COVID-19 as the tip of globalization: A name for a change to an expansionist fiscal coverage
Since the 1980s, leading nations have relied on the two pillars of promoting globalization and fiscal consolidation. However, the corona crisis brings a major change in direction. Here a polemicist who has always spoken out on globalism speaks about a world after COVID-19.
As it spread around the world, the COVID-19 pandemic has hit global economies hard. In the second quarter of 2020, the gross domestic product of the major industrialized countries recorded the steepest decline since the global financial crisis in 2008. After the lockdowns in various countries have been lifted, business is likely to recover somewhat in the last two quarters of this year, but optimism about the situation is unimaginable.
An end to the pandemic is not in sight for the time being. Experimentation with large-scale urban barriers has shown how inefficient they are in completely eradicating the infection. As soon as the locks are lifted, the virus circulates again and the number of infected people increases. Many countries, starting with Japan, are now afraid of further waves of infection. As long as this situation remains unchanged, a recovery in consumption will be delayed.
The German sociologist Ulrich Beck coined the term “risk society” to describe modern society. At a time when the accumulation of wealth was not enough, people were striving for greater and greater wealth. But once a certain standard of living was achieved, the focus shifted to discomfort and caution about anything that might threaten it. Health risks in particular have been strongly emphasized among the population and the burden of reducing these risks has been placed on governments. Beck’s theories date back to when the Chernobyl nuclear accident put people around the world at risk of radioactive contamination. This time the object of people’s fears is an invisible virus. People face the risk of person-to-person contagion and especially the risk of death for the elderly.
Anti-globalization is picking up speed
In the face of the pandemic, many countries – initially not Japan – have started closing their borders. The virus circulated in unison with the movement of people around the world. Of course, the new coronavirus isn’t the only dangerous infection. But the widespread media coverage of this new infectious disease made its existence even more real to people. Unknown threats haunt people’s imaginations and are not easy to get rid of.
So far there have been proposals to restrict entry to countries in order to prevent terrorism and crime, but voices calling for freedom and respect for human rights have prevented such measures from being carried out. This time, however, things are different. Calls that this must be done for the sake of public health – something no one can fight back – and the spread of panic through the mass media provided widespread support for closing the borders. The governments strictly controlled the flow of people into the countries and carefully screened the applicants. This trend is likely to continue even after the pandemic has subsided. The power of countries to control their borders has increased significantly as a result of the COVID-19 shock.
Not only has passenger traffic become more controlled. The countries that manufacture masks and medical devices have taken measures to limit exports one by one. Masks, which were widely available in the market until last year, temporarily disappeared from stores. Tighter investment controls have also emerged as more and more countries are drafting laws to prevent foreign investors from buying companies with cutting-edge technology in medicine and related fields.
In the past, such measures would have been criticized as protectionist. But now they are seen as necessary by governments to protect people’s lives. In times of crisis, governments must step up their border controls. An expansive fiscal policy is also gaining new acceptance in order to alleviate the economic pain of the pandemic. We are therefore seeing a gradual but widespread change in public opinion.
Since the 1980s, the world’s leading economies, including Japan, have had increasingly open market policies. Companies have improved production productivity by moving production overseas and building global supply chains. But COVID-19 is likely to bring about big changes in this regard. As countries close their borders due to the pandemic, the cost of a global supply chain increases. And governments will likely focus on strengthening domestic production of important raw materials. The current dependency of tourism and hospitality on incoming demand also needs to be reconsidered. It looked like the walls dividing countries would be removed in the great age of globalization, but now governments and corporations are looking more inward, towards the single market.
Global economic reconstruction out of reach
The change in the geopolitical environment is also important. The trade frictions between the US and China have already become extremely delicate. Allegations that China is responsible for the coronavirus crisis have surfaced in both Europe and the United States. The increase in Chinese military maneuvers in the South China Sea is also changing public opinion in Japan. So far there has been a precarious balance between political friction and economic cooperation. But we are moving into an age where politics – and security concerns – take precedence over economics.
There is also a threat of a new financial crisis. Despite dramatic economic downturns, stock markets remained excessively strong in many countries. If the demand for office space from working from home decreases, there is a potential for a negative impact on urban real estate. Private debt is also expanding rapidly, from Europe and North America to Asia and beyond. Which of these factors will actually trigger a crisis is difficult to predict, but there is no doubt that financial markets are unstable today.
As the world economy slows down, it is likely that friction between countries will increase. The previous financial crisis occurred in the midst of a broad trend towards greater globalization worldwide. Back then, the United States, still acting like a responsible great power, aggressively injected dollars into troubled European and Asian financial institutions. International institutions such as the World Trade Organization were also functional. But what will happen this time? The movement of people has ceased due to the pandemic, and the flow of goods and money has stagnated. Washington has evolved into an insular “America first” attitude and as a result global institutions can no longer properly fulfill their role. When the age of globalization comes to an end, the next recession is very likely to trigger a complex crisis, even bigger than that of 2008.
There was no longer any demand from overseas
After the Japanese bubble burst in the 1990s, it was foreign demand that sustained the Japanese economy. The combination of exports and foreign investment offered Japanese companies new growth opportunities. In the tourism sector, too, aggressive measures to attract overseas visitors in the 2010s filled the void created by the decline in domestic travel demand. As a result of this outward-looking development, export dependency rose significantly from 8% in the first half of the 1990s to 17% in 2019. Foreign direct investment also rose from 0.3% of GDP in 1993 to 4.9% in 2019.
In the looming economic crisis, it will be difficult to find escape routes overseas. The effects of the pandemic will linger for a while. Greater international friction will further hamper trade, cross-border investment and passenger traffic. With unprecedented uncertainties in the past, companies, investors, and even governments are being pushed to rethink their existing approaches.
Whether the corporations like it or not, they will have to take care of reducing the size of the overdeveloped supply networks. The Japanese government must consider strategies to initiate a renaissance in domestic production. The shrinking national population and regional disparities must also be taken seriously. A particularly urgent task will be decentralization, which will reduce the overconcentration of population and economic activity in Tokyo and other urban areas that make them far too susceptible to pandemics.
People will become more aware of the role of the state in the future. The government needs to address several issues, such as: For example, the return of production to the homeland, the correction of disparities, the achievement of decentralization and the promotion of the low birth rate. To achieve this, a switch to an expansive fiscal policy is essential. And it’s not just Japan. Countries around the world are in the process of expanding the scope of public finances to overcome the economic crisis.
For the past 30 years, politics has been rooted in the two pillars of promoting globalization and fiscal consolidation. But the post-COVID-19 world will be an opportunity to reflect on what politics is about. A major change in values with a view to the future will probably become visible to everyone very soon.
(Originally published in Japanese. Banner photo: A plane flies over Minato, Tokyo. With the rise in coronavirus infections, none of the major airlines have been able to significantly reduce their flights. © Jiji.)