That the world will emerge economically battered from the COVID-19 pandemic is not in doubt. “The lockdown will directly affect sectors amounting to up to one-third of GDP in the major economies. For each month of containment, there will be a loss of 2 percentage points in annual GDP growth. The tourism sector alone faces an output decrease as high as 70%. Many economies will fall into recession” (OECD, 2020).
In Part 1 of this series I noted that, while the COVID-19 crisis was not Armageddon, the fragility of globalization had stretched governance systems-wide and thin. In Part 2, I explored the LongErPestleEidc; a comprehensive strategic systems analysis tool that can provide multi-dimensional analyses; it marks a dramatic shift from the traditional linear, or the reductionist way of thinking and demonstrates how interconnected these different systems are. In this third installment, I look at the economic and political dimensions of the pandemic, focusing on the United States and its global linkages.
Part III
COVID-19 Political Ecosystems
At present, the only debate between economists is how severe the financial damage will be, the estimated timeframe for recovery, and the most effective responses. Will the world be plunged into a recession or a depression? How long before global GDP grows again? What policy measures will accelerate or retard this process?
Will the world be plunged into a recession or a depression? How long before global GDP grows again? What policy measures will accelerate or retard this process?
According to a reportfrom consultancy McKinsey & Company, “If the public health response, including social distancing and lockdown measures, is initially successful but fails to prevent a resurgence in the virus, the world will experience a ‘muted’ economic recovery” (Oliver, 2020). In this scenario, the global economy would recover to pre-pandemic levels by the third quarter of 2022. However, the US economy will not rebound until the first quarter of 2023, with Europe’s recovery most likely occurring even later in that year.
Already, leading businesses in the US have been hard hit by the COVID-19 crisis. In the BEACH industries (booking, entertainment, airlines, cruises, and hotels) market capitalizations have declined drastically. One analysis finds that “the global airline industry alone has seen $157 billion wiped off valuations across 116 publicly traded airlines. Investor confidence in cruise lines has also dropped. Between Carnival, Royal Caribbean, and Norwegian Cruise Line Holdings, over half of their market value has evaporated – equal to at least $42 billion in combined market capitalization” (Neufeld, 2020). Other industries hit hard by COVID-19 include commercial aerospace, entertainment, and sport. “The International Air Transport Association warns that COVID-19 could cost global air carriers between $63 billion and $113 billion in revenue in 2020, and the international film market could lose over $5 billion in lower box office sales…entertainment giants like Disney expect a significant blow to revenues. Restaurants, sporting events, and other services will also face significant disruption. Industries less reliant on high social interaction, such as agriculture, will be comparatively less vulnerable but will still face challenges as demand wavers” (Segal, 2020).
Source: Visual Capitalist
With the world’s largest economy, the United States will be the key player in any post-COVID-19 scenario. America accounts for over 15 percent of the world’s GDP and, although this was projected to drop in the coming decade (Statista, 2020), the pandemic has disrupted all economic trends. Much will depend on what policy decisions America makes now, and when the pandemic’s peak is passed.
Marshall America, again
From Europe, OECD Secretary-General Angel Gurría asserts, “We need a level of ambition similar to that of the Marshall plan – which created the OECD – and a vision akin to that of the New Deal, but now at the global level” (OECD, 2020). But, although the OECD head addressed his plea to the G20 nations, it is the United States that would inevitably bear the lion’s share of such measures, which include foreign aid, subsidies for business, and additional funding for healthcare. It is hardly coincidental that Gurría invoked two specifically American policies since it is unlikely that the G20 nations will be in a financial (or political) position to implement any of these measures after the pandemic.
“We need a level of ambition similar to that of the Marshall plan – which created the OECD – and a vision akin to that of the New Deal, but now at the global level” OECD Secretary-General Angel Gurría
The flip side is that America’s economic future is closely tied to Europe’s. Together, European nations comprise America’s main destination for exports and its main supplier of imports. In 2018, trade-in US goods and services with European Union members totaled $1.3 trillion. Along with the UK, it is Germany, Italy, France, Belgium, and the Netherlands which do the most business with the United States (Office of the US Trade Representative, 2019). America thus has a strong foundation on which to establish a post-pandemic economic arrangement with these European countries. The stumbling block, however, maybe the EU itself.
As a supranational body, the EU was created partly with the intention of becoming a super-power bloc able to compete globally with the US. But the EU’s anemic response to the pandemic has weakened its influence over member states which, given the Union’s antipathy to America, could lead to the EU parliament aligning itself with China rather than as a third autonomous world power. If that happens, then some member countries may well decide to follow Britain’s lead in exiting the EU, hence further exacerbating economic instability within the continent.
