In the light of the devastating coronavirus pandemic and its global responses, new trends are emerging in international markets, that are likely to disrupt the status quo and create a new world order, writes Jaykhosh Chidambaran for The Arabian Stories.
Global geopolitics is often a zero-sum game. The COVID-19 pandemic has intensified political one-upmanship in Sino-US diplomatic and trade relations. In early 2020, when coronavirus was wreaking havoc across the globe, a distraught Japanese Prime Minister Shinzo Abe, earmarking 245 billion Yen and exhorting Japanese companies to relocate out of China as part of de-risking strategy, is a harbinger of an irrevocably redefined global geopolitics in the future, past the pandemic. Interestingly, the virus had arrived at a time when a ‘White Swan’ event was inevitable by virtue of policy mistakes and a failure to address structural problems after the 2008 financial crisis that has led to the Great Recession.
White Swan events are predictable phenomena which, culminate as a result of lopsided economic and financial policies by governments and corporations, triggering seismic shocks of recession across the world, eroding wealth and wiping off livelihoods of millions. Environmentalists are eager to classify COVID-19 as an extremely rare and unpredictable ‘Black Swan’ event, and while economists and think-tanks debate on its appropriate nomenclature, the ‘Great Lockdown’ has caused global GDP to contract by more than 4% in 2020 alone and eroding trillions of dollars from global stock markets.
In the light of the devastating coronavirus pandemic and its global responses, new trends are emerging in global markets, that are likely to disrupt the status quo and create a new world order. Central banks, through unconventional monetary policies, such as Quantitative Easing, will continue resorting to monetize fiscal deficits by printing digital currencies and buying financial assets to thwart depression and deflation. These measures of injecting liquidity into the financial markets, historically have induced currency debasements and its spillover effects lead to rising inflationary pressures. Inflation depreciates the value of assets, generally termed in economic parlance as ‘inflation tax’. Lawrence Summers, the former US Secretary of Treasury and current Harvard University professor of economics has voiced concerns that the US economy is overheating, labor shortages are acute, inflation has crossed 5% and supply bottlenecks are looming on the horizon. He warned of similar consequences of the late 1960’s when prices spiraled out of control and inflation catapulted from 2% to 6%. If new virulent strains of the COVID-19 virus like Omicron and Delta that maybe resistant to the current vaccines causes another global lockdown, the world could be heading for a ‘W shaped’ double-dipped recession. A slow recovery will witness more firms becoming insolvent and labor markets afflicted with an economic phenomenon called hysteresis where long-term unemployment results in erosion of workers skills that render them unemployable.
The recovery from COVID-19 pandemic hinges on a digitalization drive by prominent developed and emerging economies, witnessed by a surge in e-commerce ecosystems, EdTech learning, digital marketing, online low-touch businesses and an explosion of demand for digital skills that will decimate the role and redefine the function of brick-and-mortar companies. These socio-economic shifts will further widen the gap between the haves and the have-nots as unemployment in traditional high-touch real estate, tourism, hospitality, and transport sectors will disproportionately rise around the world due to Income and Substitution Effect. Least developed countries (LDC) and small island developing states (SIDS) will be the hardest hit since they have fewer resources, less diversified economies and tighter fiscal space to maneuver. According to an UNCTAD report, more than 32 million people were pushed into extreme poverty in least developed countries (LDC) by the catastrophic effects of the coronavirus pandemic. The resurgence of these economies is dependent on suspension of debt servicing, development finance support from wealthy economies focusing on investments in green technologies that will mitigate their dependence on fossil fuels that currently is weighing heavily on their fiscal balance. Unless Greenfield Investments in productive, transformative industrial capabilities occur in these economies accentuated by flow of capital, technology, acquisition of management know-how and New Age Economy skill sets and capabilities, the Great Divergence warned by the IMF pertaining to economic divide between rich and poor countries will irreparably widen.
