After the 2008 crisis, what economists have called deglobalisation began. It was characterised by a widespread loss of confidence in global institutions and an open questioning of the benefits of international free trade. The maximum exponent of this position has been precisely the nation that contributed most to the creation of the world order that is now being criticised, the United States. “America First” better symbolises the definitive death of multilateralism and the return, to a greater or lesser extent, to protectionism and isolationism. This trend, not coincidentally, has gone hand in hand with the shift of economic power towards Asia, whose countries are also not very interested in rescuing global institutions that they consider serve interests other than their own and in which they are also under-represented. China, which in 2014 overtook the United States in terms of GDP in purchasing power parity, something that had not happened since 1872 when it was the United States that overtook England, has a voting share in the International Monetary Fund of 6%, compared with just over 16% for the United States. The unipolar world that came into being after the fall of the Berlin Wall has thus given way to a multipolar world, with unstructured governance in which regionalism has replaced multilateralism.
In this new multipolar order with weak governance, the year 2020 was supposed to mark the birth of the Asian century, with the consolidation of this continent as a global economic engine, achieving a GDP higher than that of the rest of the planet taken together. And, with it, the beginning of a third phase of globalisation, or re-globalisation, marked by the consolidation of emerging countries as economic powers (India, Brazil, Indonesia, Mexico and Turkey, among others) and the maximum extension of value chains (“Made in the World”), all within the context of what some economists call “the fourth industrial revolution”, defined by the complete digitalisation of the economy, artificial intelligence and big data. However, history will remember the year 2020 not as the first of a decade of consolidation of the above global trends, but as the year in which the world came to a halt as a result of the COVID-19. Already in 2011, the OECD warned in a report of the imminence of three global risks, which included, along with climate change and cyber-attacks, the occurrence of pandemics as a result of the extreme mobility of people and the concentration of the population in large cities.
The current pandemic will have a strong economic impact and, as a result, a significant number of countries will have double-digit GDP contractions. Most international organisations, as well as governments, agree that this shock, although severe, will be temporary, which means that its effects will pass in a more or less short period of time and, to some extent, normality will be recovered. Of course, there will be company closures and job losses, but in a context of temporary shock these losses could end up being recovered. Similarly, government debt will increase, but with an extremely low cost of financing they will be able to be sustainable. The temporary nature of the current health crisis on the economy will largely depend on the application of the lessons learned from the 2008 financial crisis and, in the case of Europe, also from the 2010 debt crisis. Although the origin of the current crisis and that of 2008 is completely different, the mechanisms of transmission and amplification of the crisis remain the same (contraction of demand and economic activity, tensions in international financial markets, liquidity problems that turn into solvency problems…). This explains why both governments and central banks have implemented massive fiscal and monetary programmes, the so-called «big bazooka», a term coined by US Treasury Secretary Hank Paulson, to break down these transmission mechanisms.
However, in addition to the uncertainty about the occurrence of possible outbreaks, which would mean the final blow to many jobs and companies, there are two factors that may make this crisis more persistent than temporary and that are linked, like the pandemic itself, to the high global interconnection. Firstly, the health crisis is not a country crisis, it is a global crisis. Even if some countries beat the pandemic, unless the borders remain closed for a prolonged period of time, with the incalculable economic cost that this would entail, reinfection will still be a threat. The health crisis will not be fully resolved until the pandemic has been eradicated globally. Emerging countries, not to mention poor countries, have high levels of inequality, marginality and poverty, with much of the population having very limited, if any, access to health services. Overcoming the health crisis is proving to be a very difficult task; planetary vaccination is simply impossible. Moreover, these countries are generally unable to implement the necessary monetary and fiscal stimulus packages to be able to mitigate the economic impact of the crisis; the sharp fall in the price of raw materials, of which many are exporters and are their main source of income, or their high level of debt in dollars and the tightening of international financing conditions explains this. The difficulty or inability to overcome the combination of health and economic crises will result in greater exclusion and poverty, feeding back into a loop that is difficult to solve. There is no mask that can prevent the most lethal route of transmission of viruses, either biological or economic: inequality.
Second, the perceived need to cut back on complex global value chains to make them more resilient and to ensure domestic production capacity in areas considered critical to the national interest may accentuate not only the search for particular, rather than global, solutions to the crisis, but may be the perfect excuse that would justify a return to protectionism, while countries will claim greater control over their borders to make them less permeable to the transit of people, thus accentuating the protectionist and isolationist tendencies that existed before the pandemic. An open free trade regime may be a necessary, though not sufficient, condition for growth, but what is certain is that a highly protectionist regime is a necessary and sufficient condition for slow growth, which would amplify the economic effects of the pandemic.
The problems and challenges facing a highly interdependent and interconnected world (climate change, migration, organised crime, terrorism, pandemics…) are global and require global governance that favours cooperation among countries for their resolution. Each country’s attempt to provide a particular solution to a global problem, such as the current pandemic, is simply not going to work. Time will tell how much suffering we will have to endure before we cooperate.
Javier Ordóñez Monfort, director of the Institute of International Economics (IEI). Universitat Jaume I
https://www.uji.es/com/investigacio/arxiu/noticies/2020/5/opinio-javier-ordonez/
