What are the longer term political implications of Covid-19?

‘Global orders have a tendency to change gradually at first and then all at once.’ (Foreign Affairs.)

Covid19 is a growing humanitarian disaster, but given time, the virus will be defeated and most people affected will recover. The political implications of the choices made during the crisis will, however, be with us for many years to come. It is vital to understand what these might be to help shape them. The pandemic may well be a turning point ushering in a new political era. With opportunity for change comes significant danger if, as seems possible, the wrong choices are now made.

This essay summarises several broad (and in some cases, deeply troubling,) themes regarding the political implications of covid19. It is deliberately wide in its scope attempting to raise serious questions.

‘Decisions taken today could shape the world for years to come.’ (Y Harari, FT).

Economic Impact

As explored elsewhere, economically we face an unparalleled set of crises each alone damaging enough but together providing a massive economic shock: a humanitarian crisis; a wealth shock with falling asset prices; simultaneous demand and supply shocks and a new credit crisis all during an oil-price war. Few economies are well-prepared to respond to and weather such crises after years of anaemic and debt-fuelled growth.

Crucial to predicting the depth and duration of the economic fallout is understanding what underlying financial and economic vulnerabilities were waiting to be uncovered. This will be much more than just an ‘event shock’. Rather it will unearth and magnify multiple structural economic problems.

To mitigate this, and to prevent immediate mass company bankruptcies, layoffs and bank runs (predicted otherwise to be worse than the Great Depression), central banks have engaged massive monetary stimulus while governments have turned on the fiscal taps — many like never before. More has been achieved in the US in one month than 3 years of the GFC. Averting a depression is the singular economic aim. However over the longer term and as a result of debt write-off/monetisation measures, a new era of ‘stagflation’ appears unavoidable, with low growth and high unemployment alongside varying inflation rates. This will affect nations differently with swathes of the developing world hit hardest among defaults and fiscal crises. Experiences of managing stagflation in the 1970s are very troubling.

Political Choices

Significant, wide-ranging and long-lasting political decisions are now taking place virtually on a daily basis. Many changes will endure and these are, principally, where C19 solidifies and magnifies previous trends: the C19 pandemic will ‘accelerate history’. These trends include: the continued rise of nationalism, the reverse and fragmentation of globalisation, the return of leviathan (the all-powerful state), the troubled rise of China alongside the US/China conflict.

1. Nationalism and the end of ‘Hyper-Globalisation’…

‘Coronavirus is the historical marker between the first phase of globalisation and the second… Globalisation 2.0 is about separating the globe into great-power blocs with their own burgeoning militaries and separate supply chains, about the rise of autocracies, and about social and class divides that have engendered nativism and populism.’ (R Kaplan, Bloomberg).

Prior to C19, globalisation was already in reverse following the US/China trade war, the breakdown of multilateralism and the rise of nationalist leaders. The pandemic (exacerbated as it was by globalisation itself) and reactions to it, will reinforce this dynamic as governments look inwards to solve supply shock challenges and outwards for blame. This trend is likely to extend as frightened citizens demand resilience. C19 has exposed hidden vulnerabilities in supply chains (see Foreign Affairs here) with more undoubtedly to come.

Shortages in health equipment and food, (Kazakhstan initially banned the export of wheat flour and Vietnam rice), may lead to unrest (as well as rationing) and this experience will scar the conscience of many societies. Certain ‘emergency’ measures will endure as nations and firms seek to lessen these vulnerabilities and reduce the long term adverse economic effects, ultimately this will result in a brake on economic growth as the private sector is crowded out. Growing autarky will be the aim: the antithesis of a globalising trend that has delivered the greatest reduction in world poverty ever known.

However while the West will look inwards, China will continue to look to expand its own trade frontiers and influence. Globalisation will thus have opposing influences acting on it and so its structure and flavour will change to become more fragmented and China-led. The Chinese ‘Belt and Road Initiative’ shows us how China will look to rebuild globalisation with its own conditionality attached (see here for more). This implies deep fragmentation of the globalised trade system.

