The defining characteristic of the coronavirus crisis has been its speed. Markets fell by the same magnitude during the dot-com crisis, but this time the fall took 16 days and not 16 months. The speed and drama of the crisis is heightened by the fact that it is breaking things—diplomatic relations, investment funds, political careers, and economies. The difficulties created by the coronavirus crisis are compounded by the fact that it has occurred at the end of a long, somewhat sluggish expansion phase of the business cycle.
At a structural level, the coronavirus crisis is a resilience test of the international world order. It has revealed many of the deepening fault lines in the world economy, such as the damage to commerce caused by the trade war between the United States and China. Many of these fault lines will be more pronounced after the coronavirus crisis.
In the run-up to the crisis, the world economy was beset by conflicting forces. Stock markets were at all-time highs, but wage growth was flagging, investment spending was negligible, and productivity feeble. There was a sense that economic performance could be sustained only by the elixirs of central bank asset purchases and rising debt loads.
In the engine room of the world economy, globalization was slowing. Trade levels relative to GDP, perhaps the most straightforward representation of globalization, were dipping toward levels not seen since the global financial crisis. In particular, the tenor of world trade was undercut by the trade war between Washington and China, the recrafting of the North American Free Trade Agreement, and the threat of a trade war on Europe from the US. Multinationals had begun to retrench, rethinking supply chains and, at the margin, declaring a wish to bring jobs home.
Other aspects of globalization, such as the flow of finance between countries and regions, the flow of people, and the flow of ideas, had also slowed from high levels. Globalization and the liberal order that acts as its skeleton had been vandalized by populist politicians, with many of them ascribing to globalization side effects, notably inequality, that are, in fact, outcomes of national policy choices.
The coronavirus pandemic has accelerated the demise of globalization. Travel, labor markets, and consumer spending have come to a halt and may never again be the same.
The most disappointing aspect of the crisis, from the point of view of globalization, has been the lack of international economic policy coordination. In previous international crises, there was always a committee that people hoped might save the world, led by the likes of Nicholas Brady, Robert Rubin, or more recently Gordon Brown. That such a directed sense of hope does not now exist is testament to the fracturing of the world order and the growing difficulty in marshaling a call to action on the part of groups such as the G20 and G7, let alone the G2.
This fracturing points to the transition into a new order in politics, economics, finance, and geopolitics. As with so many transitional periods throughout history, whether 1912, the 1930s, the 1950s, or 1991, this transition from the end of globalization to something else will be uncertain and loaded with risks.
The succession to globalization is not infinitely open: it may proceed in one of two ways. In the first, the misery of the 1920s and 1930s is replayed. This is a nasty, brutish scenario, and its specter should drive policymakers to more constructive outcomes. The second requires the replacement of a globalized world and its replacement by a multipolar one. This scenario will carry plenty of scope for friction and tension between nations, volatility across markets, and the growing pains of new trends.
A multipolar world will be one dominated by at least three large regions: the US, the EU, and China, with the possibe addition of the India–Dubai region. These are regions that will be marked by very distinctive policies. The internet is already an example. China has its own walled-off internet, America, its internet giants, even as Europe has attempted to enfold the internet into a regulatory state. The same distinctiveness will feature in their approach to democracy, climate change, economics, and diplomacy.
The stress test provided by the coronavirus appears to confirm the development of a multipolar world. The rivalry between the US and China has intensified, the US has pirated protective equipment and medical research destined for Europeans, and there is a great deal of talk about bringing supply chains back home.
More profoundly, the way each region has approached the crisis is distinct, revealing much about social contracts in each region. In the US, political leaders showed concern for the economy by speaking of the cure being worse than the disease. In China, social control has been severe and information scant, while in Europe social welfare systems may prove the bedrock upon which the crisis is resolved.
In a multipolar world, competing economic models are expected to replace a single international model. Whereas the globalized world was driven by multinational corporations, consumers, and markets, the multipolar world will be driven by the very different philosophies of the large regions, the way these philosophies drive these regions’ power and security, and the way they are used to tackle the mounting political, environmental, and economic challenges the world faces. A contested century is in prospect, driven by a battle of emerging philosophies. Consider each in turn:
America is still Rome, the world’s dominant power. It is still the strongest in the three F’s—firms, finance, and fighting. America’s aim is to preserve its place as the world power, but as its soft power diminishes, it will use other means, such as finance, to maintain its influence. The greatest risk to America is not external but internal. If it does not resolve the imbalances of inequality, indebtedness, and falling human development, the political pendulum will swing wildly.
Europe, which is often underestimated as a coherent world power, is slowly becoming more strategic in that it sees the urgent need to be a competitor with China and the US. As a result, it will need first to make the benefits of its social philosophy clearer to its citizens, and second to boost its economic growth. The coronavirus crisis has helped with the former; it has done nothing to boost growth.
China’s philosophy is deeply ingrained in its history. A few hundred years ago, China was the world’s biggest economy. It wants to regain that dominant economic position and to be the geopolitical lynchpin of Asia. China has manifestly not permitted the coronavirus to derail its ambitions, even if initiatives such as One Belt, One Road are now badly damaged in terms of reputation and funding.
Beyond the shock of the coronavirus crisis, China badly needs economic growth to sustain its part of the bargain with the Chinese people—the exchange of liberty for stability. Unemployment and social unrest are the two biggest risks to the Chinese Communist Party, which has as many internal debates and factions as the Democrats or Tories. The big surprise in and for China is that the next ten years will be about social policy, and not growth.
These philosophies or ways of doing things are diverging. They point to a world of more friction. This will be exacerbated by scarcity of economic growth and productivity, and by the constraints that high debt levels and severe climate damage place on policymakers’ room for maneuver.
The economic shock from the coronavirus crisis has been speedy and severe because of the economic fault lines that I have already noted. These fault lines will drive economic decisions. Debt is one area that deserves attention. Prior to the coronavirus crisis, the world’s debt-to-GDP ratio was at a level matched only by the aftermath of the Second World War. It will now balloon into the levels reached after the Napoleonic Wars. At some point in the near economic future, this debt will congest the world economic system. What is required in the near term is an international framework that reclassifies new debt. Coronabonds are an example. What is additionally required is a change in the rules governing which investors can hold different types of debt, with the aim of making world debt more tradeable and less of an encumbrance to balance sheets.
At the same time, there is an urgent need to speed the restructuring of corporate debt in the US and China. This will be easier to do under common bankruptcy rules, accounting norms, and business practices. The risk is that these practices are diverging rather than converging, so that there is a siloing of regions and countries according to corporate governance and capital markets approaches. Indebtedness, like climate change, is just one area in which governments generally lumber on until the burden is too much and there is need to repeat the 1924 Dawes Plan that helped restructure international debt obligations.
The coronavirus has presented an appalling humanitarian crisis. In economic terms, it serves to remind us that the world is becoming more fractured. The risk is that some remedies and policy methods will intensify the fracturing until these schisms become overbearing.
