Trying to predict the future is so inherently human. To me, this is a sign of ingrained optimism: even when the future predicted is very gloomy, it is still a future we are talking about. Future forecasting becomes particularly challenging when we have to deal with challenges that have no or little precedent in the past (and the past is the best predictor of the future). Whereas there are some examples of future predictions that came true, on average our prediction power is very poor as Branko Milanović, one of preeminent inequality economists argues in his Global Inequality.
Surely the coronavirus pandemic is not the first large-scale health emergency that befell humanity. From the Black Death that struck Europe and Asia in the mid-1300s killing one third of Europe’s population to the more recent Spanish flu pandemic in 1918-1920 that killed an estimated 50 million people worldwide and was the first truly global event, humanity had to deal with health emergencies and their economic and social consequences. Yet, the scale and scope of these emergencies as well as the national capacity to deal with them differed significantly in each episode. The Black Death ravaged for more than 5 years and the Spanish flue for about two. It took 200 years for Europe’s population to recover to its previous level after the Black Death, and some regions (such as Florence) only recovered by the 19th century. The post-Spanish flu recovery in Europe and the US was much faster even against the backdrop of World War One. As a research paper by the Federal Reserve Bank of St. Louis argues, “most of the evidence indicates that the economic effects of the 1918 influenza pandemic were short-term” followed by a V-shaped rebound. The capacity of healthcare systems, levels of hygiene and the ability to mobilize resources to contain the epidemic were also incomparable. There was no healthcare system to speak of in medieval Europe. Neither the cause nor the transmission patterns of the epidemic were understood, and the popular cures included rubbing onions, herbs or a chopped up snake (if available) on the boils or cutting up a pigeon and rubbing it over an infected body. Arsenic, mercury or even ten-year-old treacle were also highly recommended. The period of the Spanish flu saw a modern hospital system with a capacity significantly strengthened by the war-time resource mobilization, use of masks, social distancing arrangements and other devices that are still very much in use.
So, the previous experience can shed little light on the present situation, even ignoring for the moment the single big unknown—the duration of the COVID-19 epidemic. But this of course cannot stop the attempts to adumbrate the post-COVID world based on the new knowledge we believe we have and hence a better predictive ability. Unsurprisingly, most predictions focus on the economic impact of the pandemic and long-term consequences it may have on consumption and inequality. According to ILO estimates, we could lose between 5 million and 25 million jobs and see losses in labour income in the range of USD 860 billion to USD 3,4 trillion.
However, many look beyond the doom and gloom of the economic decline, trying to understand what exactly it may mean and whether the current crises may open some new opportunities. Authors as different as Marianna Mazzucato, Joseph Stiglitz, Paul Collier, Branko Milanović and many others (including the author of this article) are trying to crack this nut.
Will COVID-19 bring us a new brave world? Will the pandemic forever transform how we live, as the recent opening piece in FT argues? Whereas the previous pandemics may be a poor predictor of what is ahead, none of them was followed by any revolutionary social developments. But they did accelerate processes that had been underway at the time. The Black Death in particular made labor supply in the cities and countryside relatively scarce, increased mobility of serfs and contributed to the fall of feudalism in Europe. But this development was not caused by the Black Death and was part of a long-term historic process of dismantling the feudal order that took another 250 years or so to completion.
Hence, it could be worth it to consider the current key trends and the possible impact of COVID-19 on them.
Globalization is certainly one of the key features, which has taken the biggest dip with the closure of national borders and restrictions on the movement of labor and to some extent goods (but not capital). This effect is likely to be temporary, and a return to normal is expected once the restriction measures are lifted. Globalization has been an established trend with its own mechanisms, temporarily put on hold but remaining intact. These mechanisms include a system of international division of labor, global value chains and supply chains, modern transport and communication, global financial system and information flows. The vested interests in continued functioning of these global systems are just too big. The dizzying rates of capitalization of the biggest US companies (such as Apple, for example, which is worth $483.15 billion) are mainly a result of the fact that their products are mainly produced overseas, and only a small percentage of profit is given to overseas workers. Ending globalization is simply not an option for the big business, which will lose its super profits.
Of course, anti-globalization sentiments have strengthened in the past few years. The Brexit and global tariff wars (most importantly between the US and China) have slowed down the progress of globalization. But predictions that globalization would collapse under a wave of economic nationalism have proven no more accurate than proclamations of a flat world that dominated the global business discourse a decade ago. If this “containment” trend continues, it will be because of the prevailing policies, not because of COVID-19.