‘The pandemic will strengthen the state and reinforce nationalism. Governments of all types will adopt emergency measures to manage the crisis, and many will be loath to relinquish these new powers when the crisis is over,’ (S Walt, Foreign Policy).

Nationalism appeals to the sense of solidarity and unity that the crisis has created. National security hawks and populists will feed off this and will promote more isolationist policies. Nationalist populist leaders such as Putin, Modi and Orban have been emboldened by events and will now cement their anti-liberal agendas. Indeed, across the entire world, elections have been postponed, journalists muzzled and parliaments suspended.

In Europe, C19 is seriously testing EU unity, (see BBC here). Old divisions, papered over after the 2010 Eurozone (EZ) crisis are being tested again. While EU nations engaged in uncoordinated fiscal action, the ECB has at least bought time. The key question now, with southern Europe once again on the verge of fiscal crisis, is which way Germany will fall in the debate on debt-sharing as a second Euro sovereign debt crisis now appears likely. With Italian populists ready to pounce on the slightest hint of conditionality from the Lutheran north, the future of the EZ is at stake (see Foreign Policy here).

‘I hope that everyone understand, before it is too late, the seriousness of the threat to Europe.’ (Sergio Mattarella, Italian president.)

While Merkel’s instincts are to continue to kick the can down the road — it is next to impossible to imagine she will give in to the demands for full debt mutualisation demanded by Spain and Italy (even though the ECB has, to a degree, forced her hand) — she must now make tough choices as the recession worsens, the first stop being her own voters. The EZ crisis appears likely to centre on Italy and ultimately a strongly anti-EU government (probably led by Mateo Salvini) appears on the cards there. The EZ was able to muddle through up until now but this is the biggest crisis to hit Europe since WWII. Without leadership, an EZ breakup, triggered initially perhaps by innocuous-seeming Italian debt and tax measures (see Stiglitz here), is a very real possibility.

…but perhaps less so populism?

There has been a ‘coming together’ in support of incumbent governments (Macron, Johnson, Merkel all currently on historical highs). Is this temporary or do voters recognise that alternative leaders would be no more effective (and that populists currently on the side-lines could well be a lot worse) in dealing with the crisis? As current leaders themselves embrace nationalism, the populist themselves may be marginalised. Also of note is the return of ‘the experts’. The running of some states has been virtually handed over to scientists, with strong popular support. This counters the classic anti-elite populist arguments. There is hope therefore that longer term responses will be science-based and reject the emotion-driven solutions of the populists.

Solutions have to be global…

That international cooperation is now essential should become obvious. Ultimately it will be through global scientific cooperation that a vaccine will be found and via multinational pharmaceutical production (using global supply chains) and Asian manufacturing power that treatments and the vaccine will be brought to the masses. Any post-pandemic reckoning should clearly show the value in this multilateral cooperation. Global health governance should improve significantly. Nationalism, nativism and autarky by definition cannot solve global problems. In this way, the pandemic and its global impact provides a useful lesson for fighting climate change.

As for the West, with leadership we could see a renewal of western alliances as democracies come out of their shells (as J Ikenberry argues in Foreign Affairs here). It should become clear to US leaders that their power is amplified by such alliances. If the US stops pushing them away, the threat of China should push democracies and smaller Asian nations together, the former through shared values and the latter also through ‘strategic hedging’.

…that emanate from a shared community experience

The C19 pandemic is a leveller, we are all, for now at least, in the same boat facing the same storm. A sense of palpable togetherness can be felt on the streets and in the neighbourhoods across the world as we reach out to help our communities. This can help reduce political polarisation as we fight the common enemy (although exceptions are notable, e.g. Catalan leaders attacking Madrid). Indeed, one very positive aspect of nationalism is that it enables this sense of community to be magnified on a massive scale to millions of individuals we can never know. We feel closer as a nation and deeply grateful to those fighting on our behalf: nurses and doctors have become the new soldiers fighting for us. The question is whether this sense of community can mitigate the inevitable anger.

2. Authoritarian Socialism

The state replaces the private sector

As fiscal measures kick in, C19 is delivering a vastly expanded state. As the private sector reels, national budget deficits of 10–20% are predicted across the West this year while economies will face declines of up to 10%. Health, social care and unemployment insurance systems will face unstoppable and long term pressure for massive expansion. National debt as a percentage of GDP will inevitably explode upwards.

