We are happy to announce that a new article by prof. Maciej Walkowski has been published in the “Życie Uniwersyteckie”, a journal published by the Adam Mickiewicz University, Poznań, Poland.
UNCERTAIN FUTURE – THE PROSPECTS AND ECONOMIC CONDITION
OF THE WORLD IN THE [POST]PANDEMIC PERIOD
The SARS- CoV- 2 pandemic and its subsequent respiratory disorders not only produced a serious health and humanitarian crisis, but also, particularly in the long term, an economic and financial crisis with the threat of a long-term recession. Due to progressing globalization, the contemporary global economy has become a structure comprising interdependent national economies. It is also influenced by regional integration organizations, large global corporations (MNEs) and regulatory and coordination institutions, such as the WTO, IMF, OECD and the World Bank, in addition to national economic policies. The pandemic has unexpectedly hit all global economy actors, chiefly national economies and transnational corporations. It is often compared to the Black Swan, a phenomenon that is de facto unpredictable. The emergence of an epidemic in China, which, as a result of globalization, has spread rapidly across all continents, can be an example of the Black Swan. For this reason alone, from the current perspective, it is so difficult to prove with full confidence and certainly what will happen to the world in social, economic and financial terms in the coming years. Allow me to provide a certain diagnosis that offers a scenario for the future.
Firstly, much will depend on how the largest national economies, which have a major impact on international economic relations and, at the same time, severely affected by the pandemic, will cope with the crisis. I mean, of course, the United States, People’s Republic of China, European Union headed by Germany and France, United Kingdom, and emerging markets, such as Brazil, India, Mexico, Turkey and Indonesia. With Japan and South Korea, over 60% of world production and services (GDP according to PPP) and over 70% of the nominal GDP concentrate in these countries. As we know, the situation is particularly worrying in the United States, which, given the importance of the US economy in terms of global trade and investment, is not very optimistic. More than 20 million unemployed, another dozen million people who are among the so-called “working poor”, a systemic health crisis, massive bankruptcies and the threat of deflation are only some of the symptoms of the current crisis in the epicenter of the world economy. From a political point of view, on the one hand, the governance of the state in such sensitive circumstances does not, of course, make the resolution of the deep racial conflict easier. On the other hand, it is worth remembering that Americans are people with the cult of hard work, entrepreneurial, dexterous and innovative, with almost innate rules of free market. So far, the American society has successfully emerged from every crisis, including that of 2008. They can be helped to address current economic problems by an unprecedented recovery package of billions of US dollars. The problem is, however, that SARS -CoV-2 is incomparable with SARS, MERS and Ebola epidemics regarding its scale, and so the current crisis should not be compared with the global financial crisis of 2008 or the great depression in 1929-1933. It does not make much sense to look for similarities to the pandemic of the Spanish Flue, the most dangerous influenza strain to date, which caused deaths of several hundred thousand people in the United States alone. Although the Spanish Flu virus, like SARS-CoV-2, spread very easily and quickly, it caused incomparably greater mortality than the present virus, attacked other age groups, and caused death much faster. The Spanish Flu appeared more than a hundred years ago in quite different times in terms of medical knowledge, the development of vaccination and drugs, as well as the implementation of preventive measures and communication. One hundred years ago, the level of development interdependence of the world was also incomparable with all its positive and negative consequences.
