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The Covid aftershocks will upend the global power structure for years to come

We’re only just beginning to understand the vast political ramifications of the coronavirus, both here and around the world, writes Colin James.

What comes after Covid-19? Not business as usual. The global virus is a disjunctive shock and such a shock sets up a chain reaction that changes the order of things.

That there is a viral pandemic is not a surprise. Sars in 2003, Mers in 2012 and Ebola in 2014-15 telegraphed warnings. It was Covid-19’s timing, origin, nature and spread that could not be known, not that something like it was likely.

Expect more viral pandemics. Also, possibly worse, an antibiotic-resistant bacterial pandemic looms. The thinning of ecosystems may be a factor. The globalisation of people through migration and tourism helps the spread.

Covid-19’s immediate damage is to human lives: illness and death. Anaesthetising the economy to save lives does collateral damage to the livelihoods of those who live though the crisis and survive. Some firms will not survive it.

But will the lockdown be just four weeks? Or six, eight or more? Or one or two repeats if the virus regains virility after visiting Africa or the Middle East? And how long or how often can the economy be anaesthetised before causing serious hardship to everyday mums, dads and kids?

The front page of the Wall Street Journal, October 10, 2008

Even when the national economy is free to get back in business, there will be reverberations because foreign economies on which we depend for supplies and export earnings, not least in education, are being damaged.

And that pandemic-triggered global economic shock might be compounded by a convulsion in the international finance system. The most recent disjunctive shock came out of that system when, in 2007-08, opaque collateralised debt obligations unravelled and banks, insurance companies and ‘investors’ became bankrupt or corporate welfare beneficiaries.

Did we go back to business as usual after that shock? No. Ultra-low or negative interest rates, lavish money printing by central banks have palliated economies, not fully cured them.

Stagnant wages and inequalities of distribution of corporate welfare have brought about populist regimes in the United States and United Kingdom and fuelled populist and extremist parties across wealthy democracies (except ours, so far).

Have we learnt from the 2007-08 debacle? Not about risky lending, it seems. Since 2008 global debt – personal, government and corporate – has gone on climbing to an all-time high of more than 320% of global GDP in late 2019, from around 180% in 2006. According to the OECD, non-financial corporate bond debt was $US13.5 trillion in late 2019, double the 2009 level in real terms. In 2019 51% of new investment-grade bond lending to corporates was rated BBB, the lowest investment rating, and 25% of all bond lending to corporates was non-investment-grade – “junk”.

Economists say debt is OK if backed by assets. But highly leveraged loans may turn out not to be backed by assets if Covid-19 lockdowns push the tide out too far. Can governments and central banks sustain another prolonged massive rescue in the vein of the GFC?

Finance minister Grant Robertson makes an exit at the conclusion of a Covid-19 financial response package announcement (Photo by Hagen Hopkins/Getty Images)

New Zealand starts this process in a good position. Grant Robertson could more than double net government debt to 40%-50% of GDP and still not be near the debt levels many rich-economy governments start from. But, over time, pumping up government debt weighs on already highly indebted households and firms. So does unemployment, which could top 10% as a result of this crisis.

From high government debt and unemployment levels in 1990-92, we got back down to a comfort zone by the mid-2000s. That gave us fiscal leeway to respond to the severely costly Canterbury earthquakes.

But in the 1990s and 2000s global trade and tourism were expanding, China was on the rise and measured, mainstream parties ran rich-country governments. Since 2016 Donald Trump has set out to pull apart that rules-based international trading order. And there is Boris Johnson’s little England project.

There are more risks to weigh, including governments’ likely nationalistic reaction to Covid-19’s disruption of complex international supply chains and exports. The golden age of hyperglobalisation is over.

International business as usual was already looking less ‘usual’ in 2019. The pandemic’s impact and aftermath will compound that shift. More risks: another pandemic in five years or so – and water shortages with famines (India? China?), climate events and heightened potential for conflict as a result. Plus, possibly, digital disasters.

Such events will be local. But they will also be global, bringing home the profound Covid-19 message: that global interdependency is not dead.

Even Trump’s transactional United States and Xi Jinping’s mercantilist China need international interaction for their citizens’ material prosperity. Travel might not recover to 2019 levels but it is not likely to die, however much Covid-19 is wrecking tourism and airlines right now.

Don’t expect global solutions and institutions to command action on future pandemics, as a former Swedish prime minister, Carl Bildt, urged last week. Nation-states are not ready yet to hand over sovereignty.

But there is scope for ‘coalitions of the willing’ such as groups of nations committed to pro-climate-action tariff adjustments – and to zero tariffs for virus-fighting equipment and medicine – in which our Trade and Economic deputy secretary Vangelis Vitalis has been a prime mover.

Such coalitions provide a glimmer of opportunity to begin genuinely building a positive global framework. That will, however, be within a readjustment of the global balance.

China’s rigid autocracy stifled talk of an epidemic and arguably turned the epidemic into pandemic. But former United States assistant secretary of state for Asia Kurt Campbell points to Chinese internal lockdowns, followed by material assistance to Italy and other nations to fight Covid-19, as potentially giving Xi an edge to claim leadership in changing global systems and governance to China’s advantage.

Xi wants to restore the China which thought itself the centre of the world – at the very time that Trump’s self-absorption and tantrums have been undermining the United States’ 75-year claim to be global leader (as it was in the fight against Ebola).

And this challenge comes when the economic order and orthodoxies established under that United States leadership are increasingly debated and questioned – even in such decidedly capitalist publications as the Economist and the Financial Times. Last week, writing in the FT, Klaus Schwab, head of the market-liberal World Economic Forum, condemned companies which focused tightly on shareholder returns instead of wider ‘stakeholder’ benefits.

There is no new orthodoxy sitting on a United States shelf as Milton Friedman’s was when the Bretton Woods monetary system collapsed in the early 1970s. But Xi would claim there is one on his shelf. That doesn’t mean China’s distorted capitalism is the next orthodoxy. But it does underline that the 500-year ascendancy, then dominance, of ‘western’ thinking, from humanism to neoliberalism, is under challenge.

The coronavirus disjunctive shock will kick along this refashioning of global activity, leadership and thinking. It will pose huge questions and opportunities for New Zealand. When Jacinda Ardern’s government and officials get through the mind-bendingly difficult immediate challenge, they will find those huge questions on their plates.

It will not be business as usual.




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