GLOBALISATION CRACKS REVEALED

Interconnectedness of world economy is becoming a vector of contagion

THE coronavirus will eventually pass, but the same cannot be said for the Panglossian phenomenon known as “globalisation”.

This hollow philosophy’s main claims now appear badly exposed, as the supply chains wither, and the very interconnectedness of our global economy is becoming a vector of contagion.

There were many warning signs that called into question our hitherto benign assumptions about globalisation: the Asian financial crisis of 1997-98 (during which the Asian tiger economies were decimated by unconstrained speculative capital flows), the vast swaths of the Rust Belt’s industrial heartlands created by outsourcing to China’s export juggernaut, the concomitant rise in economic inequality and decline in quality of life in industrialised societies and, of course, the 2008 global financial crisis.

Nobel laureate Joseph Stiglitz and economist Barry Eichengreen noted that globalisation was severing a working social contract between national governments and their citizens that had previously delivered rising prosperity for all.

Globalised economic activity and free trade were dominant before the onset of World War 1; in 1914, trade as a proportion of global gross domestic product stood at 14 per cent. Needless to say, two world wars and the Great Depression (which brought us the Smoot-Hawley tariffs) reversed this trend.

But while it is true that viruses do not respect national boundaries, nothing has blown apart the pretensions of this New World Order as dramatically as the coronavirus, a pandemic now assuming global import, as international supply chains are severed, and global economic activity is brought to a screeching halt.

While the coronavirus started in China, its most long-lasting impact might be in the European Union, as it has dramatically exposed the shortcomings of the latter’s institutional structures.

Take Italy. The spread of Covid19 has been particularly acute there. Being a user of the euro (as opposed to an issuer of the currency), the Italian government risks exposing itself to potential national bankruptcy (and the vicissitudes of the volatile private capital markets) if it responds with a robust fiscal response, absent the institutional support of Brussels and the European Central Bank (which is the sole issuer of the euro).

According to MarketWatch, “Italy needs a €500 to €700 billion precautionary bailout package to help reassure financial markets that the government and banks can meet their debt payment obligations as (the) country’s economic and financial crisis becomes more fearsome”.

Here is a perfect example of where European Central Bank support would go a long way toward mitigating any financial contagion. But so far, the ECB remains in “monitoring” mode.

Italy remains particularly vulnerable as it has an ageing population. If coronavirus runs rampant through the country, it could potentially crash the nation’s entire hospital system. EU solidarity, showing cracks on issues ranging from finance to immigration, increasingly resembles every country for itself.

This might well represent the death knell for a European project based on aspirations for an “ever closer union”.

The United States at least has institutional mechanisms in place via the Centers for Disease Control (CDC) and the Federal Emergency Management Agency (Fema) to provide Americans with clear, credible instructions devoid of political spin.

Most Western economies, having largely succumbed to the logic of globalisation, are vulnerable as supply chains wither. Worse, there appears to be a singular lack of understanding on the part of multinational companies as to how far these supply chains go.

When goods are widely dispersed geographically (instead of centred in a localised industrial ecosystem), it is harder for executives to have full knowledge of all of the items in their respective companies’ supply chains, so the deficiencies of the model only become apparent by the time it is too late to rectify.

In the US, specifically, it has evolved from being a nation of industrialists to a nation of financial rentiers. And now the model has exposed the US to significant risk during a time of national crisis, as the coronavirus potentially represents.

The most problematic consequences now evident in the pharmaceutical markets. China or India are beginning to restrict core components of important generic drugs to deal with their own domestic health crisis.

This has the potential to create a major crisis, given that the US “depend(s) on China for 80 per cent of the core components to make our generic medicines”, writes Rosemary Gibson in the

American Conservative.

Constraints on production, therefore, intensify as more and more of the manufacturing process pertaining to the drugs themselves is geographically globalised.

We should start by reducing our supply chain vulnerabilities by building into our systems more of what engineers call redundancy — different ways of doing the same things — so as to mitigate undue reliance on foreign suppliers for strategically important industries.

We need comprehensive government-led actions. In other words, the revival of a coherent national industrial policy. Otherwise, the coronavirus will simply represent yet another in a chain of catastrophes for global capitalism, rather than an opportunity to rethink our entire model of economic development.