For the first time in history, the pandemic hit the world economy twofold. Firstly, by a negative supply chain shock caused by a temporary interruption of the global supply chain. It resulted in limited production, redundancies or the so-called labor downtime. Secondly, we witnessed a dramatic fall in consumer spending, which has affected many industries, especially transport, tourism, catering, accommodation and events (HoReCa – Hotel, Restaurant, Catering/Cafe). The crisis affected the above industries first. It is also very likely that they will come out of the crisis as the last, if at all, (first in-last out). The second element of the almost total lockdown in spring this year had the strongest impact of the Mediterranean economies in Europe, such as Spain, Greece, Italy and Portugal, Croatia and non-EU countries: Turkey, Egypt and Indonesia. These are the economies with the highest share of the HoReCa sector in GDP and jobs. Croatia has been the European leader, which outperforms Spain, for many years. A dramatic demand-side shock is a particular problem in the current situation in the world. We should remember that changes in behavior account for more than 50% of the pandemic cost. This is due not only to the need for social distance and restrictions to the movement of people, but also to the natural fears preventing non-rudimentary spending in the time of uncertain future. For certain, basic needs do not include going for holidays or eating out in good restaurants. Although understandable, the fear is amplified by the infodemic, of the flooding of often false information that accompanies the pandemic. This often results in irrational decisions and consumer behavior. The remaining costs of the pandemic include prevention and treatment and health-care organization (around 15%) and permanent or temporary production lockdowns and associated redundancies (around 30%). While several months into the coronavirus pandemic, healthcare has become more organized and more professionally prepared for potential further waves of the disease and industrial production and services are slowly recover many regions of the world (certain improvement in PMI- Purchasing Managers’ Index), in many cases, the contribution of domestic consumption to the national gross product is still far from its expected level. According to some opinions, in the current situation, any form of purchase should be supported, no matter how unjustified by actual needs. This to a large extent fits into the often criticized consumptionism. The massive return of consumers to shopping malls, with its socio-cultural drawbacks, would be a visible sign of the return to a pre-pandemic balance, a kind of “global economic recovery“, not to mention the improvement of the turnover and profits for thousands of companies. But how soon will it happen? In my opinion, for many reasons, not very fast. This should be considered in the medium term, which means that we will wait at least a few years to return to a pre-pandemic normality. However, we will encounter various consequences of the current crisis much longer. According to various analyzes, the global economy will shrink by at least USD 10 trillion in 2020, which means a global recession around 5% of aggregated GDP. A deep crisis, marked by rising unemployment (in some cases up to a dozen or so percent), an increase in irregular forms of employment (civil law contracts instead of permanent employment contracts), and a general decline in income and quality of life will affect citizens of all countries of the world, primarily “development countries” but also many less developed ones. It will also considerably deepen existing problems on the labor market in the European Union, which I examined in 2016 – 2019 as the manager of Jean Monnet Chair (JM Chair: The European Union – Economic Development, Young Europeans and innovations in crisis override and Union’s sustainability), together with a group of experienced researchers from my home department. The long-term effects of the current crisis may be experienced by economies which had a very high level of public debt in relation to GDP (close to or above 100% of their GDP) before the pandemic, GDP) and/or highly dependent on the status of the HoReCa service sector. Unfortunately, these include many European countries. At the beginning of 2020, the global debt exceeded 320 percent of the global GDP, whereas the net debt of 900 largest corporations, especially American and German ones, increased by USD 1 trillion! According to calculations by the Economist, the 2020 budget deficit of developed economies will be 11% on average, and their public debt 122% of their GDP (USD 66 trillion). According to the Eurostat simulation presented not so long ago by the European Commission, the EU-27 recession will reach the level of 7.5% of GDP (7.75% in the euro zone) in 2020. The smallest decline is going to be recorded by Poland and the largest by Greece, Italy, France and Spain. The situation in Germany, the largest European economy, is not much better, since they are going to encounter the deepest recession since the end of World War II. The UK economy will also be in the worst position in the past decades. According to the optimistic forecast of the European Commission, the delicate economic recovery in the EU can be expected next year. Of course, the Commission assumes that national recovery packages are effective, and possibilities offered by the next EU multiannual financial framework are utilized together with the comprehensive recovery package. Leaders of the 27 Member States approved the multi-annual budget for 2021-2027 and the Recovery Fund (non-returnable grants and low-cost loans), which is expected to total an impressive EUR 1.824 trillion. The combination of these, if coupled with a high level of responsibility and social