Will the coronavirus pandemic kill globalization?
Imagine pouring grains of sand from the beach onto a cone-shaped pile. The heap is getting higher and higher, but in the process it is getting closer and closer to a critical state – the state in which an additional grain of sand can cause a cascade or even collapse of the heap. As with a pile of sand, economic globalization is a complex system made up of the interplay of many parts. The pursuit of interdependence and efficiency led to the criticality of economic globalization. The coronavirus is now triggering a cascade of health, economic and social effects that can lead to a collapse in economic globalization.
The many advantages of economic globalization, such as increased connectivity and interdependence, also give rise to risks such as the transmission of viruses and a lack of self-sufficiency in the production of essential goods. Once economic globalization is viewed as a complex system that brings great benefits as well as systemic risks, it is possible to think more clearly about options for dealing with these risks in order to protect against collapse. These options may include reforms that may, for example, reduce the concentrated dependency on certain nodes within the system or increase the redundancy of vital supplies to encourage greater resilience.
The sandpile thought experiment comes from physics and is used to explain how complex systems often organize themselves into a critical state. These systems consist of many interdependent parts, the interactions of which are non-linear and not fully predictable. Physicists cannot predict when adding a single grain of sand will trigger a cascade or how large that cascade will be.
Sociologist Charles Perrow explained in Normal Accidents how two factors increase the likelihood of catastrophic risk in complex systems. The first is the degree and nature of the connections involved: the more connections there are between the components and the more insecure their interactions, the greater the interactive complexity of the system. Think of the myriad effects that the introduction of a new predator into an environment can have.
The second is whether the links are tightly coupled. Something that affects part of the system can cause cascading effects through the system. If items in a sequence have to be combined at a certain point in time or in a specified order, or if, in the event of a delay, no replacement deliveries or alternatives are available, a system is closely linked. Remember how delaying an appointment can create cascading effects when your schedule is tight.
Both aspects – interactive complexity and close coupling – apply to economic globalization. Influenced by David Ricardo’s principle of comparative advantage and supported by technological advances, countries and corporations reorganized production to specialize in producing what they did best and buying the rest. As a result, they have become increasingly dependent on global supply chains for everything from essentials (like food and medical supplies) to means of production (like auto parts). At the same time, many manufacturers have taken a “just-in-time” approach to delivering essential components, which means that global supply chains are tightly coupled and are more likely to spread shocks through them.
The coronavirus exposes some of the vulnerabilities created by these interdependencies and efficiencies, causing cascading shocks around the world. On a physical level, the virus is transmitted through face-to-face contact, that is, by meeting and traveling with people (a vector of transmission), especially in and through large hubs (like global cities and large airports that are becoming hubs for super-spread). ). To reduce these flows, governments are restricting international travel and locking people in. While these guidelines are effective at containing the virus, the restrictions are causing a massive drop in demand for everything from flights to restaurant meals to gym visits.
At the same time, the world is experiencing real supply problems as the global flow of goods is cut off or reduced. Car manufacturers around the world had to stop production due to missing components from China. The number of computers and telephones produced has plummeted. Large generic drug suppliers like India cannot continue production because 80% of the active ingredients on which these drugs are based have to be imported from China.
The effects are both indirect and direct. Many countries introduced export controls on certain medical items in order to serve domestic versus international markets. As orders fail due to a lack of supply, workers are laid off, which affects demand. At the macroeconomic level, the simultaneous supply and demand shock is putting a massive strain on many economies and presenting governments with unprecedented challenges with regard to the options for intervention.
What started as a small virus outbreak in Wuhan, China has spread across the world, both physically and economically, due to the density of connections resulting from economic globalization and the tightness of their coupling. In addition, the globalized system is so complex that no one can predict the full effects of the coronavirus.
Will the economic crisis triggered by the health pandemic lead to a social collapse, as Professor Branko Milanovic fears? Will there be a complete collapse of the sandpile of economic globalization when countries and companies decide to revive their production and emphasize resilience and self-reliance on economic efficiency and interdependence? Or will this pandemic result in a moderate avalanche that will lay the foundation for a more balanced, sober model of economic globalization?
In responding to these challenges, it is important to consider the two-way nature of economic globalization. Economic interdependence has played a role in lifting hundreds of millions out of poverty, while our greatest hope for a vaccine lies in open communication from scientists around the world. Globalization also contributes to the diversification of country-specific risks: if a country were completely dependent on domestic production for essential goods, for example, it would be completely vulnerable in the event of a natural disaster.
But many of the elements traditionally celebrated about economic globalization, including connectivity and efficiency, also create systemic risks where problems can cascade through complex interactions, a trait Ian Goldin and Mike Mariathasan refer to as a “butterfly defect.” Such risks were also evident during the global financial crisis, when the risk of toxic debt originating in America quickly spread through the deeply entangled bank balance sheets around the world.
Recognizing that economic globalization is a complex system that creates systemic risk enables us to think more systematically about options for dealing with these risks by reducing criticality and increasing resilience.
Between the extremes of full self-sufficiency or deep interdependence, countries should take a carefully balanced approach to reap the benefits of open markets in general while increasing domestic and regional capacity to supply certain goods, particularly essentials. Both complete independence and complete interdependence involve risks, so a diversified balance should be found between the two.
With the market often viewing layoffs as only negative in terms of short-term economic efficiency, regulators should consider asking for some level of assistance to ensure resilience. Realizing the need to better store masks and ventilators, and have greater surge capacity in hospitals, is a reminder that too much efficiency can be a bad thing. However, this recalibration between the values of efficiency and resilience can also be transferred to other areas, from food stocks to certain production capacities to the standard operating capacities in which hospitals are operated.
It also reflects a similar recalibration after the global financial crisis, where regulators required banks to increase their capitalization (decrease in short-term economic efficiency) in order to reduce the possibility of bank failure (increased medium to long-term resilience).
Although the pandemic draws attention to the trade-off between efficiency and resilience, an approach that takes systemic risk into account also leads to another risk that arises from economic globalization. Part of the interactive complexity of global systems must be reduced and made transparent so that the systemic risks that arise can be better understood and managed.
This applies to complex financial transactions and opaque supply chains. The banking crisis has also shown how important it is to be more transparent, so that the actors can better understand the complexity and recognize systemic risks. Here, too, countries recognize the importance of transparency about the effects of the virus in different states.
Efforts must be made to reduce reliance on major nodes in the global system and to ensure that there are backup systems that are separate in physical and virtual space. Imagine, for example, the financial damage that would radiate around the world if a hyper-connected metropolis like New York or London were destroyed by a major earthquake or terrorist attack.
We should focus less on the virtue of specialization than on the value of adaptability in order to better deal with unforeseen events. The adaptability could be helped by technological advances such as 3D printing, which was used to make masks for hospitals in Italy. Loosening the clutch also creates more room for adjustment.
Globalization brings enormous benefits, but it also brings with it systemic risks, so countries need to find a better way to manage interdependence. This does not mean swinging the pendulum from one extreme of high globalization to the other of deglobalization; rather, it means taking a more moderate and moderate approach to globalization that strikes a better balance between efficiency and resilience. The countries will continue to want to be coupled, just not so closely. You’ll want to make sure that a single grain of sand won’t collapse next time.
Anthea Roberts is Professor of Global Governance at the Australian National University in Australia and writes on international law and geoeconomics. She and Nicolas Lamp are currently writing a book on Winners and Losers: Narratives about Economic Globalization for Harvard University Press in 2021.