Macroeconomics

Only germs this time, no guns and steel (yet)?

  • Blog Post Date 14 April, 2020
  • Print Page
Author Image

Anindya Chakrabarti

Indian Institute of Management Ahmedabad

anindyac@iima.ac.in

Author Image

Chirantan Chatterjee

Indian Institute of Management Ahmedabad

chirantanc@iima.ac.in

The first round of globalisation over the previous centuries was associated with a transmission of diseases between continents. With Covid-19, history seems to be repeating itself, but this time in the form of a global pandemic fuelled by increased human connectivity. Chakrabarti and Chatterjee discuss how globalisation may itself be set back by Covid-19, as countries have stopped production and supply chains have been disconnected, reversing the gains made by mankind over the past two centuries.

 

In 1997, in his now famous Pulitzer winning book, ‘Guns, Germs and Steel’, UCLA (University of California, Los Angeles) professor Jared Diamond wrote that germs were a major factor in the development of immunity among Eurasians due to natural selection. This, Diamond argued, contributed to Eurasian hegemony around the world. Proximity of human beings to livestock in communities resulted in division of labour in agriculture and non-farming activities, which subsequently led to transmission of diseases such as smallpox, influenza, and measles. Thus, the first round of globalisation over the previous centuries was also associated with 'trade' in diseases, both unilaterally from Europe to the US and bilaterally between Europe and Africa and South Asia.

History is repeating itself but with a global pandemic this time

With Covid-19, right when the third decade of the new millennium begins, history seems to be repeating itself. This time again between Asia, Europe and America, and back. The reason is still the same – transmission of virus from animals to human beings – apparently from bats, pangolins, and snakes. But the difference now is that there has been tremendous economic growth and globalisation over the last two centuries, and with increased human connectivity especially through air travel, Covid-19 has become a global pandemic. Over the last few months, countries have stopped production, supply chains have been disconnected, and The Economist Intelligence Unit believes all G-20 countries are likely to go into a recession sooner rather than later.

Germs – to borrow from Diamond’s work  are setting back the gains made by mankind in a world of increasing interdependence, especially when these gains manifested with force multipliers across global value chains with economies of production, consumption externalities, and increasing returns from technological change or labour migration. Of course, globalisation has also raised associated problems like inequality and exacerbated its distributional consequences. Societies have so far tried to intervene with corrections, essentially with policy nudges, but now it seems that larger questions are arising not just about social support schemes such as universal basic income, but also about how globalisation itself might be set back by Covid-19.

There is also an associated optimality discussion. Will the amount of pushback to globalisation from Covid-19 be of a similar nature as it happened with the Global Financial Crisis of 2007-09? Conceptually, both the shocks and their effects are similar. Both originated and propagated from an initially small failure. They were both uncontained locally and spilled over to economic counterparts and agents, and ultimately led to a reinforcing effect due to a positive feedback loop. The current policy of complete country-specific lockdowns implies a lagged long-term effect, as the economic machinery will take substantial amount of time before it can get back to being normal. Conditional on massive government support in defusing the adverse consequences, it is thus still unclear whether Covid-19 will cause greater harm than the 2007-09 shock.

De-risking manufacturing industries in the future?

A related interesting element is of political economy. In pharmaceuticals, for example, the world is realising more acutely now than ever before, how key markets such as the US and India were dependent on China for the supply of active ingredients for pharmaceutical drugs. Wuhan and the Hubei province from where Covid-19 originated, are in fact the epicentre of the bulk pharmaceutical production clusters in China, and for India, the magnitude of Chinese dependence seems to be in excess of 80%. American and Indian pharmaceutical firms are therefore increasingly moving away, de-risking themselves with multiple sources of supplies. China might land in distress as a result, and so would the rest of the world in terms of downstream prices of products as relocating manufacturing industries (not just in pharmaceuticals but also in other sectors like automobiles, smartphones, electronics, or textiles) will be a non-trivial and costly endeavour. It would hence be interesting to observe how politics guide economics here with Covid-19. On 26 March, US President Mr. Trump, perhaps following the lead of the Indian Minister of External Affairs Mr. Jaishankar (and after initially deriding the ‘Chinese virus’), tweeted that he had a conversation on cooperation with his counterpart Mr. Xi Jinping, adding willingness to work together going forward. So, the end game on this is still unclear.

What may lie ahead?

This can also be speculated drawing from ‘Collapse: How Societies Choose to Fail or Succeed’, Diamond’s 2005 follow-up book. Historically, how societies responded to the challenges in terms of the environment, economic transactions, and different forms of cooperation, have determined their propensity to survive or collapse. Isolation is clearly not a long-term answer like in Easter Island, as that leads to a drastic reduction in the complexity of societal and economic interactions. As Diamond argued, a mix of order to protect local and global organisations, and disorder to allow for innovations, would be the way ahead. Tikopia, a tiny island in the Pacific, adopted sustainable gardening practices to resist environmental degradation, as did Tokugawa-era Japan, while the Netherlands has showed the way with the Polder model of governance that is based on consensus-based economic and social policymaking. It is time for countries to learn from these lessons of success that prevented collapse, adopt digitalisation as a companion in this journey, and perhaps transition to an artificial intelligence-enabled future.

Covid-19 is making us live through shifting equilibriums for sure, although it is still unclear whether they are – as economists would argue – partial or general in nature.

1 Comment:

By: Santosh Saladi

A nice article that speaks about the possible consequences in the wake of coronavirus induced pandemic. It is high time these issues are discussed in an Indian context too. Some of the migrants impacted by this crisis are unable to have one good meal a day. It is important for the government to plan sustainable end equitable economic growth across regions and types of work.

Show more comments
Join the conversation
Captcha Captcha Reload

Comments will be held for moderation. Your contact information will not be made public.

Related content

Sign up to our newsletter