Covidonomics: What Will the Covid-19 Crisis Do to Our Political Economy?

by | Mar 21, 2020

The Covid-19 crisis is fueling a race to find solutions for the problem while also shutting down large parts of the economy and giving governments enormous economic powers. Except for wartime mobilization, this situation is unprecedented. In this article I discuss fifteen major potential negative consequences of the crisis.

1. Small, independent businesses will decrease as a share of the economy

Small, independent businesses will tend to be the first to collapse because:
· they typically have smaller reserves than big companies
· they typically have less access to stimulus funds
· they and/or their customers remain on (partial or complete) lockdown while giants such as Walmart & Amazon remain open (especially online) & take over their business

2. More people become dependent on government

Meanwhile, millions or tens of millions of people will lose their jobs or encounter great economic difficulties, and will turn to the government for help.

3. More businesses become dependent on government

Many smaller or medium sized businesses that do survive will have had to rely on government assistance. Dependence on aid and other privileges may persist for some time and to some extent, and government loans will have to be paid off.

4. Public-private partnerships benefit big business

The technological and institutional solutions to the Covid-19 problem will involve lots of ‘public-private partnerships’ that benefit well connected businesses and that will create new industries or transform existing ones. Through government contracts and regulations these businesses may come to form de facto cartels, keeping out or crowding out independent competitors.

5. A public-private surveillance industry and control system emerges

To keep track of virus spread governments need data. Businesses will develop new, more advanced and comprehensive tracking and collection systems that can be used by governments. Said governments will use those new tools to not just contain and control the virus but also the people.

6. Revolution through crisis

For decades governments, businesses, NGOs, voters have been talking about economic measures against climate change. These talks are slow, the negotiations tense and difficult, the changes small & incremental— lots of talk, little action. But now with Covid-19 we are fundamentally restructuring the economy in a matter of weeks, with little to no talk and all action.

7. A supply crunch followed by a demand crunch = not good

Due to the virus’s first confirmed cases happening in China and due to the drastic measures the Chinese government took to contain it, supply chains to Western economies were severely disrupted. These seem to be recovering but now Western economies are shutting down, causing a huge demand crunch. In a hyper-leveraged economy and a very uncertain economic environment, this is a recipe for disaster.

8. Borders become a thing again

The problem with viruses is that they spread. Border controls of people and goods can slow or halt that spread. So borders —both between countries and within countries— will become a thing again, and trade and travel will become less free.

9. The world economy becomes more protectionist, less free

Western countries —especially under pressure of a pre-existing anti-China lobby that is seizing its opportunity and is painting China as the Great Enemy that brought this plague upon us— will erect more barriers to trade with China, will try to decouple more, start making more goods (especially pharmaceutical & medical) at home or in other countries.

10. Protectionism creates a more dangerous international situation

A reduction in trade and the further politicization of existing trade cause political tensions between countries. With less economic interconnectedness the direct economic and social costs of conflict decrease which means there are lower barriers to war and war-like actions.

11. A big geopolitical shift away from the US and toward China could take place

If the US keeps its economy shut down for much longer and if China’s economy continues its recovery from the Covid-19 crisis, and if China continues to assist other countries in dealing with the pandemic, the US will lose economic and political power while China gains it. Expect the US to put up some serious economic, political and military resistance to this development. Few empires go gentle into that good night.

12. Anti-China rhetoric and policies will go up by a lot

For several years now politicians, media and think tanks have been increasing their anti-China rhetoric. Now faced with an economic collapse and looking for scapegoats the Trump administration will pull a Hillary: Blame a foreign power for his own failure.

China and China alone will be blamed for the Covid-19 crisis, despite the lack of evidence for the accusations, the considerable evidence to the contrary and ample evidence for the Trump administration’s own mishandling of the Covid-19 crisis and the disastruous effects it has had. Those people and special interests with a pre-existing hatred of China will seize the opportunity this climate provides them with.

Like Russophobia, Sinophobia will soon become a key part of the bipartisan foreign policy consensus.

13. High unemployment & high economic uncertainty create a volatile domestic situation

Institutions will come under pressure; scapegoats will be sought and found; demagogues find willing audiences; people become more open to radical solutions; people’s and businesses’ increased dependence on government means those governments will have more power to wield; divisions within the country can be created or fueled and exploited; war against perceived domestic or foreign enemies may come to be used as a tool to unite a country, give its people a sense of purpose and a way to channel their anger & frustration.

14. Emergency work and life changes become permanent

To contain the virus, protect themselves and the people around them, a lot of individuals, families and businesses are making big changes: Working from home, home schooling and online education, various forms of social distancing. After the virus threat has receded and life has gone back to normal, some of these changes will endure because more people will now have experience with these practices and because a better infrastructure will have been built up to facilitate them.

15. A new narrative rationalizing the transformed political economy emerges

There was no public process of discussion, analysis, reflection and justification that formed the intellectual basis for the fundamental changes made to the political economy. The public was not given an opportunity to vote on whether they want this new system or not. Instead, these changes came in the form of direct emergency actions taken in the middle of the crisis or as a result of more indirect macroeconomic developments that the crisis and the measures taken to combat it gave rise to over time.

But although there was no prior process of deliberation and justification of the new system, the public will have to come to see the new system as legitimate. And so a new narrative or framework that rationalizes the new system will form and be communicated to the public by politicians, media, economists, social scientists, think tanks, schools and other major influencers of public opinion.

Koen Swinkels

This article first appeared on Foreign Policy Follies.

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