COVID-19: Will the world remain flat after the curve flattens?

Reflections on disruption, supply chains, and globalization by Krisha Gandhi ’20 (ITFD)

Photo by Edwin Hooper on Unsplash

In my all-time favourite book ‘Antifragile’, Nassim Taleb divides the world into 3 categories- fragile, robust and antifragile. He refers to fragility as the state of being that involves avoiding disorder and disruption for fear of the mess that threatens to disrupt your life: you think you are keeping safe, but really you are making yourself vulnerable to the shock that will tear everything apart. Robustness is the ability to stand up to shocks without flinching, without changing who you are. But you are antifragile if shocks make you better able to adapt to each new challenge you face. You are antifragile if you can opportune from disruptions, to be stronger and more creative. Taleb thinks we should all try to be antifragile!

On March 11, 2020, declared a world pandemic, the COVID-19, is an epitome of the chaotic disruption Taleb was referring to. The onset of this crisis got me pondering whether populations, institutions, financial bodies, governments and policy-makers -i.e. the world as a whole will be able to be resilient in the face of the aftermath of this crisis? Do we have the acceptance, courage and strength besides the technical, innovative and problem-solving skills to start afresh and turn this disequilibrium around into the most memorable salvation story we have ever seen? Or will we succumb to this dooming, seemingly apocalyptic spiral, and lose everything we take for granted in our day-to-day lives? When the noise of this unprecedented shock dies, will we be left at the inception of a brand new system that will push us to rethink policies, and rewrite mandates that shape, govern and structure the world? 

The outbreak of this global health crisis saw a strong backlash against globalization in the form of acceleration of trends underway. Before COVID-19 slammed the global economy earlier this year, China had adopted selective international exchange rates for political incentives. This had consequently led to US-China trade wars involving up to 25% tariff imposition on Chinese imports.

In March, COVID-19 contributed to this backdrop by declining the number of cargo ships setting off for the United States by 10%. The cost of shipping goods by air nearly doubled, restricting trade further. In order to contain the outbreak of the rapidly spreading virus, countries were forced to close their borders to foreign visitors which severely restricted the movement of people worldwide.

With no signs of the situation returning to normalcy, countries are desperately trying to be “self-sufficient” by ordering factories at home to produce ventilators, banning exports of face masks, and localizing pharmaceutical supply chains even at the cost of added expenses. The declaration of a potential suspension of immigration into the U.S by the President seemed like a final nail in the coffin for the era of globalization.

The world’s response to COVID  comes across as ratifying Trump’s argument for protectionism and supply chain controls. This alludes to a pressing question in such uncertain times: Will the world remain flat after the curve flattens after all? Let’s first look at what does it mean for the “world to be flat”? In the book, ‘The world is flat’ by Thomas L. Friedman, the author endorses his view of the world as a level-playing field, wherein all players have equal opportunity and the world is a global market where historical and geographic boundaries are becoming increasingly irrelevant.

Globalization has persisted in different forms for decades. In my opinion, just like the dotcom bubble, 9/11 debacle, 2008 financial crisis, the COVID-19 pandemic too, is a temporary shock, which will perhaps change the face of globalization but not sink it. In the near future, we will likely either have a vaccine or much of the world will be infected by the virus. Either way, the current restrictions will neither be needed nor sustainable in the long run.

For instance, by the time the curve peaks, most countries will perhaps already have bought or produced enough inventory. In that case, will it really make sense to use tax-payers money on incurring exorbitant production costs to set up ventilator factories at home when their supply is already bolstered by sufficient purchase? Evidently, medical supply chains will change less than politicians currently promise! 

But even after the shock evanesces, COVID-19 will heavily influence the decision-making process with regards to investment and relocation. Many argue that the crisis was an exemplary demonstration of increased risks associated with globalised supply-chains. A flip-side to the dispute is that in the quest to maximize profits and reduce the risk of localized disruption from the crisis, if anything, firms might only expand production lines across the world, creating employment more evenly, and promoting eventual global recovery. In fact, the renowned economist, Obstfeld, who served as IMF’s chief from late 2015 through 2018, said that “While global supply chains will undoubtedly change in a post-crisis economy, much of that change will be in the form of diversification, not on-shoring.”

While layoffs and increasing unemployment in a post-crisis recessive economy are inevitable, they will not mark the end of outsourcing. Turning to autarky-like economies will be too costly to be sustainable for countries world-over. There will be plenty of opportunities to employ people in jobs that demand highly skilled labour to meet the needs of the recovering economies. This will pave the way for Globalisation 3.0, described in Friedman’s book as individuals focusing on finding their foothold in the present global competition and making significant global collaborations. In fact, skill up-gradation of this form, to ensure relevance as demanded by the need of the hour, will push humans towards becoming antifragile, as recommended by Taleb. 

However, “Outsourcing is just one dimension of a much more fundamental thing happening today in the world”, Friedman claims. Experts often view globalization from a one-dimensional perspective- physical goods and services crossing borders. But in fact, many intangibles- data, value, ideas, innovation frequently cross borders. In his book, Friedman emphasizes that “You don’t need to emigrate to innovate”. “Globalization in recent times has created a platform where intellectual work, intellectual capital, can be delivered from anywhere. It could be disaggregated, delivered, distributed, produced and put back together again — and this gave a whole new degree of freedom to the way work is done, especially work of an intellectual nature.” In light of this view of global integration, I believe that the world is going to get flatter. With workforces across nations getting training on Zoom video conferencing, to extensive sharing of knowledge in research on medical advances, the spillover of ideas and innovation is going to witness only an onward spur. The quantity and value of data transmitting between countries are increasing and with the high-value data processing replacing supply chains as the predominant channel of global economic exchange, I see this only increasing further. 