The deteriorating Sino-US trade relations that had exacerbated with the incoherent trade sanctions by the erstwhile Trump administration could lead to de-coupling of the economies to devastating effect on global geopolitics and trade. If supply chains, especially manufacturing facilities move from low-cost labor-intensive China and South East Asia to high-cost onshoring in developed economies, corporations will have increased incentive for automation to reduce overhead labor costs to retain profitability. These strategic shifts in global economies will accelerate the process of de-globalization, retracing the steps back to the Cold War period, highlighted by balkanization of the world into partisan and parochial camps. In the current scenario it will be United States vs China. Decoupling between US and China which limits bilateral movements and transfer of technology, capital, labor, services, information and data could set off a bandwagon effect, where G8 and G20 economies may follow suit. Perhaps the world will enter a phase of de-globalization in the future.
Global unemployment is estimated to be around 220 million in 2021 at an alarming rate of 6.3% according to an ILO report. Mass unemployment, mostly of blue-collar workers due to automations, rising inequality and economic deprivations will reinforce backlash against democracy, resulting in enthroning populist leaders who will win votes, blaming the socio-economic ills on immigration and scapegoating foreigners. Resurgence of xenophobia and jingoism in otherwise progressive liberal economies will be the baneful consequence. Fringe elements, propagating extreme right-wing radicalism are steadily rising in many European, Latin American and Asian countries. Brexit and Trumpism have reinforced populist ultra-nationalist campaigns.
A geo-political standoff between the US and China, worsened by decoupling could forge new political alignments. The revisionist powers of Iran, Russia and North Korea in all probability will declare solidarity with China and their common interest in weakening the US clout in global markets may trigger an intensification of asymmetric warfare for global dominance. Asymmetric warfare in the form of cyberattacks are already threatening the credibility and integrity of a seamlessly networked digital world. Clandestine cyber warfare could disseminate misinformation and deep fakes among rival countries and such subversions could potentially lead to conventional military clashes. These clear and present dangers were vociferously articulated by global leaders like Christine Lagarde, the ex IMF head and currently serving as the president of the European Central bank. She has warned of a cyberattack on the Society for Worldwide Financial Telecommunications (SWIFT) platform- the market leader in global electronic funds transfer- that could potentially cripple the European Financial System, incurring damages in excess of $645 billion USD.
China, apprehensive of US sanctions on US financial asset holdings could pursue a policy of aggressively selling US Treasury Bills, the debt instrument where China is the largest sovereign investor. The bearish Treasury Bills market will increase interest rates in the US and will affect its economic growth. The stockpiling of gold assets by both Russia and China since 2020 could be a strategic decision aimed to diversify and de-risk the dependence on US Treasury instruments.
But the paramount danger is environmental degradation and loss of biodiversity due to human encroachments into the natural habitats of wild animals. It is a ticking time-bomb for many unknown viruses to cross species barrier and find new hosts who are invariably human beings. Underwater volcanic activity is rampant and an upsurge could cause marine acidification, resulting in massive depletion of global fish stocks, that will jeopardize millions of livelihoods on an unprecedented scale. Permafrost is thawing in Northern Canada, Alaska and the Arctic Tundra, opening up pathways in the deep reservoirs of earth to release toxic gases of Methane and Carbon. It is warping landscapes and destroying vegetation. Prehistoric pathogens and deadly viruses like anthrax, small pox, influenza and plague could be resurrected from the cemeteries in the permafrost zones across North America and Russia.
Greenhouse gases and global warming are causing gigantic ice shelves in Antarctica and Greenland to break off, thereby sea levels are rising ominously. Humans are likely to be buffeted intermittently by extreme events in the future as these geographical cataclysms are byproducts of human greed, that has never shown any signs of mitigation. The sooner Man realizes that his greatest enemy is Man himself, the better are his survival as a species.
A new temperature record was set in Antarctica on February 6, 2020. The last time was in 2015. The Antarctic region is one of the hottest areas due to climate change. Read the full story here.