Inequality is another issue that has been hotly debated in the past decade. Wars, revolutions and indeed pandemics are known as levelers of inequality as convincingly argued by Thomas Piketty in Capital in the 21st Century.
Globally, as Branko Milanović posits, global inequality may decline: “If the economic decline is the severest, as it appears now, in the United States and Europe, the gap between large Asian countries and the rich world would be reduced.” Furthermore, a slower growth in the West may attract additional inflow of capitals to the developing world, accelerating investments for development. The current trend of capital flight (around USD 90 billion have already left emerging economies, according to the IMF) may reverse as excess capital in the developed world is looking for profitable investment.
What will happen depends on how much developing economies will be affected by COVID-19. However, so far COVID-19 impact in developing countries has been limited, both in terms of health losses and economic losses due to containment measures, such as lockdowns. With 70-80% of their economies operating in the informal sector and relying on informal supply chains and customer contacts, developing economies are proving to be resilient. Low dependence on international economy (with a few exceptions for resource-rich countries), such as commodity prices or supply chains and structural unsophistication of their economies, make them less exposed to the COVID-19 shock. Research shows that many developing countries experienced a lighter shock and recovered faster after the 2007-8 global financial crisis. FDI in Uganda contracted by 25% in 2008 but reached 120% of the pre-crisis level just six months later. If things remain this way and the epidemic passes in another three months or so, developing countries have a good chance to rebound quickly and even accelerate their development. A faster growth in the developing countries implies more people lifted out of poverty and moving to the global lower middle-income status.
Internal inequality is a more nuanced story. Of course, COVID-19 exposes multiple inequalities of which we have known for years but have grown used to them. The media and academic research are full of examples how COVID-19 impacts disproportionately women, people with disabilities, the poor, informal sector enterprises, etc. The longer-term impact of СOVID-19 in developed economies taking a much deeper hit of COVID-19 may lead to an economic recession. This will compound the current economic difficulties the developed world has been experiencing since the financial crisis. Unemployment, low disposable incomes, and suppressed demand may further the existing inequalities and stagnation of middle-class incomes. The impact on developing countries is likely to be less tangible or even negligible. Reliance of informal economies and the government sector as a major formal employer implies a quicker recovery with fewer jobs lost. In three East African countries (Uganda, Kenya and Tanzania) the inequality measured by the Gini coefficient has reduced since the pre-financial crisis levels, in the case of Kenya by 5 percentage points). It is not clear if there is any correlation with the global financial crisis (the more so that its impact was muted in those countries) but this trend is worth pondering on.
Most governments are taking measures to reduce the negative economic impact, particularly on the most vulnerable populations through social safety networks including direct cash transfers and food distribution. Some developing countries are expanding their rather rudimentary social security mechanisms to involve other groups. If these expanded mechanisms stick and the new redistributive policies continue, COVID-19 may become a catalyzer for reducing inequalities in the developing world. The big assumption here is “if”—it is not obvious whether there is enough political will to retain some policies after the epidemic is over.
COVID-19has highlighted the indispensable role of the government. These days the scariest phrase is no longer “I’m from the government and I’m here to help” as Ronald Reagan famously said but “Sorry, there is no government to help you”. Sharp crises like this one tend to encourage a more substantive role of government because this is often the only way that societies can survive. This comes in the wake of hot debates over the past two decades at least about the role of government in general, which is steering away from unconditional support to self-regulating markets and towards a pro-active engagement of the government to promote equitable economic development and social justice. This is the theme of a few recent high-profile books, from The Value of Everything by Marianna Mazzucato to Capitalism: The Future of an Illusion by Fred Block and People, Power and Profits by Joseph Stiglitz. The current crisis highlights the ambivalent and unsustainable position of the proponents of free markets who support government intervention as long as it favors the business (through all kind of relief packages, tariff barriers, etc.) and object to it when it regulates the business.
However, there are at least three areas in which the government is strengthening and expanding its role. Whereas it is inevitable in the short-term, the continued engagement of the government in some of those areas may not be so desirable. The five areas include:
- “Nationalization” of the healthcare sector, which involves government-driven and government-funded mobilization of resources for the epidemic response and strengthening of the national health system’s capacity.
- Financial sector regulation including measures of financial repression, such as caps on interest rates as well as a moratorium on credit defaults through loan restructuring.
