“We are still faced with extraordinary uncertainty about the depth and duration of the crisis”. This is what the current International Monetary Fund (IMF) Managing Director, Kristalina Georgieva, recently announced when trying to predict the future of the global economy, and there is much truth in the statement. Economists that are busily trying to create models for post-COVID-19 scenarios, are consistently forced back to the drawing board when some new endogenous shock nullifies their assumptions. Given this difficulty, this article primarily aims to provide insight into the development of specific emergent trends. This includes a discussion on supply chains and an exciting discussion on the future of work (or lack thereof).
1. The need for diversified supply chains
Often when economists try to be optimistic about a potential recovery, they point to the SARS pandemic as a ‘similar’ healthcare crisis and how the global economy was able to withstand lasting damage. Unfortunately, such a comparison masks the reality of the situation. The big difference between China in 2002 when SARS emerged and China seventeen years later is its influence in global trade flows (Goodman, 2020). Saying that China on lockdown will mean the closure of the world’s factory sounds too abstract; telling the world that everything from the new iPhone to the upcoming summer fashion collection is on hold makes the impact very concrete.
If this sounds familiar, it is because investors can still remember the analysis that came out of the trade war that also involved China. Supply chain experts from Boston Consulting Group to McKinsey have highlighted that companies that responded to that trade dispute and diversified their supply channels have been better placed to handle the current crisis (Forde, 2020). However, this naturally self-selects the largest firms that can afford the costly investment to find non-China substitutes. This could create more concentrated industries and raise barriers of entry for future firms, especially given the detrimental impact COVID- 19 has had on SMEs. This exposes a potential critique of such action as prices are likely to rise with lower competition and new higher fixed costs. On the other hand, the new nations jostling for some of that trade is likely to create its own competitive pressure. Also, there is even a case to be made that new firms that are more geographically centred around these new sources of manufacturing (e.g. Asia, Africa…) may emerge to be more competitive themselves and keep prices down too.
Two notable results emerge as a result. The first is the effect on the rate of globalisation and whether more countries will assess the need for a more considerable amount of autarky. Capri from the National University of Singapore believes that we have entered an entirely new era now, with past globalisation over as we know it (Tan, 2020). If this is true, then there could be significant new socio-cultural barriers to achieving these diversified supply chains. Secondly, some countries would benefit from this trade diversion, especially countries that have established production networks that already exist. This should provide hope to struggling nations, contingent on long-run introduction of foreign direct investment, once the crisis ceases.
2. The case for greater automation and UBI
Diversified supply chains may insulate companies from future crises better, but if the COVID-19 pandemic has shown anything, it is that no country is immune (literally) from economic malaise. It is no exaggeration to state that billions of people are in a state of lockdown, and this is a significant proportion of the global workforce. After China was affected by the virus, other countries such as South Korea and Japan faced a large number of infections (Tan, 2020). These countries collectively are the epicentre of technological manufacturing and can explain why there is a lag in the production of lifesaving devices. This in itself bolsters the need for a more automated production process, and COVID-19 is likely to expedite that need (Frey, 2020).
Now intuitively, automation is seen as a damaging prospect to employment for a vast amount of people, and that is true. Yet, as COVID-19 has shown, there is a reality where governments give their citizens a form of ‘Universal Basic Income’ (UBI) as they stay at home. Research shows that companies are cutting costs by culling their workforce (Frey, 2020) and so adopting a business as usual mindset once the crisis ends will not work.
So, if firms automate their operations, instead of taxing income on workers, they can raise taxes on businesses on their productive value. There is still an incentive to find higher paid jobs to raise your standard of living, but it gives everyone a safety net to live on. This is not a new idea and was even advanced in Thomas More’s Utopia, where everyone doesn’t have to worry about being a corpse (Volpicelli, 2020). Now, governments around the world see the need to implement it for their most vulnerable populous. Principally, there is nothing different if someone suffers from COVID-19 or another life-threatening condition and so people should not have to hope for some civilisation ending event to get some relief.
What COVID-19 has also shown was that the initial critiques of UBI, which was that certain countries could not afford it, is not wholly accurate. Although it is a significant financial burden for individual countries, countries around the world are forced to find ways to make it work (Volpicelli, 2020). If UBI becomes a political reality post-COVID-19, then nations will have to work around it and seriously address the issue with their tax systems. The UK has tax breaks worth £430 billion per year for the wealthy, and the US has some low capital gains tax rates (Volpicelli, 2020). Imagining a world where everyone gets some guaranteed income is not impossible if the impacts of the pandemic continue. At the very least, it is clear now that during these difficult times, that no one deserves to be left behind.
Conclusion
Just three months ago, forecasters expected positive income growth in 160 countries, but now 170 countries are projected to face negative per capita income growth (Georgieva, 2020). The key takeaway is that it isn’t sufficient to be reactive anymore, and proactive measures need to be taken to adequately prepare for future issues. Everyone will meet some form of suffering, and business owners will work hard to ensure any future crisis of the same magnitude is accounted for. This can eventually result in mechanisation of many workplaces for low skilled operations. In such a world, it is seriously worth remembering why we are all currently locked in right now.
Ensuring no one gets hurt from the crisis doesn’t just mean not passing the virus to them. It means making them feel financially secure as we all navigate the new world after the pandemic. Let’s make sure we can do it together!
Written by Joshua Varughese
2nd Year Philosophy Politics and Economics, University of Warwick,
Head of Research for Malaysia Link UK
Bibliography
- Forde, M., 2020. Pwc, Amcham China Predict Companies Will Pursue A ‘China+1’ Strategy After COVID-19. [online] Supply Chain Dive. Available at: https://www.supplychaindive.com/news/coronavirus-companies-expect-china- operations-normalize-under-3-months-pwc/576355/
- Frey, C., 2020. Covid-19 Will Only Increase Automation Anxiety. [online] Ft.com. Available at: https://www.ft.com/content/817228a2-82e1-11ea-b6e9-a94cffd1d9bf.
- Georgieva, K., 2020. Confronting The Crisis: Priorities For The Global Economy.
- Goodman, P., 2020. SARS Stung The Global Economy. The Coronavirus Is A Greater Menace.. [online] Nytimes.com. Available at: https://www.nytimes.com/2020/02/03/business/economy/SARS-coronavirus- economic-impact-china.html.
- Tan, H., 2020. There Will Be A ‘Massive’ Shuffling Of Supply Chains Globally After Coronavirus Shutdowns. [online] CNBC. Available at: https://www.cnbc.com/2020/03/20/coronavirus-shocks-will-lead-to-massive-global- supply-chain-shuffle.html.
- Volpicelli, G., 2020. Can Universal Basic Income Fix The Coronavirus Crisis?. [online] Wired.co.uk. Available at: https://www.wired.co.uk/article/can-universal-basic- income-fix-the-coronavirus-crisis