discipline, which minimizes the risk of illness (which is the most difficult at the moment), will produce the first signs of economic recovery in the European Union in 2021. In 2022, the European economy is expected to grow by 6.25%, at least “on paper”, to compensate for the loss. There is no doubt that due to trade creation and diversion effects, around 75% of EU trade takes place on the single market (intra-EC trade). This makes it integrated Europe highly independent from the situation in other markets, in particular the US market. However, this problem will particularly affect the UK since it has left the single market. The EC forecasts are still rather optimistic, which does not mean that all scientists and analysts subscribe to this “moderate enthusiasm”. In an optimistic scenario, the rapid return of the world economy to its macroeconomic equilibrium and economic growth, after an equally rapid decline, is symbolized by the letter “V”. It is a possible, however unlikely, option, as well as the “I” scenario which means a long-term recession with the risk of deflation. The scenario of gradual recovery appears to be much more likely, as illustrated by the letter “U” (possibly its development in the form of a popular logo of a renowned global corporation, owned by Philip Knight). The first scenario, marked ‘V’, is very unlikely. At the moment, we do not see all the social economic and financial consequences of the crisis, which are still being mitigated by anti-crisis packages-shields. However, aid schemes of this type are not and cannot be maintained all the time. The “landscape after battle” with coronavirus and its socio-economic consequences is far from being optimistic. Recovery packages only postponed negative effects of the pandemic. In order to ensure decent living and working conditions for billions of people around the world, the whole decade 2020-2030 will be one of the most difficult since the end of World War II. A significant increase in unemployment and decrease in income appear unavoidable and money cannot be printed endlessly. In the coming years, societies will have to pay for the dramatic increase in public debt. This will be done by freezing or cutting down various public spending, lifting of tax allowanced and increase of taxation. In many countries, the state of public finance will not be sustainable during post-pandemic years, and this will translate into restricted aspirations and opportunities for future generations. However, the uncertain future may require additional funding to take care of growing alcohol addiction or depression epidemic, a phenomenon which has been widely observed, for instance, in the UK. It is hardly possible that the mental health of billions of people in the world, some much weakened by fear of the virus and its aftermath, improves quickly and without cost. Furthermore, we do not know what the autumn wave of flu envisaged by epidemiologists will bring and what government restrictions will follow. We also do not know how citizens react to their deteriorating financial status. Germans, Brits, Spaniards, Americans, Brazilians and Serbs have already oozed their frustration through massive street protests. One thing, however, is certain, no one can imagine a full economic lockdown or freeze. The lockdown already had a dramatic impact on the economy with 97 percent drop in the number of passengers at the London Heathrow Airport in April compared to the corresponding month a year ago, a 46 percent decrease in the South Korea export, the Mexican economy shrunk by 90 percent, as well as more than 20 percent drop in the transpacific container labeling and more than 50 percent decline in orders for cars. The list of examples is by no means exhausted. Therefore, we must learn to live with the virus and… wait for an effective and safe vaccine. Undoubtedly, at least from a psychological point of view, the mere information about the invention of the vaccine would be a very positive and much awaited impulse for development. It would result in a record high increase in key stock indices. It would provide billions of people with a shot of optimism and prospects of greater certainty for the future, which are so desperately needed.
At the moment, more than one hundred renowned pharmaceutical and biotech research teams have been working on SARS-CoV-2 vaccines worldwide. In order to exchange knowledge and experience, some of them established research and development cooperation within the CEPI (Coalition for Epidemic Preparedness Innovations) and announced the implementation of non-profit solutions. This cooperation does not exclude the race for prestige, in particular the government of the People’s Republic of China for well-known reasons. Currently, the US leading companies are Moderna Inc., Novovax Inc., Pfizer Inc. and UK-Swedish AstraZeneca Plc which are at the third stage of their clinical research and German Turkish Vac Inc. Although not always so significant or certain, Russian and Chinese corporations also contribute to the research. It is worth noting that the European Union not only financially supports research on the COVID -19 vaccine, but it also joined the global vaccine access program (COVAX), which promotes a free vaccination program for the most sensitive professional and social groups. If the most optimistic scenario materializes, which assumes that the SARS-CoV-2 vaccine is going to be safe and available in the next few months (five or six as often predicted), massive vaccination may take at least twice as much time (if not longer). It is also unclear how much time will be needed to achieve the level of sustainable herd immunity. This factor supports the assumption that the return to the normal status before the pandemic, also known as the “new normality”, will start not earlier than in 1.5 years, or 2 years according to the WHO.