Leaders will find it very hard to relinquish new powers they have gained and voters typically won’t want them to. This is the era of the ‘dirigiste’ state which will take an ever-increasing role in the economy through enforced part- and full- nationalisations, massive fiscal transfers funded by debt and centralised command and control.

While debt (and debt monetisation) will initially cover much of the increased spending, taxes will have to rise significantly in the medium term. Ultimately this will reinforce a less efficient overall allocation of resources resulting in a further drain on growth.

Civil liberties become nice-to-have

‘A critical part of this narrative is Beijing’s supposed success in battling the virus. A steady stream of propaganda articles, tweets and public messaging, in a wide variety of languages, touts China’s achievements and highlights the effectiveness of its model of domestic governance,’ (Foreign Affairs).

Currently it is the Chinese model of a strong authoritarian central state that appears more effective in dealing with C19, notably contrasting haphazard western responses (with Taiwan providing a rare counter-example). This despite some commentators in the West initially predicting that C19 could be Xi’s nemesis (see here). This may change when later waves hit and western nations up their game.

Concerns about civil liberties and privacy will wane, the danger from virus-spreading individuals who do not follow government instructions will literally be a case of life-or-death for others in society. Those at risk will demand action. It is also worth noting is the fact that leaders almost all populate the C19 high-risk age groups and also that these groups typically vote in greater numbers than others. Such voters will feel less doubt about a stronger state which enforces societal rules to protect them rather than relying on individual compliance through choice. This could encompass strengthening police-state type measures such as increased surveillance and less freedom of movement (enabled by Big Data and AI). The surveillance state is proving its worth in China and Singapore in enforcing the lockdown and saving lives — why risk a new outbreak? Likewise fast data sharing has lowered data protection provisions and this is likely to last. This choice between civil liberties and health is in actual fact a false one (as the examples of Taiwan, Germany or Sweden show) but most voters are unlikely to see it that way.

Taken together these trends imply a significant long term shift towards state control of productive means and reduced individual freedoms. Voices countering this will be lost in the ‘never again’ mantra of the pandemic.

‘The US government’s pandemic leadership has been its own special brand of catastrophe…. [It] has placed its own citizens in unnecessary peril, while sidelining itself from acting as a global crisis leader,’ (Council on Foreign Relations).

While China is winning plaudits (notably from the WHO), America’s response has been lamentable. The EU had also turned inwards and had next to no global leadership capabilities in any case. The West is simply not leading, literally or through example. History is written by victors and should China’s response prove successful longer term there is no doubt this will be taken advantage of remorselessly by the enemies of democracy. China is indeed now manoeuvring to take maximum advantage of the crisis deploying and magnifying its soft power (although initially this has been about deflecting blame) (see FT here). Much of the world may in the future now look to China for global leadership.

Scapegoating has been in evidence from both superpowers and further conflict seems inevitable. In fact the on-shoring of supply chains weakens a key mitigating factor against conflict, namely the economic cost of breaking such supply chains. Rising autarky thus makes conflict less costly.

Nonetheless, it would be foolish to exaggerate US decline (and underplay its ability to recover), China’s global leadership influence and the rationale for conflict. The US maintains significant advantages, (the US dollar, corporate power, science and technology, innovation and education, natural resources, geography, population dynamics, military and alliances, English language and its legal system), that will retain its unique position as global hegemon for many years to come. (See Foreign Affairs here). China has too many of its own problems (not least debt and demographics and the fact that it may be blamed for the outbreak in the first place), is still far behind (and not catching up fast enough where it counts) to challenge the US globally within the next decade or two. Although within the Asian region China is clearly the hegemon.

A US/China conflict may become more likely although this does depend greatly on US election with re-elected Trump being a less predictable foe for China. His actual hawkishness in foreign policy is debateable but his isolationism is not. In reality though, foreign policy is not one of the great drivers of US political polarisation with the threat of China well-recognised across the political spectrum. The modern Democratic Party is not globalist so whatever the outcome in November attitudes towards China will not change much. A Trump presidency possibly reflects greater unforeseen ‘event risk’ with China however and certainly less global cooperation and coordination generally.

