The economics of coronavirus (I)

The economics of coronavirus (I)

by Pininvest Analysis

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Pin-insights

During the long cycle of expansion, governments were focused on the ‘golden goose’ of the economic benefits of globalization – although the rules of ever closer integration of international supply chains were bound to constrain their political heft

The breakdown of these intricate supply chains is a unique feature of the coronavirus crisis halting economic activity worldwide, leaving downstream manufacturing facilities empty handed

With failing supply, the support of consumer demand by cash allocations and out-of-work subsidies, provided with urgency on the public purse and in disparate national programs, is unlikely to provide as much of a boost as hoped for

In the globally integrated financial system of our times, crisis management on a national basis is certain to fall short in its broader goals of keeping the economies whole and of restoring international trade

 

Janus-bifaced

Presiding over war and peace, and by extension over all beginnings and transitions, Janus was a god in ancient Roman religion with functions pertaining to journeys and exchange, and in his association with Portunus, a similar harbor and gateway god, he was concerned with travelling, trading and shipping (Wikipedia)

Globalization has been mostly benevolent by lifting millions of people out of poverty, in China and beyond, and hugely beneficial in the developed consumer markets by lifting purchasing power seemingly effortlessly

And public policy in country after country, focused on the ‘golden goose’ of economic benefits, has been benign – although the rules of ever closer integration of international supply chains constrained governmental choice

It is true the loss of production capacity has raised protests in contrived alliances of left-leaning movements and right-tainted nostalgia but, on the whole, the trend was set and the interest of the general public impossible to resist

Entranced by the economic potential unleashed by the leaders of globalization, foremost China as nexus of world manufacturing, national policies of governments confident in their export potential became the cheerleaders of a societal transformation they could not control

Firmly in command of many interconnected supply chains, China could afford to shrug off the ambiguous attempts of national governments to hem in its pervading commercial influence, fully confident the shared interest of local business would prevail

…as it did, in the weak trade agreement passed by the US with China (addressing none of the key issues sensibly raised by the American administration) or in the even weaker response of the European Union, recognizing the ‘systemic’ risks of trade dependence …

 

The Chinese export model – built on domestic strength and interaction with ‘client’ supply chains – has spread amongst developed countries, extending its reach – as a matter of course – in governmental choices of all major manufacturing exporters, from Japan to South Korea to Germany

Specializations, demonstrably in the automotive industry and in semiconductor manufacturing, have been the strength of national exporters before China’s emergence as key economic power in the late ‘90’s but their production capacities also fitted neatly in the global network, committing each country to its perennial success…

These favorable trends inspired others – setting their sights on equally spectacular results without paying due attention to the painstaking build-up of expertise of the exporting manufacturers…
…and the bubbly promises of ‘Global Britain’ come to mind

At the heart of the split between proponents of British specialization on a global scale – presumably in financial services – and those defending heartland industries, the appeal of globalization never was shared by a majority of Britain’s people but the storyline could indeed seem to open fresh vistas …

Janus - credit fr.vikidia.org

By showing the other face of globalization, the sudden emergence of a virus broke down popular expectations, confronting governments with awkward questions regarding national interest

Firemen attending a raging economic crisis, politicians of all stripes resort to the familiar toolbox of demand stimulation, opening the floodgates of debt-financed economic support, in a grand show of command and control

Because of the unique features of the downturn, driven by the breakdown of intricate supply chains leaving downstream manufacturing facilities empty handed, the support of demand by cash allocations and out-of-work subsidies is unlikely to provide as much of a boost as hoped for

What is more, implemented with urgency and on basis of domestic considerations alone, the disparate national commitments lack the momentum only international coordinated credit support could hope to provide

Ominously, go-it-alone policies to address human despair and urgent business frailties for the duration of the crisis may front inward-looking policies for the foreseeable future

Under the illusion national planning will provide social wellbeing, environmental protection and economic security, governments ‘on the barricades’ and borders are once again popular

Much points towards collective withdrawal from the tumble of international affairs and the draw will be hard to resist
It is not the least paradox of the virus’ exponential spread, which no border could resist, to reinstate borders as barrier of last resort …


Throwing money at the wall…

…in the hope it will stick

Exponential spread of the coronavirus is a tragic reversal of the no-less exponential economic growth expectations, confidently taken for granted not-so-long ago – to say nothing of the exponential increases in US stock market valuations

Integration of the modern economies was achieved mostly by the willingness of governments to ‘stay out of the way’ while reaping the occasional political benefit of benign economic growth trends

Pro-active government policies, readily tainted by interference, might surely have born the onus in recent years by impeding a seemingly irresistible march forward

Not so much today, as the people, exposed in their physical integrity, are turning back expectantly towards their politicians

In all fairness, the urgency of the crisis does not allow for much long-term strategic thinking and, by reverting to familiar tactics of cash allocations, governments may indeed alleviate temporary pain

Nevertheless, the great confusion in these ‘Band-Aid’ policies does not portend great outcomes on the international level

Most developed countries choose to fund a mix of direct cash allocations to families, support to small business in the form of subsidies and broad-based public guarantees of loans, likely to benefit the larger companies

But none of these financial policies are obviously coordinated and, to make matters worse, all of them betray the glaring inequalities between nations

 

Turning back the clock by taking the lead to shield the economy from a 1930’s like-depression will be an improbable feat

Huge credit facilities make the headlines but the brutal increase in sovereign debt across the world will deepen the split between the advocates of fiscal rectitude and those guilty of budget profligacy

At times requiring much international coordination and mutual support, the strongest economies are anxious to regain their balance, leaving the debt-burdened countries to fend for themselves – with the fate of commodity-dependent emerging markets an after-thought

With trade in free fall and international supply chains out of kilter, the response on a largely national basis to the current economic crisis is strangely reminiscent of the self-defeating monetary policies of the 1930’s

Clinging for too long to the gold standard at the expense of mass unemployment in their home markets, the leading economies of the time shared the view that no price was too high to protect the integrity of the currency

In the globally integrated financial system of our times, crisis management on a national basis is certain to fail in its broader goals of keeping the economies whole and of restoring international trade

Sadly, disparate agendas beach today’s leading economies on the dry sand of their respective missions, dictated by past experience or future ambition, a long way from coordinated action

Inward looking policies we hope to discuss in the second issue of the Economics of Coronavirus