The China peril
China’s government, in turn, will be highly motivated to try and outperform the US in a post-COVID-19 world. According to the World Economic Forum, “China seems to be over the initial supply-side shock caused by the lockdown. However, the country now faces a double-headed demand shock: Domestic demand is slow to gain traction due to psychological scars, bankruptcies, and job losses. In a survey conducted by a Beijing financial firm, almost 65% of respondents plan to “restrain” their spending habits after the virus. Overseas demand is suffering as more countries face outbreaks. Many stores are closing up shop and/or canceling orders, leading to an oversupply of goods. With a fast recovery seeming highly unlikely, many economists expect China’s GDP to shrink in the first quarter of 2020—the country’s first decline since 1976 (Ross, 2020).
Table 1: Slowdown in China’s business activities
As the source of the coronavirus, China now has to burnish its cracked international image. Providing economic aid to other countries will help do this. But the Chinese government will also see this as an opportunity to accelerate its long-held goal of replacing America on the global stage. More fundamentally, China also wants to convince the world that its governance model of capitalist authoritarianism is far more effective than the liberal democracy of the United States (Khan, 2020). Here is where political calculations will most acutely affect economic policy.
China wants to convince the world that its governance model of capitalist authoritarianism is far more effective than the liberal democracy of the United States. Here is where political calculations will most acutely affect economic policy.
In the US, the criticisms about America’s dependence on Chinese goods have already started. This antipathy is likely to be amplified by President Donald President Trump, who even before the pandemic had gotten America into a trade war with China. In 2019, both President Trump and President Xi Jinping seemed unwilling to compromise over trade disputes, to the extent where globalization itself seemed under threat (Davies, 2019). Although China and the US eventually reached a trade deal, the ideological divide did not change and may harden now. Globalization has already begun to threaten the livelihoods of farmers and blue-collar workers in the southern states of the US, and this cohort also has concerns about multiculturalism and being dominated by other ethnic groups.
All this will factor into President Trump’s and the Republican Party’s political decisions, especially since a presidential election is due later this year. President Trump won office in part by promising to clamp down on immigration, protect American jobs, and get America out of military interventions. Given that he can now add pandemic prevention to that list, President Trump’s protectionist rhetoric is more likely to become reality as he enters campaign mode. And, while most economists agree that protectionism harms countries that adopt it, America is economically strong enough to sustain such a measure, especially if tariff barriers are limited to China alone.
The 2020 United States presidential election is scheduled for Tuesday, November 3, 2020. It will be the 59th quadrennial presidential election
Until the pandemic, the American economy had been performing well. This was in large part because, despite his economic aggression towards China, President Trump oversaw significant deregulation within the US, which helped stimulate business expansion and job creation. By contrast, without America as a trading partner, the Chinese economy will certainly contract, hence reducing the supply of affordable goods to the world.
Deregulation seems not to be an option for President Xi, who has reversed the economic reformsstarted in 1978 by Deng Xiaoping. Under Xi, State-owned enterprises have been resurrected, government banks dictate business decisions to private sector companies, and more restrictions have been imposed on commercial activity. This is in a context where, despite its massive economic growth, China has not yet escaped what economists call “the middle-income trap”, in which per-capita income stalls before a nation becomes rich. That trap locks when rising wages and costs erode profitability at factories that make basic goods like clothes or furniture, and the economy fails to make the jump to higher-value industries and services. China’s economy requires more competition in financial services, upgraded technology, and tighter corporate governance (Bloomberg, 2018).
If, however, American companies operating in China are forced by political decisions to reduce or stop manufacturing in China, the possibilities for economic reforms are further stymied. This will also have an effect within the US, since higher production costs for American goods will be passed on to consumers and, in turn, other countries that trade with America. Even the threat of such possibilities will slow global economic recovery since markets are unlikely to be robust if faced with uncertainty due to conflict between the world’s two largest economies.
A new Cold War?
In this scenario, the countries of the world may be forced to choose sides. America and China will be issuing promises and threats to potential allies or enemies. America’s relations with continental Europe will become a key issue. “After the crisis passes, the world is unlikely to become more cooperative. Powers such as the US, China, and Russia are unlikely to draw the same lessons from the coronavirus as the EU about the need for cooperation and multilateralism. Quite the contrary. For them, the world’s reaction to the coronavirus vindicates their Hobbesian view of the world” (Popescu, 2020).