Secondly, especially in the long term, the shape of globalization will have a greater impact on the level of global economic growth than ad hoc anti-crisis measures. Although, according to some opinions, the world will quickly return to “business as usual” (with some corrections, such as the increase in the importance of e-commerce and home-working), it is believed that it is necessary to “rethink globalization” or even try to deglobalize. The dispute over the main paradigm of the development of the world has already been in progress for many years, at least since the 2008 crisis. The pandemic only strengthened it. In its economic dimension, globalization means a coordinated effort to eliminate barriers and obstacles that may distort direction, nature and structure of the world trade. This process involves a very strong interdependence and the implementation of free market principles to ensure the free movement of goods, services, capital, technology, money and people (labor). Globalization means the openness to competition and multifaceted international cooperation. Over the past few decades, this process has contributed to an unprecedented increase in specialization and production efficiency and to an overall welfare improvement. Hundreds of millions moved out of extreme poverty on all continents. At the same time, it has also contributed to unprecedented disparities of income and wealth at national, continental and global levels, and to a massive fraud (e.g. tax optimization through offshore financial service centers, commonly referred to as tax havens). The exploitation development model has resulted in a dramatic deterioration of ecosystems, with global warming and its catastrophic consequences. The SARS- CoV-2 pandemic highlighted many weaknesses of globalization, which were already evident before the pandemic. Additionally, it disrupted supply chains, in particular in the pharmaceutical, chemical, automotive, electronics and clothing industries. The “Triad” countries (US, EU and Japan) have lost billions of dollars, and the disruption of supply from China – the “largest factory in the world” – has boosted the discussion on the need to return to reshoring and nearshoring. According to this assumption, part of the capital is expected to return to the country of its origin to create jobs and generate income, and foreign direct investment (FDI) goes to regions with higher production cost than China but which are more predictable and geographically closer. A production system based on “just in time” supply from Chinese factories, with small or zero own stocks, will become obsolete. Economies from the Western Balkans and Central and Eastern Europe, including Poland, can benefit from the de-sinicization. Stability and resilience of the national economy will become more important than rapid productivity and profit growth. In this context, we can expect an increase in supervisory and control of the state, which is going to stimulate interventionism and protectionism. This has already been reinforced by calls for consumer ethnocentrism. As demonstrated by various sociological research, such policy meets social expectations. However, while the expansion of regulatory functions of the state, as well as planned, temporary and selective protectionism, can have a profound socio-economic sense, the extending of this status indefinitely and retorsion which follows can cause more damage than good. As a result, “the medicine will be worse than the disease”. Of course, social, economic and financial shocks we are currently experiencing should be an incentive to redefine globalization processes. However, moving away from the neoliberal development paradigm does not necessarily mean the end of globalization. It should become more transparent, fair and honest, as well as based on solidarity, efficient global governance, intensive multi-level cooperation and, last but not least, an economic value. This does not necessarily mean the negation of market rules, and the rejection of the “win-win” paradigm and benefits of international trade as such. Failure to implement specific measures will result in growing isolationism and multilateralism, and harmful quasi-autarky trends and trade wars devastating to everyone involved. As a result, the problem of hunger, poverty and exclusion will increase over the next decades, and the same applies to migration pressures (e.g. “boat people” from Middle East and North Africa/ MENA region to EU), including climate migration. We should bear in mind that the temporary freezing of the world economy has reduced global CO2 emissions by only 17%, mainly due to the reduction of road transport (data from “Nature Climate Change”). Natural disasters, such as drought, fires, floods, typhoons and cyclones affected more than a hundred countries and half of the world’s population in 2019 alone. The lockdown, instigated for several weeks this spring, has changed little and the problem remains. Social media posts, such as “who cares toady about Greta Thunberg calls, as consecutive coffins with bodies leave hospitals in Bergamo”, apart from their dubious polemic value, bring nothing into the discussion about the future of the world. I should reiterate: the pandemic can act as a catalyst for necessary changes in the world, but the focus on returning to the rapid economic growth will not make the world better and more equitable. Large inequalities will increase and the access to good quality and common healthcare will become hindered, whereas many environmental problems will become less urgent. The number of frustrated and desperate unemployed people will increase, and the same applies to those that lack the access to good education and modern medicine advancements. Economic and climate migration will increase.
