By Satyjit Das
AFP via Getty Images
The coronavirus is attacking economies that are dependent on the consumption of private-sector supplied goods and services — revealing for all of us just how fragile this foundation really is. Going forward, foreign ownership and free movement of capital will face greater barriers, while essential and strategically important services may shift back into some form of government control.
The COVID-19 pandemic quite quickly disrupted production and interrupted transport links and other parts of the global supply chain, showing that manufacturing is vulnerable to even small breakdowns, let alone one caused by a pandemic. Dependence upon imports of finished goods risks shortages. For example, the public health response in the U.S. has been hampered by reliance on medical items sourced from China.
Beyond supply chains, restrictions on movement and the closure of borders affects immigration, which drives growth in many countries and is an essential source of labor. Agriculture in the U.S., Europe and Australia, for example, depends on foreign seasonal workers. American technology firms rely on skilled workers from India and China. Countries and industries reliant on foreign students and tourism have suffered steep drops in revenue, threatening their survival.
Moreover, just-in-time practices, low inventories, frequent deliveries and logistical integration also weaken supply chains. This practice extends to the crucial health care industry, which assumed the ability to scale up to meet surge capacity but in fact underestimated the time and cost of acquiring resources and staff in an emergency.
Outsourcing of services has similar risks. Call-centers, sometimes for essential services, have been forced to operate at reduced capacity or close due to lockdowns in developing countries.
Another weight on the world economy is that much of it depends on people consuming personal services, entertainment, arts, sport, travel and tourism. Social distancing and limitations on movement have crushed consumer spending; even online entertainment requires content whose production necessitates close contact.
You can’t store services for a sunny day; if not consumed when available, the supply is lost forever. If a restaurant is closed for a month, then it is difficult to make up lost revenue through increased future sales. In contrast, if demand for manufactured products cannot be met now and the buyer is willing to wait, they can be suppled later. Income losses in services through disruption are permanent, creating greater problems for businesses where they must suspend operations. Advanced economies have shifted to services from manufacturing and production, making them vulnerable to such shocks.
The so-called gig economy is also fragile. Around 40% of the workforce in the U.S., U.K., Australia and New Zealand are casual workers or contractors. Many small businesses are self-employment vehicles. About 80% of the small businesses in the U.S. are sole proprietorships, such as hairdressers, personal trainers, and Uber drivers.
This part of the workforce lacks protections, such as sick leave or holidays. It makes them vulnerable to any inability to work. If you are casual or lose your job, then you may lose health insurance coverage. Casual employees, contractors or the self-employed typically lack capital or cash reserves and access to finance. They cannot survive shocks, even if short-lived. In a crisis, it is difficult to channel assistance to these groups.
Markets don’t always work in crisis conditions.
Since the 1980s, many essential services, such as health, telecommunications, utilities, and emergency response have been transferred to private ownership from government. In a crisis, private concerns, responsible to shareholders, may not respect national interests. Markets don’t always work in crisis conditions. Current problems in procuring and distributing ventilators, PPE and even basic medical supplies needed to deal with the public health crisis, underscore this problem. Arguably, in dealing with COVID-19, China could act quickly and decisively because the bulk of the economy is government owned or controlled.
After the crisis, there may be increased focus on industrial self-sufficiency and reduced reliance on imports or lengthy international chains of supply. This will accelerate the drift towards closed economies. Local production will be more expensive, sub-optimal scale or inefficient. The alternative is operating with larger inventories. Switzerland, for example, which imports 40%-50% of its food, has strategic stockpiles of three- to six months’ worth of essential goods.
More direct, active government intervention after the COVID-19 pandemic will affect nations’ economic growth and shift resource allocation within countries. Such actions to improve the strength and resilience of the economies and living standards are needed, and will not be inexpensive.