Epidemic to Pandemic
Origins of the Coronavirus contagion named COVID-19 bear stark similarity with the Severe acute respiratory syndrome (SARS) outbreak of 2003. If SARS originated in the Guangdong province of China, COVID-19 traces its origins to Wuhan in the Hubei province. What is significant is the initial response to the outbreak. Early cases of the virus at the end of 2019 were concealed and mismanaged to the extent that the opportunity to localize the contagion was surrendered. Once the Chinese Government publicly announced the spread of the virus on 31st December, its machinery went into overdrive. Further proliferation within China was contained despite the heavy price in terms of casualties.
The genie had escaped the bottle anyway. Europe became the new epicentre of what was now declared a pandemic by the World Health Organisation (WHO) followed by the U.S. East Asia responded with alacrity to contain the spread of the virus. Testing is low in developing countries like India, so the actual numbers afflicted are still ambiguous. Population density is high, and health care infrastructure grossly inadequate. In the absence of a cure, a portent for the immediate future is not encouraging.
Management of the crisis to date offers contrasting examples. There are the evident success stories of South Korea, Taiwan and Singapore that serve as a model for others to emulate. Within Europe itself, Germany offers a positive contrast with Italy and Spain that were slow to respond and hence have casualties far in excess of even China. The U.S. response is widely acknowledged to be eccentric and personality-driven. Developing countries are still grappling with the magnitude of the crisis. In the absence of a Vaccine at this stage, containment is the primary focus the world over. Effective governance in the face of a pandemic, unlike any other in recent memory will determine the level of success that can be achieved in defeating what is now a full-blown pandemic.
The geopolitical scenario
The concept of Globalisation was already under severe stress due to the vast disparity that arose between the rich and poor over the past decade or so. Capitalism, which is viewed as the driver of globalisation, is identified as the front of the malaise. The wave of migration from conflict-ridden areas of the globe to Europe and North America cannot be separated from economic migration. Migration is thus being viewed as abetting stress on limited resources. Such fracturing of societies has given rise to nationalistic movements that thrive on parochialism. Right-wing governments have found favour across continents. President Xi Jin Ping of China first projected the country's single-party autocracy as the ideal model for governance during the party Congress of 2017. COVID-19 and China’s response to the pandemic (notwithstanding its initial bungling) is now projected as proof of effective governance.
President Donald Trump’s America First policy and demonizing of international institutions has led to their being deprived of adequate funding. A cash-rich China is selectively stepping in to partially fill the void. The outcome of the US-Chinese rivalry is the waning legitimacy of international institutions, their politicization and manipulation. WHOs wholesome praise of China after the effect of COVID 19 was controlled in China is case in point.
The U.S. withdrawal from international trade agreements, besides the nuclear deal with Iran, and Trump's undermining of the WTO has adversely impacted global trade. Withdrawal from Trans Pacific Partnership (TPP) and the North American Free Trade Agreement (NAFTA) has only partially been salvaged by the US, Canada and Mexico Agreement (USMCA). Trump's unpredictable negotiating style and his threat of tariffs has alienated allies in Europe. Tariffs on steel and aluminium on Germany are a clear refusal to recognize that the European Union (EU) is a single trading block. The US-China trade war has seen only a temporary reprieve with the Phase 1 agreement in January this year.
American withdrawal from the international arena has similarly given rise to a fractured geopolitical landscape. Rivalry in a multipolar world has witnessed a more belligerent China impose its writ in East Asia. Russia, in its quest for the glory days of the Soviet Union, has openly challenged the West particularly in Eastern Europe and the Middle East. The fractured relationship between the Organization of the Petroleum Exporting Countries (OPEC) and Russia that is presently playing out with regard to oil pricing has the US in focus.
Nationalistic Governments and compromised international institutions have created a churn in geopolitics and global trade, as we know it. Massive stimulus spending after the financial crisis of 2008 has created a debt economy that was already staring at a global slowdown in the immediate future. The leadership void created by US withdrawal from the global stage adds to what is a least conducive environment to respond to crises like the COVID 19 pandemic. To quote Prof Sridhar Venkatapuram in the Indian Express "(it is) unfortunate that the Coronavirus pandemic has plagued the international community at its weakest moment where national politics and economic parochialism are upending the idea of one global village". The COVID-19 pandemic demands a global response.
The economic impact of COVID 19
The Coronavirus arrived into a near-perfect storm. While China attempted to conceal the crisis in the initial stages, governments in Europe and the U.S. failed to recognize the magnitude of the crisis. Identification of the threat and proactive planning, preparation and execution to counter it was manifest only in East Asia. Much of the rest of the world was found wanting, at considerable cost in human lives. If ever a crisis demanded leadership and collaboration at a global level, it was this.
Governments are suddenly being made to recognize the frailty of their health care systems. While the state of health care infrastructure in developing countries like India is severely wanting, developed countries like the U.S. have also been exposed. Absence of a national health care system in the U.S. has left the country ill-prepared to respond efficiently to the pandemic. Trade dependent countries of North and Western Europe tend to have large welfare states that act as shock absorbers that help to mitigate economic shocks. India has a pressing need to realign priorities so that the quality of the health care infrastructure is enhanced and its reach extended.
