The Coronavirus Crisis is an Opportunity to Reform the Global Economic System

HKUST IEMS Thought Leadership Briefs No. 40


Donald Low, Michael Tyrala


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


The first is that almost every major economy experienced prolonged lockdowns, with significant parts of their economies effectively shut, and are only now gradually and tentatively returning to anything resembling normalcy. The lockdowns and shutdowns – the result of what was known as the suppression strategy – have exacted a huge economic toll. The International Monetary Fund (IMF) now predicts global growth to shrink by 4.9 percent in 2020. Earlier hopes of a V-shaped recovery from the pandemic have all but vanished. Even if global growth for 2021 achieve the 5.4 percent that the IMF projects – a big if – this would still leave the GDP for 2021 about 6.5 percentage points lower than the pre-pandemic projections of January 2020. And unlike the global financial crisis more than a decade ago, emerging markets and developing countries will not be spared a sharp contraction this time.

While the impacts on developed economies have attracted most of the headlines, it is the real economy impacts on developing countries that are of greater concern. After the United States, the next four countries that have registered the highest death tolls from the pandemic are middle-income emerging markets: Brazil, India, Russia, and Peru. The impacts on developing countries are particularly severe as most lack the means to cushion the impact on their large populations of migrant and informal workers. Across the developing world, recession-hit economies will see substantial job losses this year, possibly reversing the gains in poverty reduction over the last few decades.

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

The second truth is that it is extremely unlikely that suppression will succeed in eliminating the disease. Even if the suppression measures employed by most countries succeeded in slowing the spread of the coronavirus, cases are likely to rise again when the lockdowns are lifted. 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 more realistic “endgame” is that 50-60 per cent of the world’s population is eventually infected and develop some sort of 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. But this is not expected till the first half of 2021, at the earliest.

The third truth is that the current system of neoliberal globalization, which was threatened but neither abandoned nor significantly reformed during the global financial crisis, is no longer “fit for purpose”. Policymakers around the world, especially in emerging markets, should seize the opportunity this crisis offers to remake the current system of globalization in ways that are more diversified and resilient against shocks that are now too easily transmitted in our highly networked, interdependent economies.


Transiting to a “new normal”

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 in emerging markets depends on them taking steps to transit to a new normal while safeguarding public health.

Fortunately, we already know of practical steps that governments can take to exit suppression and transit to a “new normal”. Some of these steps have already been undertaken by the East Asian states – namely China, South Korea, Taiwan, Singapore and Hong Kong – that have been relatively successful, so far at least, in containing and responding quickly to the spread of the virus. There are four 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 a large enough proportion 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 partly 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 tough social distancing rules, a continued emphasis on mask-wearing and other personal hygiene measures, 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. 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 tracing and testing capabilities to identify new clusters of infection early so that targeted containment measures can be put in place quickly, thereby avoiding large-scale and costly lockdowns in the future. This is something that South Korea and China did when they discovered new clusters of infection in their capitals.

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

The first two steps may be unpopular because they involve communicating the reality that this disease may 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 adapt we must and 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 measures (step three) 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 step three 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 draconian measures of suppression unavoidable. We simply cannot afford the costs of a second failure.

Just as importantly, the current suppression measures are causing a global economic disaster that could be larger than the Great Depression, 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 suppression soon.

Reforming Globalization

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 there is 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 globalization 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 more diversified and less vulnerable to cataclysmic shocks emanating from any one node. The alternative if that cannot be achieved may well be a less networked, less densely connected global economic system, with its attendant losses in efficiency and economic growth.

For emerging markets, the choices before them are particularly stark. In the last three or four decades, globalization helped to lift billions of people out of poverty. Now, those gains are threatened by the pandemic-induced global recession and the potential reversal of globalization (or de-globalization). To avoid the latter, emerging markets must now take centre-stage to construct a system of globalization that is not overly dependent on any one node, and is sufficiently diversified to adapt to the disruptions the future brings.


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