The pessimistic viewpoints of this type should be countered more effectively than before by the coalition of highly developed, free-market liberal democracies headed by the United States and the European Union. However, we are now facing a weakening of the global US leadership, growing weakness of the internally incoherent European Union and the growing role and political, economic, technological and military significance of the People’s Republic of China. Therefore, in my opinion, the November presidential election in the United States will be play a fundamental role in the shaping of the new economic order in the world. The Democrats’ candidate Joe Biden has repeatedly announced the rebuilding of trust to the US leadership in the world and traditional alliances of democratic states. Apart from EU Member States, the coalition of common interests and values includes Canada, Australia, Japan and South Korea. Under certain conditions, it also includes India, although the “largest democracy in the world” has been evolving toward “soft authoritarianism”. The lack of China in this group is more than symptomatic and speaks a lot about Donald Trump’s foreign policy. Joe Biden considers fair trade and the fight against protectionist tendencies, transparency of the global financial system, including the abolition of tax havens, reduction of social inequalities, decarbonization of the economy, 4.0 innovative economy, linked to maintaining a high level of technological sovereignty, to be the priority of his presidency. At least “on paper”, most of these have been demanded by the European Commission for many years. Conclusions are obvious, the enhanced transatlantic cooperation between Europe and the United States should once again be the cornerstone of the global development in difficult and uncertain times after the pandemic. The prospective Joe Biden’s presidency does not provide a guarantee, but it is a great opportunity to reactivate this alliance. Certainly, the possible reelection of Donald Trump will not bring this vision any closer.
Thirdly, there is at least one more important element critical for the world economic order in the nearest future. It is the future US-Chinese, EU-Chinese and US-European relations in the new geostrategic context of international relations. There has been a pronounced increase in Washington-Beijing tension for at least several months. Relations between Washington and Brussels are not at their best either. The multiple questions about China’s responsibility for the pandemic, and hundreds of billions dollar claims for damages are announced by different countries in the world, chiefly from the United States and Australia. Researchers from the University of Southampton, one of the most renowned universities in the world, calculated that if the Chinese authorities had not concealed the epidemic and informed the international community about the virus in the capital of the Hubei Province, the geographical spread of the pathogen would have been significantly reduced and, under certain conditions, the number of infections would fall by up to 95%! Despite serious evidence, China does not want to take responsibility for the coronavirus and its postponed response to it. On the contrary, they try to create an image of a global leader in the fight against the pandemic, effectively taking over the financial control of the WHO. They would like to become the main proponent of globalization. The criticism of Chinese behavior is mixed with the expression of admiration for this country. However, the criticism applies not to ways but rather effects of measures taken to combat the epidemic. Additionally, at least a part of the public and political decision-makers have shown a fascination with the model of “authoritarian capitalism” and “deliberative dictatorship” exercised in China. This admiration is reinforced by reports of China’s success in managing the patriarchal society during the ‘fight against the epidemic’ through the Social Credit System and the rapid return of the economy to its rapid growth path. This is the research problem that I focused on in my last book entitled The China Strategy for Socio-Economic Growth. Implications for the European Union [UAM, Poznań 2018]. Undoubtedly, the Chinese government will make various efforts, including soft power, sharp power and smart power, to use the crisis to restore and strengthen the country’s weakened geostrategic position in the world. The best indication of these will be further incentives to participate in the geostrategic concept of Belt& Road Initiative and the promotion of the ultra-modern 5G Mobile Broadband Network, mainly through investment by Huawei, China’s ICT leader. There can be dozens of examples to support the above statement. The most recent is a giant promotion action that supports the US-Chinese super-movie production “Mulan”, which, despite rather poor reviews, is probably going to be a blockbuster, if not in the US and Europe, than for certain on the vast Chinese market.
