What the world will look like post-Covid

Alok Ray | Updated on June 03, 2020

Amidst the changes in work culture and economic systems, global cooperation is likely to face major setbacks

What will the post-Covid world look like? Though the pandemic has not yet played out fully, some plausible speculations can be made.

One rather optimistic view is the parallel between World War-II and the situation created by Covid-19. By an extension of the parallel, some anticipate (or rather wish) that the post-Covid world would also see the emergence of greater international cooperation and strengthening of existing and possibly creation of new multilateral institutions like the UN, IMF, World Bank, which were formed in the aftermath of WW-II.

But the more likely scenario presents a different picture. World War-II (despite a massive destruction of human life and property) created an economic boom through huge hikes in government expenditure on war-related activities in all countries, which co-existed with acute shortage of essential consumer goods (including famines) as resources got diverted from ‘butter’ to ‘guns’ in an over-filled employment economy and a consequent spike in inflation.

By contrast, the unfolding pandemic-caused disaster first created a huge supply side shock resulting from breakdown of supply chains. This, in turn, led to massive cut in production, jobs and income (particularly after widespread lockdown), which is plunging the global economy into an economic situation that is, at least for the next few quarters, likely to be similar to the 1930s’ Great Depression.

Economic consequences

The basic constraints on economic activity would come in the form of shortage of workers and critical inputs (due to disruptions to supply chains and spatial movement of labor), as well as shortage of demand as people’s incomes are squeezed. Also, more work from home (or anywhere) would be the new normal in many industries, which involve mental instead of manual labour, saving transportation, energy and real estate costs. Unlike the aftermath of World War-II, deflation rather than inflation would be a bigger concern in most parts of the world.

There will be several other longer term consequences.

Business firms would look for greater automation to reduce the need for labour in future emergencies. Machines, unlike humans, are immune to pandemics and stay in the firm without extra costs. Given the ever-expanding urbanisation and cutting of forests, human beings would increasingly come into contact with animals, and such transmission of virus from animals to humans is likely to increase in frequency and intensity. Greater automation, on the other hand, would improve labour productivity while accentuating job losses and rising inequality in income distribution.

There would be greater tendency to rely on domestic (where possible) and geographically closer regional supply chains, instead of far-flung ones. This would cause global efficiency loss (also loss for consumers) while reducing the loss arising out of possible supply chain disruption.

Some China-centric countries may like to diversify their sources of supply by buying from others. This, along with rising trade frictions between the US and China, may open up additional production and export opportunities for manufacturing in India. Foreign countries (including China) may also like to increase FDI into India to make use of these opportunities.

Global frictions

The China-US rivalry is likely to sharpen. On top of the existing trade frictions, the fixing of blame on China (for the initial outbreak of the virus, cover-up, supply of faulty test kits etc) and the compensation demand by the West for the pandemic damage are sure to sully the atmosphere. Instead of cooperation we are likely to see more antagonism and diplomatic fights between China and the US (plus Western allies) in various global forums.

Though the US would continue to be the number one military power, the economic rise of China with huge resources to invest abroad would go on weakening US leadership, particularly in the less developed countries. China would seize the opportunity to provide additional funding to international institutions whenever the US would refuse to do so. This is on top of the beating that the image of the US model has already suffered by having the biggest death toll due to Covid-19, despite being the richest country with its much-vaunted advanced health care system.

The price of oil would remain weak due to global recession, despite attempts by OPEC and non-OPEC countries to reduce supply. Rather paradoxically, the US — so far opposed to the role of OPEC — may also join efforts to artificially raise the price of oil by cutting supplies, in the interest of its shale oil producers. As investment in the oil-producing capacity is gradually curtailed, the price of oil may again move towards $100 per barrel when the global economy fully recovers in 3-4 years. The recovery itself may well be a prolonged W-type recovery, instead of a sharp V if there are several waves of infection.

The anti-globalisation and anti-immigration forces are likely to become more powerful. In times of government failures and economic crisis, the natural tendency would be to shift the blame towards ‘foreigners’.

Finally, many countries may see the need for significant hikes in government expenditure on public healthcare services, as the vulnerability of the existing systems is being exposed so brutally. There would be more public pressures (including politicians championing the cause) for moving towards some kind of a universal health care system (even in the US) and some form of universal basic income. That could be biggest positives from this global disaster.

The writer is a former Professor of Economics, IIM, Calcutta and Cornell University

Published on June 03, 2020

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