that we will make it worse by creating a crisis of globalization.

Traditional measures to cope with major disruptions to supply chains or monetary transmission will not suffice in this case. How could monetary or fiscal policy translate into economic activity in a shutdown economy? Past remedies, like broader sourcing to avoid supply chain disruptions after the Fukushima Nuclear Disaster in 2011 or central banks’ wonderfully successful opening of taps following the financial crisis in 2008, will obviously prove insufficient.

In contrast to previous pandemics, COVID-19 has spread around the globe within only a few weeks. But on a positive note, never before have scientists from all over the world identified crucial elements of the disease in a coordinated or competing manner. Knowledge on the pandemic has itself spread virally from those on the front line providing treatment and experiencing some success. Naturally, these successes were initially reported from China, Japan and Singapore, and later South Korea.

Doctors and politicians around the world already possess quite a bit of information on reducing the risk of infection, incubation times, protecting high-risk groups, specifically elderly populations, and how to effectively treat the sick. Certainly, this will save the lives of many infected, despite an effective vaccine only becoming available, hopefully, in the not too distant future.

Interconnectedness is not only a cause but a cure as well

COVID-19 exposes the risks and highlights the opportunities of an interconnected world. Clearly, governments must act to restrict free movement in order to protect human lives, but at the same time, better interconnectedness will be 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. A lot of pain, lives, and economic damage could have been spared if those precious weeks were used to stockpile testing materials, expand treatment facilities, retrain medical staff, enable quick testing at borders, and swiftly and efficiently isolate those infected.

Now is not the time for hypotheticals and finger-pointing.[iv] Rather, it is the time to cooperate on a global response. A multilateral approach is needed to respond on a truly global scale. It is time for the G20 to revive its leadership by providing a framework for the exchange of 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.

  • Global information system

Comprehensive, resilient and comparable information is key for decision-makers. Information on a pandemic must be standardized. For example, the world wonders how infection or mortality rates can vary so widely. Do these deviations point to the effectiveness of solutions or are they a result of differences in definition and methodology? Data sources, time lags, intensity and triggers of testing, as well as methods of attributing lethal cases, all can change the outcome and either create panic or an illusion of safety, neither of which is desirable. In addition, clear criteria must be met for declaring an infection a pandemic.

  • Global cooperation on tackling infections

A recent study from Imperial College London expects 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.”[v] The same is true if there are still undetected cases in places that lack the public health infrastructure to manage testing and monitoring of such an outbreak. The decades-long struggle to eradicate smallpox and measles around the globe show just how difficult this will be. Less developed countries will especially need practical and financial support to cope with these challenges.

  • Stabilization of economic activity

Like any system in intensive care, the world now faces a severe threat to stability that deserves immediate attention. Right now, the key challenge is business continuity, otherwise, insolvencies will rise and cause lasting damage to productivity, which could result in a lasting impact on prosperity and life expectancy. When COVID-19 started in Wuhan, a central part in the global manufacturing ecosystem, it posed a disruptive challenge to supply chains and thus, to business continuity. This certainly put a lot of pressure on authorities to delay action. This reluctance to act was basically repeated in every location the virus spread. The resulting economic crisis puts the very merits of globalization into question. Supply chains need to be redrawn, the lessons of Fukushima learned after all.

Authorities were, however, quick to respond to the wider economic fall-out of their measures. First and foremost affected is the global financial system, the canary in the coalmine. Governments must ensure the financial system’s ability to provide the liquidity needed to restart the economies after the shutdown. However, the monetary measures widely applied by almost all central banks have so far proven to be on their own painfully inappropriate tools in the wake of the current pandemic. Central banks slashing rates, buying bonds or otherwise pumping money into the system will not suffice. Financial institutions are needed to disburse and allocate capital to give businesses a fair chance to survive the storm. To enable them to fulfil this scope, a government-backed special risk absorption mechanism, essentially a state guarantee, is needed. Otherwise, given the current environment, any risk assessment would only lead to calling loans, rather than giving new ones.

These relief instruments should be targeted at SME’s and key industries. This can realistically only bridge a limited period of time, such as the famed German Kurzarbeitergeld, that provides a temporary furlough, subsidized by social insurance unemployment benefits.

Institutions like AFCA have a new role: to conduct 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 suffering income loss. These findings should allow the international community to develop a proven set of measures to avoid structural disruptions and thus, maintain economic, social and financial stability.

  • Provisions against Black Swans

Many countries have been overrun by the virus and face shortages in hospital capacity, ventilators, personal protective equipment, and medicine. Pandemics are Black Swan events which require a coordinated response. Hence, it is important that the international community provides for a sufficient stock of critical equipment and establishes a dedicated fund which allows affected countries – based on the principles of insurance – to quickly receive additional assistance. This would be similar to strategic reserves of oil or other strategically important resources.

  • Maintaining global supply chains by alert and containment systems

Business continuity can only work if global supply chains are stress-resistant. Supply chains are only as good as their weakest links. Alert systems are only as good as the willingness and ability to hear and react to them. Therefore, COVID-19 calls for the global supply chains to be equally global alert, contain and coordinate mechanisms for such a crisis.

Not even the lessons from Fukushima’s impacts on global supply chains were fully implemented. For some medicines, the active pharmaceutical ingredients were only produced at one or a few nearby locations. COVID-19 has induced disruptions in production and shortages of many generic medications.

The international community must find solutions for a sustainable supply system, identifying essential products and their multiple potential sources, ideally as independent from each other as possible. The decisions should not be based solely on geography, but also account for specific risks like natural disasters, civil unrest or pandemics.

A wake-up call for global coordination

The current crisis makes us aware of our interconnectedness. The world needs a framework to learn as fast as possible from those who’ve faced the crisis early on, medically, economically or financially. These learnings will be critical in the coming weeks, as we plan out how and when to get our economies back to work, sooner rather than later. A lack of coordination will expose those who go it alone and create a dilemma leading to inaction or resource absorbing on-and-off decisions.

Getting back to work will only happen as and when the risks to human life are under control. Younger and elderly people, younger and elderly nations will differ in their views on when this point has been reached. But a debate is unavoidable and either way, the choices will have significant consequences and repercussions. Collectively, the world must become more agile to cope with COVID-19 and hopefully be better prepared for the next virus, which will certainly come.

Failure to cooperate, however, should not be an option.

 

 

[i] See https://blogs.imf.org/2018/03/21/the-economic-scars-of-crises-and-recessions/

[ii] (https://www.chathamhouse.org/expert/comment/lasting-effects-financial-crisis-have-yet-be-felt#.)

[iii] (https://blogs.imf.org/2018/03/21/the-economic-scars-of-crises-and-recessions/).

[iv] See The Times, https://www.thetimes.co.uk/edition/world/pandemic-blame-game-widens-rift-between-trump-and-furious-china-gfqtflkc2, inspected 22 March 2020.

[v] See https://www.imperial.ac.uk/news/196234/covid19-imperial-researchers-model-likely-impact/, inspected 22 March 2020.