- Expanded social safety networks and support to vulnerable populations (already mentioned above) including direct cash transfers to compensate for the lost income, food distribution, provision of shelter for the homeless and vulnerable people, bans on evictions and disconnections from public utilities. Since the outbreak of COVID-19, India has transferred $3.7 billion to 320 million poor people including women, farmers, senior citizens, and disabled people.
- Support to small and medium enterprises (which make the backbone of any economy) through relief measures such as deferment of various payments and taxes, free use of relevant public facilities, etc.
- Enforcement of restrictive measures involving limitations on citizens’ right (e.g., to public gathering and freedom of movement), patrolling by security forces, and electronic tracking and monitoring of individual movements.
Greater focus on, and continued strengthening of national health systems would be very beneficial, particularly for developing countries where the health sector is often woefully underfunded. Effective financial sector regulation to minimize its rent extraction and maximize its contribution to the real economy is also a worthy initiative. Expanded social safety network, as already discussed, would be a great contribution to reducing inequalities in both developed and developing countries. Pro-active support to SMEs to help them overcome temporary difficulties is something many economists have been advocating for years (e.g., Marianna Mazzucato in Entrepreneurial State). Again, whether there will be enough political will to continue such policies is a big question. But the crisis provides a convincing rationale beyond theoretical discussions and empirical evidence why a more substantive role of the government in these areas is highly desirable.
Government’s intrusion into private lives and individual rights is a different matter. We have already seen a spike in police brutality (including fatalities) as some African countries (Uganda, Kenya, South Africa, Nigeria) started enforcing COVID-19 containment measures. Normalization of police violence justified on the account of emergency will create a dangerous precedent. Intrusive tracking of individual movements greatly facilitated by modern digital technologies is another concern. Will the tracking systems launched in many countries as different as Russia and the US be rolled back as the epidemic is over or will it mark a new page of the Big Brother’s societal control? Where can it take us? Whereas the government claim that the use of big data is properly appropriate when properly anonymized and aggregated, experts report that the original data is pseudonymized and it is quite easy to reidentify someone. Some governments are already notoriously advanced in their grip over civic freedoms. There is likely to be reluctance to divest the additional power accumulated over the crisis, the more so that those who have accumulated it can credibly claim that such powers serve the best interests of society.
Digital economy appears the single big winner of the COVID-19 crisis. Of course, the digitization trend has been there for over a decade. But the requirements physical distancing and non-availability of transactions based on direct physical contact has accelerated the uptake of digital solutions, tools, and services, speeding up the global transition towards a digital economy. Government and the private sector all over the world are now conferencing on Zoom whose daily active users ballooned from 10 million to over 200 million in 3 months of 2020. Telecommuting has become a new normal for office workers although the plight of those whose work cannot be done remotely (such as street hawkers, small vendors, waste pickers, daily laborers and many other poor and vulnerable people) should not be ignored.
Coronavirus has given people a new incentive to go digital while operators have also lowered barriers by making it cheaper and in some places easier to sign up to mobile money services. Mobile money providers across Africa have reduced or waived transaction fees and governments are encouraging digital payments to reduce person-to-person contact and potentially slow the spread of the virus. Developed countries are also witnessing a growing number of e-payments.
Teleteaching, telecounselling, telemedicine and a variety of other “tele” services has become much more common. Businesses have increased the use of digital platforms to conduct their business and eliminate physical contacts where possible. What was considered exotic yesterday has become normal today. Again, these services are reserved to those with relevant equipment and expertise (and capacity to pay). People at the bottom of the income ladder can only dream about such services.
Curiously, one much spoken of area that has not received any uptick is digital currencies. Some have prophesied the likes of Bitcoin to replace all existing currency tomorrow (or the day after, the latest). This is not happening; in fact, the Bitcoin price has crashed. But overall, we can expect the post-COVID-19 world to be more digital. Once the advantages of new digital solutions are experienced first-hand and users become more comfortable with them, we can expect further uptake. Of course, there will be some recoil as things come to normal: schools and universities will resume, in-person office meetings and negotiations will restart, small retailers and restaurants will reopen. It is likely however that some digital-based solution will be added as another line of business and the gains in e-payments will persist.
There are natural limits to digitization as not everything may be digitized. main policy takeaway from the analysis is that much more attention should be given to bridging existing and emerging digital divides to allow more countries to take advantage of digitalization.
A bright new world after COVID? Probably, not so bright and likely not so new. It takes more than a pandemic to change the world. But the longer this crisis lasts and the greater the losses, the more the popular demand for substantive changes in how modern hypercapitaism operates to address its most glaring deficiencies and injustices.