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We Need a Better Balance Between Globalization and Self-Reliance(Foreign Policy)

Economists used to scoff at calls for countries to pursue food or energy security policies. In a globalized world where borders don’t matter, they argued, we could always turn to other countries if something happened in our own. Now, borders suddenly do matter, as countries hold on tightly to face masks and medical equipment, and struggle to source supplies. The coronavirus crisis has been a powerful reminder that the basic political and economic unit is still the nation-state.

To build our seemingly efficient supply chains, we searched the world over for the lowest-cost producer of every link in the chain. But we were short-sighted, constructing a system that is plainly not resilient, insufficiently diversified, and vulnerable to interruptions. Just-in-time production and distribution, with low or no inventories, may be capable enough of absorbing small problems, but we have now seen the system crushed by an unexpected disturbance.

We should have learned the lesson of resilience from the 2008 financial crisis. We had created an interconnected financial system that seemed efficient and was perhaps good at absorbing small shocks, but it was systemically fragile. If not for massive government bailouts, the system would have collapsed as the real estate bubble popped. Evidently, that lesson went right over our heads.

The economic system we construct after this pandemic will have to be less shortsighted, more resilient, and more sensitive to the fact that economic globalization has far outpaced political globalization. So long as this is the case, countries will have to strive for a better balance between taking advantage of globalization and a necessary degree of self-reliance.

Coronavirus: 5 predictions for how the economy might recover(world economic forum)

1. “V”

The best case outcome: when a growth plunge is followed by an equally sharp recovery.

The April-June GDP contraction will likely be on a scale not seen for decades. But fiscal and monetary stimulus - over $10 trillion and counting - could aid an equally swift rebound.

Ross Walker, co-head of global economics at NatWest Markets, reckons the scale of economic decline expected this quarter implies “a sizeable rebound in Q3 and Q4 as businesses re-open”.

2. “U”

When recovery takes more than a couple of quarters. Because economies have suffered a faster and deeper contraction than in 2008-09, this may be the likeliest outcome.

U is the base case for ING’s Brzeski, who notes the lockdowns’ impact will last for a while after they are lifted.

“Easing of the lockdown measures will be gradual, social distancing will continue and the tourist industry will likely continue to suffer,” Brzeski said.

3. “W”

Double-dip - if the easing of lockdown restrictions initially boosts activity but the effects of unemployment and corporate bankruptcies then start to filter through.

This may happen also if new coronavirus cases emerge as has been the case in some Asian countries.

“Our bias is the recovery looks less V- or U-shaped but more W-shaped, with

4. “L”

When growth plunges and does not recover for some time.

For this to occur, the global coronavirus tally needs to continue rising, forcing protracted lockdowns.

That scenario looks unlikely, given Wuhan, the Chinese city where the virus emerged, has ended lockdowns after just over two months.

But L-shaped outcomes may be a risk for those emerging markets less able to engage big stimulus and often rely on commodity exports.

5. SWOOSH

“Neither L nor U nor V, will do. Instead, we look for a tick mark-style profile,” Berenberg economist Florian Hense said.

That implies a sharp downturn, then gradual recovery as lockdowns are eased more gently than they were imposed.

AXA Investment Managers group chief economist Gilles Moec pictures a “swoosh” shape akin to the Nike sports brand logo. “With consumer spending possibly impaired by a higher propensity to save and serious potential curbs on investment, we think the likeliest scenario is for the world economy’s rebound post lockdown to be quite soft,” Moec said.