A global economy that was already facing a slowdown has been severely impacted by the COVID-19 contagion. Rating agency Moody’s has now forecast a contraction of global GDP for the year. Rating for India has been revised from 5.3% to 2.5%. Growth figures just out for the quarter ending March 2020 paint a bleak picture. All major economies have slid severely. Stock markets have at best been volatile, fluctuating with every straw of positive news in terms of Rate Cuts and Stimulus package announcements. It is, however, worth noting that the percentage of the population exposed to the stock markets in countries is relatively low and varies vastly. Even in the U.S. it is estimated at just about 50 percent.
Containment of the virus being the primary focus, countries have invoked lockdowns to varying degrees. The obvious impact of the total lockdown, as in India, is the shutdown of all productive activity, save for essential goods and services. Medium and Small Industries the world over have been severely impacted. Natural fallout is massive job losses. In the U.S. at last count, over 5 million people had registered as unemployed. In India, its massive informal job sector has resulted in a huge exodus of migrant workers to their villages, thus rendering the lockdown and social distancing measures a mockery. Supply-side of the economy, the world over, has thus been severely impacted.
Education, to an extent, has transitioned online but even software services that enable Work From Home (WFH) have been impacted by the near absence of decision-making in the global arena. The shutdown of nonessential services and stay at home measures have killed demand in general. High levels of joblessness have anyway constrained liquidity.
The retail sector has been severely impacted all over. India, which is largely a consumer-driven economy, is naturally staring at a serious impact on GDP. Even a country like the U.S. with an economy the quarter of global GDP and a huge exporter of primary goods like aircraft, weapons, oil etc is essentially a consumer-driven economy. This contrasts with countries like Germany, Japan and China, which are export-driven. The demand side of the economy, like supply is adversely impacted, a double whammy unlike any other. The massive travel industry, which includes airlines and hospitality, will be in prolonged crisis because tourism can be expected to be slow to revive. The health fears of a pandemic will take time to wear off.
Financial markets have been in turmoil with Investors withdrawing close to $ 85 billion dollars, at last count, from emerging markets. It is by far the largest capital outflow ever recorded, with investors seeking refuge in the U.S. dollar. Interest rate cuts freeing liquidity and massive stimulus packages have become the norm across the globe. Its effect on what is already a global debt crisis is not being factored at this stage.
The fractured geopolitical environment had, by and large, left the existing Global Supply Chain unaffected. Impact of COVID-19 on the supply chain is bound to call for its review. The initial impact of the virus on China affected supply of components and commodities to much of the world. The pharmaceutical, automobile and mobile manufacturing sectors were particularly hit in India. The situation plays into the protectionist environment prevailing. The post-COVID 19 era could witness some change to the prevailing model.
The Post COVID 19 era
January to March 2020 economic data indicates a serious downturn. The continued shutdown of businesses and lockdown of citizens will sustain the Supply and Demand crisis. Cash grants to the needy and stimulus spending can only aid sustenance. Restoration of business sentiment will be a much longer process. Stimulus packages are a necessity in the present situation, but it is an alarming rise in Global debt. Coupled with low commodity prices, emerging economies will be the hardest hit. The absence of a vaccine in the immediate future indicates that economic performance in the forthcoming quarter will be equally bleak. Under performance in two consecutive quarters is clearly a recession that looms. Some experts even fear a Depression on the horizon.
How will COVID-19 shape the political and economic environment?
Rebecca Soinit in the New York Times says “every disaster shakes loose the old order. What replaces it is up to us”. A positive indicator in this regard is the international research effort at finding a vaccine to combat the Coronavirus. Industry realigning businesses where automobile manufacturers are rolling out Ventilators and Reflectors and Fashion Houses are manufacturing Masks are again causes to celebrate. There is, however, little else to cheer about in what is turning out to be an increasingly protectionist environment. James Crabtree, in the Asian Review, argues that complex supply chains and just in time production methods are vulnerable to shocks. In light of the current crisis, he is of the opinion that it will "hasten decoupling between the U.S. and China and accelerate the collapse of the trade-dependent model of globalization upon which so many Asian economies rely". Companies are rethinking their vulnerabilities. The pharmaceutical industry in India being dependent on China for 70 percent of its inputs is an extreme case that would naturally come up for review. It need not, however, swing to the other extreme where the genuine advantage of cross border trade is surrendered for political considerations. The system that would finally emerge will depend on the political leadership in the major economies.
Pointers to what could be a post-COVID 19 era are already emerging. China, by present indicators, has managed to bring the spread of the virus under control. Community spread of the virus has been arrested. The only new cases are those imported through returning Chinese citizens. Controls within the Country are progressively being lifted, and manufacturing is being revived. In the prevailing void, China has commenced export of emergency medical equipment to those countries in need of the same. China is widely viewed as the source of the pandemic and is now turning Saviour to the rest of the world. The geopolitical tango that was already being played out is now being revived with advantage China. Will the U.S. and China be able to set aside their differences and initiate high-level talks? The American administration should bear the burden of responsibility for having disrupted an established, if imperfect, world order. Competition with a rampant China is natural fallout, but disrupting engagement with traditional allies has only made a bad situation worse. The capacity and means to reform the system exists, will leadership stand up to the challenge? Business hates uncertainty, and there is nothing like a crisis to bring people together.
Author: Major General N George (Retired)