However, coming back to the main theme of this part of the article, it is worth pointing out that the Donald Trump’s administration treats China and its development model as a major threat to the world. Although Joe Biden has changed his rhetoric, the sense of his pronouncements on this matter differs little from the speeches and tweets by the incumbent US President. Therefore, it is clear that future US-Europe relations will depend mostly on the shape of the European Union’s relations with the People’s Republic of China, especially that the EU clearly lacks coherence, solidarity and strategic approach in this respect. In my opinion, the European Union, being an important actor in international relations and an important inclusive organization, has been inevitably heading toward a really tough test. The EU will once again face the dilemma of choosing a strategic partner and ally in the world. The choice between Pax Americana and Pax Sinica for a new era may become urgent, especially that it is impossible to reconcile interests of the three largest economic powers in the world. What should be done in this situation from the perspective of the integrated Europe? It seems that both Community institutions and EU Member States governments need to promote their traditional European values more effectively than ever before. This refers to such important elements as freedom, peace, democracy, the rule of law, human rights, prosperity, sustainable development, fair trade, as well as ethical business and corporate social responsibility. The EU’s new approach to its 2015 trade and investment policy (new approach) is an exemplary solution for the use of agreements and promotion programs, which are the essence of the “European development model”. However, we need much more joint initiatives of the type. The European Union should guard its values in its relations with all countries in the world. Based on the values, the EU should seek mutually beneficial cooperation (win-win), but not at the price of short-term concessions as it unfortunately happened in its history several times. Today, it mainly applies to EU relations with China. Indeed, China still applies many non-transparent practices in international trade, despite almost twenty years of their membership in the World Trade Organization (WTO). Additionally, China has been implementing the Social Credit System, which, at least in occidental countries, can raise many controversies and reservations. The European Union must also protect its economic sovereignty more than in the past, including its technological sovereignty in a similar fashion to the United States. This should impose the conditionality of cooperation, i.e. full reciprocity, equality and transparency. Undoubtedly, possibly the best political and economic relations with China are in the interest of the European Union. For many reasons, this seems to be obvious and should not be trigger controversies. The Deng Xiaoping’s “reform and openness” policy initiated more than four decades ago deserves much respect and admiration. However, this does not necessarily mean that we should endorse attempts to replicate Chinese social model in Europe and recognize Chinese economic policy (Xinomics) as the best model to be followed in geostrategic relations with China. We have already witnessed some reflection on the subject in EU institutions. Many documents publicized by the European Commission and the European Parliament no longer describe China as a partner for negotiation and an economic competitor, but also a systemic rival.
In the next decade, apart from the effective implementation of the SARS-CoV-2 recovery strategy, climate change, accelerated technological development, demographic change and migration problems will have a major impact on the nature, manner and standard of living of millions of citizens of EU Member States. [i] United Europe has all the attributes to lead the transformation of the world toward a greener and more digital future. Europe has a real chance to become the first climate-neutral continent by 2050 provided it successfully implements the European Green Deal. The EU also has a large and still underexploited potential to become an innovative post-industrial 4.0 economy that guarantees high employment rate and sustainable economic growth, with greater concern for technological sovereignty than before. The European Union can and should continue to uphold the vision of the European Social Model, common values and the rule of law. Being a community of law, it should protect the European way of life, while seeking to strengthen democratic procedures in the creation of its policies and ensuring their full transparency. It should jointly seek already existing and effective compromise solutions that guarantee a high level of humanitarianism and respect for human dignity to resolve the migration issue. In the geopolitical sphere, the European Union’s priority is to find suitable allies in the world, which can guarantee a “responsible global leadership”, whereas in the geopolitical sphere, the promotion of an open and fair trade agenda accompanied by the WTO reform. In the long term, the shape of a new (post)pandemic global economic and social order, particularly in the context of growing tensions in US-China relations, will determine the place, role and importance of the European Union in the world. The implementation of EU’s plans, outlined by the European Commission President Ursulle von der Leyen in her speech on the status of the EU in 2020, is supported by the three pillars of the NextGenerationEU, a new temporary recovery instrument, and the long-term 2021-2027 budget.
These objectives are certainly not the only but, in my opinion, crucial elements to respond to the question of how the European Union and the world will look in social, economic and financial points of view in the next (post)pandemic decades and how quickly can the humanity return to a “new normality”? They are a part of priority objectives of the prestigious grant for the EU EX/ACT Jean Monnet Center of Excellence project: EU External Actions in the contested global order – (in)coherence, (dis)continuity, resilience, implemented at the AMU and managed by Prof. Tadeusz Wallas. For the past two years, the project has been successfully implemented by a group of respected researchers from the Faculty of Political Science and Journalism. For more information about the project see: http://coe.amu.edu.pl/