So is the world after coronavirus tending to globalization or deglobalization? I think it depends on where you look. COVID can make it harder to ship Chelsea fan-club merchandise around the world, but no quarantine can contain cryptos from crossing borders! 

Economic Effects of Catalan Independence: A Historical and Theoretical Perspective

ITFD students organized a talk on the economic effects of Catalan independence with Prof. Jaume Ventura.

By Ben Beuchel ’16, Frederik Møller Jensen ’16, and Saskia Mösle ’16, students in the International Trade, Finance, and Development master’s program


Why are so many Catalans advocating independence? What would be the economic consequences of a potential separation from Spain? To find answers, BGSE students from the Master’s Program International Trade, Finance, and Development organized a talk on the economic effects of Catalan independence with Prof. Jaume Ventura. Prof. Ventura is a senior researcher at the Centre de Recerca en Economia Internacional (CREI), research professor at Barcelona GSE and member of the Wilson Initiative, a pro-Catalan-independence association of academics in the fields of economics and political science.

Photo: El Món
Photo: El Món

What is the optimal size of a state?

From a theoretical viewpoint, the ‘right’ size of a state is determined by a trade-off between two opposing forces. On the one hand, economies of scale and the border effect (i.e. political borders hamper trade) create a force towards larger countries. Such benefits are especially pronounced in areas such as economic markets and defense. On the other hand, heterogeneity of people’s preferences with respect to culture, the legal system or welfare, embodies a force for smaller countries. According to Prof. Ventura, these two forces have shaped the size and structure of the state in two waves throughout the history of globalization.

In the first wave, spanning from the Congress of Vienna to the beginning of the First World War, the number of countries more than halved, implying that states, on average, became larger. Political and economic integration proceeded hand in hand, and larger markets were created by sacrificing heterogeneity of preferences. After the Second World War, the second wave of globalization began. International trade reached higher levels and the number of countries multiplied to over 190. At the same time, international collaboration in the form of international organizations, such as the World Trade Organization, emerged. While this new era was characterized by political fragmentation regarding the nation state, larger markets were created through international cooperation and sacrificing economies of scope.

Figure 1
Figure 1. Trade share (right axis), the number of countries and WTO membership (left axis). Source: Gancia, Ponzetto, Ventura (2016).

 

The creation of supra-national organizations enabled countries to exploit economies of scale irrespective of their size. As supra-national entities took over functions such as defense, which had previously mandated a larger state, even small states were able to thrive. At the same time, competencies such as culture, law and order and the welfare state remained on national agendas, as cultural globalization proceeds more slowly than economic globalization. All in all, it seems that the homogeneity of constituents’ preferences has become a more decisive determinant of a country’s size in the second wave of globalization.

The Catalan perspective

With this theoretical background in mind, Prof. Ventura turned to the specific case of Catalonia. First, he argued that small states in Europe, such as Norway and Switzerland, are competitive and wealthy. A potential Catalonian state with 7.5 million inhabitants would be larger than Denmark, Norway and Ireland, and only slightly smaller than Switzerland. Studies also find that the effect of size on economic growth depends on the degree of openness (Alesina, Spolaore and Wacziarg 2005). If a country is very open, size seems to have negative effects on growth. Catalonia, with a high degree of openness of 130%, could thus potentially grow faster if independent from Spain.

Next, Prof. Ventura focused on the long-run economic benefits of independence. If Catalonia became independent, this would imply giving up economies of scale arising from the union with Spain. However, these costs remain limited, in his opinion. The fixed costs of running a Catalan state have been generously estimated to be €2.793m which represents 1.4% of Catalan GDP, or €383 per Catalan citizen. Additionally, markets and defense have already been outsourced to the EU and NATO, suggesting that Catalonia would not lose out if it gave up the union with Spain (provided that it remained a member of EU and NATO). A major benefit for the Catalan economy would be the stop of fiscal transfers to the rest of Spain. Currently, taxes paid to the central government exceed public spending in Catalonia by €16.409m (8.4% of GDP). Moreover, current public capital in the region is the lowest throughout Spain. Public investment in Catalonia accounted for merely 8-9% of Spanish public spending, even though Catalonia contributes roughly 20% to the Spanish GDP.

In the short-run, there is a chance that costs might arise from retaliation by the Spanish state, and maybe others. However, Prof. Ventura estimates such costs, e.g. commercial boycotts, to be small and short-lived. He argues that retaliation would not be a sub-game perfect outcome, as most of the EU’s foreign investments and trade with Spain flows through Catalonia.

While the potential economic gains are substantial, Prof. Ventura emphasized that the heterogeneity of preferences between Catalonia and the rest of Spain remains the key reason behind Catalonia’s longing for independence. He pointed to his experience in the U.S., where the states enjoy a high degree of autonomy regarding education, justice, infrastructure, welfare and culture. In contrast, Spain’s central government dominates most aspects of public policy and previous attempts to increase Catalonia’s autonomy within Spain have failed.

While the future of Catalonia remains uncertain, Prof. Ventura advocated the right to self-determination and believes that “Catalan independence offers a unique window of opportunity to reform a bankrupt state and adapt it to modern times, both in Catalonia and Spain”.

References

  1. Gancia, G. A., Ponzetto, G. A., & Ventura, J. (2016). Globalization and Political Structure. NBER Working Paper No. 22046.
  2. Alesina, A., Spolaore, E., & Wacziarg, R. (2005). Trade, Growth and the Size of Countries. Handbook of Economic Growth, 1499-1542.