The coronavirus has shown us the global economic system is no longer fit for purpose

  • Lockdowns and shutdowns imposed to deal with the Covid-19 pandemic have taken a huge toll on every major economy

  • While these suppression measures were probably necessary, the process of exiting them provides an opportunity to rethink our overly networked world

By now, three hard truths about the Covid-19 crisis should have become apparent to policymakers around the world.

The first is that every major economy is currently in some form of lockdown, with significant parts of their economies effectively shut down. These lockdowns and shutdowns – the result of what has become known as the suppression strategy – have exacted a huge economic toll. If they are prolonged, they create a high and growing risk of sending the global economy into a depression.

While financial market gyrations have attracted most of the headlines, it is the real economy impacts – especially on the poor and the vulnerable – that are of greater concern. In the United States, unemployment is expected to skyrocket to 20 per cent – twice the peak during the global financial crisis.

Meanwhile, the global economy is likely to go into recession in 2020 even if the disease is more or less contained by the middle of the year. This would be especially devastating for developing countries that lack the means to cushion the impact on their large populations of migrant and informal workers. For these countries, the costs of the lockdowns may exceed the lives that are saved

While the suppression strategy undertaken by China and much of the developed world was probably necessary to slow the uncontrollable spread of the disease, prolonged lockdowns and shutdowns cannot be the main long-term response – especially if, as experts say, Covid-19 is a recurrent problem and not “merely” an acute one.

The second hard truth is that it is extremely unlikely that suppression will succeed in eliminating the disease. Even if the current suppression measures succeed in slowing the spread of the coronavirus, cases are likely to rise again when the lockdowns are lifted or when the autumn flu season arrives. Eliminating a highly infectious disease is what economists call a “weakest link” public good, in that the provision of this public good depends on the weakest link (in this case, poor countries) getting its act together. This is unlikely in the short to medium term.

A far more realistic “endgame” is that 60 per cent of the world’s population is eventually infected and develops immunity to the disease. This would effectively stop its spread. Discovering a vaccine would, of course, speed up this process and allow us to normalise our response to it.

The third hard truth is that the current system of neoliberal globalisation, which was threatened but neither abandoned nor significantly reformed during the global financial crisis, is no longer “fit for purpose”. Policymakers around the world must not miss the opportunity this crisis offers to remake the current system of globalisation, and make it more resilient against shocks that are currently all too easily transmitted in our highly networked, interdependent, and globalised economies.

A FIVE-STEP PLAN

In these economically and psychologically depressing times, it is tempting for policymakers to focus only on the short term and to avoid thinking about a highly uncertain future. But they should resist such a temptation, especially since the welfare of billions of people depends on policymakers taking steps to end the current suppression measures while safeguarding public health.

Fortunately, we already know of practical steps that governments in much of the developed world can take to exit suppression. Some of these steps have already been undertaken by the East Asian states – namely South Korea, Taiwan, Singapore and Hong Kong (the original East Asian Dragons) – that have been relatively successful, so far at least, in limiting the spread of the virus. There are five essential steps.

First, governments should accept and communicate to their populations the uncomfortable fact that this coronavirus may never be eliminated and that we can only “overcome” it when about 60 per cent of the population is immune to it, either from catching the virus and developing antibodies or from vaccination. The vast majority (more than 80 per cent) of infections will be mild or asymptomatic; this is why the coronavirus is so transmissible. But the cases requiring hospitalisation or intensive care would still overwhelm our already stretched health care systems if they occur in surges.

Second, and as a result of the above, once the number of infections has stabilised, the suppression strategy should be gradually replaced with mitigation (or management of infection) measures combined with strong physical distancing requirements and steps to protect the old and those with pre-existing conditions. All this is necessary to flatten the epidemic curve and protect those that are most at risk. Concurrently governments, if they are not already doing so, should quickly ramp up capacity in isolation wards and intensive care units.

Third, governments should roll out and maintain large-scale testing to identify new clusters of infection early so targeted containment measures are put in place quickly, thus avoiding widespread and costly lockdowns in the future.

Fourth, they should also roll out large-scale serological testing, once this becomes scalable, to identify those who have caught the virus and have developed immunity to it so they can be allowed to resume their normal lives.

Fifth, they must start to rethink and reform the current model of neoliberal globalisation with a view towards greater resilience and adaptability.

The first two steps are likely to be unpopular because they involve communicating the reality that this disease may never be eliminated, and may even become endemic. This is hard for many, if not most, people to accept. In dealing with novel threats, people much prefer such threats to be eliminated rather than to have to adapt or live with them.

But the longer governments delay in preparing their populations for the transition from suppression to mitigation, the longer the lockdowns would have to be, and the greater the economic damage. In particular, governments have to put in place the necessary steps (steps three and four above) to safeguard public health and ensure that the health care system can cope with possible future increases in infections.

Indeed, one can argue that the failure to take these steps at the start of the pandemic, whether because of a lack of bureaucratic capacity or political will, or misplaced concerns about not hurting the economy, was what made the current draconian measures unavoidable. We simply cannot afford the costs of a repeat failure.

Just as importantly, the current suppression measures are causing an unprecedented global economic disaster, the effects of which are hurting developing countries and the poor among us the most. On equity and moral grounds, we must find a safe way to exit the lockdowns and shutdowns soon.

REFORMING GLOBALISATION

That leaves us with step five, arguably the hardest to achieve since it involves sustained efforts to reform the architecture that underpins our global economic system. Just as the global financial crisis revealed the risks of financial liberalisation and global financial integration, so too should this crisis provoke a profound rethinking of our global economic networks.

This crisis has already exposed the fragility of an economic system that was built on extended global supply chains and the relentless pursuit of the efficiency gains that arose from comparative advantage and specialisation, regardless of the (hidden) costs in terms of the reduced adaptability and resilience of our economies.

In this respect, one of the main insights of complexity science is especially relevant. About two decades ago, Stuart Kauffman of the Santa Fe Institute highlighted a basic fact about networks: as a network grows in size and density, the number of interdependencies grows and the probability that a change in one part of the network will lead to a cascade resulting in a negative change somewhere else grows exponentially. This means that our global economic system (a vast and densely connected network) becomes less adaptable as it increases in size and the density of connections increases.

Kauffman also showed that the more regularity or predictability in the behaviour of the nodes in the network, the more density in connections the network can tolerate. In the context of our highly integrated economic system, we can think of countries as the nodes.

If there is predictability on the decision-making of the key countries, then a more densely connected network can function. But if decision-making is less predictable, more densely connected networks are less resilient and small changes can cascade into big problems – what Kauffman called “complexity catastrophes”.

This crisis has revealed the unpredictability in the behaviour of the two key nodes in our global economic network: China and the US. If globalisation is to survive the Covid-19 crisis, we cannot simply replace an American-led system with a Chinese-led one.

Rather, we need a system that is far more diverse and less vulnerable to cataclysmic shocks emanating from any one node. The alternative if that cannot be achieved must be a less networked, less densely connected global economic system, with its attendant losses in efficiency and economic growth. But what we gain is greater resilience and a more sustainable form of globalisation.

Donald Low is Professor of Practice in Public Policy at the Hong Kong University of Science and Technology, and director of the university’s Leadership and Public Policy Executive Education.

External Link : https://www.scmp.com/week-asia/opinion/article/3078198/coronavirus-has-shown-us-global-economic-system-no-longer-fit

3-Apr-2020


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