While a Biden victory certainly will not roll the clock back to, it is likely that such a victory would rebuild much of the trust between the core democratic alliances and may mitigate some of the worst of the negative political scenarios and containing Chinses expansionism.

3. Meanwhile catastrophe awaits the developing world

Mercifully so far C19 has hit wealthier nations harder but this cannot last. In the West we are in lockdown practicing social distancing but still able to get our weekly food shop and huge government fiscal outlays. Many can now work from home and those that can’t are getting support. The ‘curve’ can be flatted to reduce millions of potential dead to the 10s of thousands. Consider now how this dynamic will play out in poorer parts of the world: the slums, favelas, townships and refugee camps… In Ethiopia, considered a recent success-story, barely half the population has access to running water and soap for many is a luxury (see its president’s views here); it is not possible to enforce social distancing given entrenched cultural norms and living conditions; food supply is entirely dependent on fragile systems and in any case health care is usually rudimentary at best.

‘Fragile and vulnerable at the best of times, African economies are staring at an abyss.’ (Abiy Ahmed, president, Ethiopia.)

It is true that C19 hits the elderly far worse than the young and that in developing countries the average age is far lower than the developed world (the median age is 19 in Nigeria for example). However we know that C19 also hits hardest those with compromised immune or respiratory systems, precisely what many suffer from in the developing world due to pollution (indoor and outdoor) and the prevalence of existing endemic diseases. So, unless by some miracle C19 doesn’t spread well in hot climes, the developing world will face millions of deaths and associated societal upheavals.

The longer term implications of this are impossible to fathom. But they will be extraordinary. It is the ideal breeding ground for extremist leaders and conflict. Fragile democracies are likely to fall and the military will, as is so often the case in such regions, play a key and brutal role.

And yet hope is not lost. Most nations are responding with the help of the WHO. There are many calls for conflicts to at least pause while the virus hits. If the developed world can recover quickly, or at least reach a level of stability in time, the effect of C19 in poorer regions may well lead to the mobilisation of unparalleled international support. The World Bank and IMF have talked realistically of a $1tn package of loans and grants that can soon become available.

The last word and room for hope

The 1918 pandemic (which killed some 50m people or nearly 3% of the world’s population) was an extraordinarily brutal event lasting 2 years and yet a mere year later it was barely mentioned by contemporary commentators. It is almost never cited by historians as having lasting implications. The world picked itself up and moved on.

The world IS capable of learning the right lessons from disaster. It has done it before. Following the Second World War, humanity’s most brutal (self-inflicted) disaster, and in the teeth of the Cold War, unprecedented international cooperation led to the formation of the United Nations, the IMF, the World Bank and WHO. The leaders at the time were singularly focused on avoiding the isolationist mistakes of the 1930s. We may now need to relearn those lessons. Authoritarian socialism mixed with nativism is palpably not the answer.

There are very strong counter-currents that run against the rise of authoritarian nationalism. They are based on the values of the Enlightenment: reason, science, liberty and progress. While renewing the legitimacy of the nation state — which, it must not be forgotten, has also delivered democracy and liberty to millions — the C19 pandemic will show the ultimate dead-end that is isolationism and autarky.

From crisis comes renewal. Economic crises themselves lead to a flowering of new ideas as innovation bursts forth: solutions become urgent and individuals and groups have to take risks to solve them. The new economic paradigm will see such an explosion of new innovative ideas. The fast and wide acceptance of new ways of working and technologies will become further embedded to enable these innovations. Governments will also find that sclerotic bureaucratic systems can be quickly unblocked when aided by a strong will and new technology.

While problems such as inequality and slow growth have reduced confidence in liberal democracy, it is still the only proven way for a large poor country to become a large rich country. The battle with authoritarian socialism remains, for now, winnable through the continued application of the basic values of the Enlightenment.

Fintech investor/director. Brit in Barcelona. LSE IDEAS MSc graduate in International Relations.

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