Within this quadruple-axis, the countries of the African continent constitute a yet-uncalculated variable. The resources of North America, Europe, and China are all constrained by over-utilization and, most importantly, an aging population. African nations have younger populations and most of the continent has experienced economic growth over the past two decades. China has a head start in investment in Africa, but both the US and Europe have longer histories. So, monetizing the continent’s natural resources may prove crucial for the advanced economies’ restoration post-COVID-19.
Within this quadruple-axis, the countries of the African continent constitute a yet-uncalculated variable. The resources of North America, Europe, and China are all constrained by over-utilization and, most importantly, an aging population. African nations have younger populations and most of the continent has experienced economic growth over the past two decades. China has a head start in investment in Africa, but both the US and Europe have longer histories. So, monetizing the continent’s natural resources may prove crucial for the advanced economies’ restoration post-COVID-19.
Additionally, the pandemic may well lead to a surge in the fortunes of specific industries. Online platforms that facilitate remote work have already had a spike in stock value, and this is likely to continue as companies and employees realize the advantages of working online. The same may happen with streaming entertainment, as more people subscribe to these platforms during lockdowns. Pharmaceuticals, food delivery services, and cleaning supplies manufacturers have also had a boost, but it remains to be seen whether this is permanent.
In all of this, political calculations will affect economic recovery. Will President Trump decide that his chances for re-election are better if he pushes protectionist policies against China, or will he decide that restoring a strong economy is the better strategy? Will Xi decides to tighten the power of the Chinese Communist Party no matter the effects on economic progress, or will he instead loosen political controls hoping to accelerate China’s economic ascendancy over a weakened America? Will the EU countries push for more autonomy from the Union or will the EU commissioners try to use a whip hand to get members in line?
Social choice theory tells us that politicians and bureaucrats typically base their decisions on increasing their power or their budgets (Simmons, 2011). There is little to reason to believe that even a global pandemic crisis changes these incentives. Caught between the rock of America and the hard place of China, leaders, and policymakers in all other countries will be calculated where their best interests lie and how to play off one economic behemoth against the other. On the other hand, it is entirely possible that the pandemic will create an equilibrium in the systems and power shuffle, especially with respect to the “essential workers” whose blue-collar power and importance have been newly realized in the current crisis.
Political gamesmanship will leave little space for the economic measures required to restore and increase prosperity, yet politics is essential for effective economic decisions. Rigorous policy decisions can be shaped using our proprietary analytical schema LongErPestleEidc (Local, Organizational, National, Global, Envision, Recreate + Political, Environmental, Societal, Technological, Legal, Economic + Ethical, Industrial, Demographic and Cultural). This holistic perspective is required to enable a deep understanding of COVID-19’s effects on the world. LongErPestleEidc is a comprehensive strategic system analysis tool that can provide multi-dimensional analyses, marks a dramatic shift from the traditional linear or the reductionist way of thinking, and demonstrates how interconnected these different systems are.
The economists are in broad agreement: the world is in for a rough three years – at best. Much will depend on initiatives taken by the US, as well as China and the European Union member nations. If these countries let narrow political considerations too heavily influence policy decisions, this may delay or even prevent economic recovery, within their own societies and globally. Certainly, it is now unlikely that the United Nations Sustainable Development Goals – ending poverty and achieving peace for all peoples – will be achieved by their 2030 target, even though most of the original seventeen benchmarks had been reached ahead of deadlines.
However, there is another overarching factor that may influence how the world is re-built during and after this pandemic. The industrial revolution 4.0 technologies which include 1. Cyber-Physical Systems (CPS), 2. The Internet of Things (IoT), 3. Industrial Internet of Things (IIOT), 4. Cloud Computing, 5. Cognitive Computing and 6. Artificial Intelligence… the concept includes: i) Smart manufacturing, ii) Smart factory, iii) Lights out (manufacturing) also known as dark factories, iv) Industrial internet of things also called the internet of things for manufacturing. I will address this issue in the next installment of this series.
Looking Forward
Here again in part III of the novel coronavirus series, I opened this conversation inviting feedback and collaboration as I continue to envision a new socio-economic contract post-COVID-19 pandemic guided by equity and prosperity for all in synergy with nature and cosmic laws.
Written By
Asaad Taha, Ph.D., PRINCE2®, MSP®
Senior Managing Partner @S4F.Solutions™, S4F.Solutions™ empowers organizations to bridge the gap “Black-Box” between their invested resources and envisioned results.”
Asaad Taha is a leading Social Impact Entrepreneur, Futurist, and Senior Principal Adviser with multi-sectoral expertise on the continuum of social impact delivery systems — from the strategic level to frontline delivery.
References
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