HOW CORONA VIRUS COULD BE RESHAPING GLOBAL AND LOCAL ECONOMIES
The going global of the coronavirus is pushing the world and local economies into a free-fall that is forcing countries to re-think neo-liberal economics.
The pandemic is not only placing an enormous stress on globalization as critical supply-chains break down and countries hoard critical medical supplies but it is also exposing European Union’s pretensions about acting as a cohesive political and economic bloc. For decades, individual firms’ relentless efforts to eliminate redundancy generated unprecedented wealth for a few individuals.
The downside, that was hidden from view until now, to these efforts has been that they also reduced the amount of unused resources—what economists refer to as “slack”—in the global economy as a whole.
The downside, that was hidden from view until now, to these efforts has been that they also reduced the amount of unused resources -what economists refer to as “slack” -in the global economy as a whole.
Until now, firms viewed slack as a measure of idle, or even squandered, productive capacity. But what the coronavirus pandemic is revealing is that too little slack makes the entire system brittle in times of crisis
as it eliminates fail-safes. To be sure, global firms had a foretaste of today’s unfolding scenario in 2011,
when tsunami waves damaged the Japanese nuclear plant of Fukushima, the second worst accident in the history of nuclear power generation. The accident forced Apple customers to wait more than six
weeks to get the iPad 2s they had ordered. Although the Fukushima accident was not comparable to the corona virus shock, it was more than enough to have a major impact on the Apple supply chain. This is because the battery of the iPad includes a resin called Polyvinylidence Fluoride (PVDF), and 70 per cent of the PVDF market is controlled by the Kureha Corporation in Iwaki, Japan, which is 37 miles south of Fukushima Daiichi. After the accident, all Kureha’s customers had to rely on its competitors for a while. Evidence on the ground suggests that no lessons were learnt from the Fukushima accident once production at the Kureha’s factories went back to normal.
Now, the Coronavirus has impacted not only a more crucial hub, the Hubei region and the whole of China, where more than 20 per cent of global trade manufacturing originates, but it has also hit other hubs in South Korea, Japan, Taiwan and others. And although it may be too early to see how the crisis will pan out in the coming days, weeks, months… years, an outline of how the future might look like is visible, albeit, faintly.
But, the question worth asking is just how in the world did countries, especially the industrialized ones, find
themselves in this Catch-22? The answer is they lured into the trap by proponents of neo-liberal economics
– which morphed into conventional wisdom—which argued that globalization created a thriving international marketplace, allowing manufacturers to build flexible supply chains by substituting the supplier or component for another as needed.
Adam Smith’s The Wealth of Nations became the wealth of the world as businesses took advantage of globalized division of labour. Specialization produced greater efficiency, which led to accelerated growth.
But globalization also created a complex system of interdependence as companies embraced global supply chains giving rise to a tangled web of production networks that wove the world economy together.
The components of a given product could now be made in dozens of countries; this drive towards specialization sometimes made substitution difficult particularly for unusual skills or products.
And as production went global, countries became more interdependent, because no country could possibly, or so it was argued, control all the goods and components its economy needed. Thus, national economies were subsumed into a vast network of suppliers.
Thanks to the coronavirus pandemic which is now exposing the fragility of this globalized system that has also created huge numbers of people without jobs or under-employed and not earning enough to live on. The result is forcing these workers to have two or three jobs simply to stay alive.
Another truth the coronavirus crisis is revealing is that just-in-time manufacturing easily becomes too late in some key industries in many countries. Critical medical supplies, such as reagents, a key component of the test-kits that laboratories use to detect viral RNA, are either running low or are out of stock in countries
such as Italy that have been hardest hit by the pandemic.
These grave weaknesses in the until-now idealized globalization are feeding into United States President Donald Trump’s declared policy of persuading American