Globalization crashes

Coronavirus has spread internationally

That a rugby match in Dublin between Italy and Ireland can be cancelled because of a virus that germinated in a market in a Chinese city, may be a chain of events that appeals to amateur chaos theorists.

In my view, the panic caused by the coronavirus illustrates how easily interconnected the world has become, how fluidly people move from one location to another, and how national infrastructure and policy systems are still so very different.

Having written about the coronavirus a few weeks ago (‘Humanity and Adversity’, Feb 2, https://thelevelling.blog/2020/02/02/humanity-and-adversity/) I thought that markets at least would quickly work through the implications. That it has not been the case owes much to another form of sickness – overexuberance in financial marketplace. The catalysts provided by the coronavirus are now treating this (in the short run the sell-off is nearly complete, and we will rally mid next week).

Ironically, in an age of machines, and where social media companies are dominant in many senses, markets are responding to the risk that humans will have less physical interaction with each other and will enjoy less physical forms of consumption (travel, shopping and consumption).

As I write, it appears at least from official numbers that the virus is somewhat contained in China, and globally the number of cases looks to have peaked. Here though, the risk is that the Chinese authorities rush people back to work and, like the Spanish flu in 1918, there is a bigger second (and third) wave of the virus.

The passage of the virus across the world has, even at what might be an early stage, revealed and further provoked a number of changes in our world.

The first relates to trust. There is widespread suspicion inside and beyond China that the authorities there have not been upfront about the true extent of the virus. Some, like US Senator Tom Cotton even believe that the virus is man-made. To that end, while China’s handling of the crisis will on one hand reinforce the sense that it can marshal huge swathes of its population, on the other the trust of outsiders in the Chinese authorities will diminish. The Belt and Road Initiative may be a casualty here. Distrust can also channel itself in other ways. If in the future China has a debt crisis, investors are likely to sell first than wait for a true picture to emerge.

Within China this episode has clearly damaged the Communist Party, though it is very hard to see how this will play out in public life, or even through social media discourse. My sense is that the Chinese authorities will react in at least two ways. One is a fiscal stimulus made up of tax breaks, support for small businesses and an acceleration of infrastructure programs.

The other more interesting one is to take what has been done in the domain of social control and social credit scoring and apply this to healthcare. I can envisage a sharp rise in self-diagnosis, tech based medicine and a related set of incentives for people to allow their health data be monitored by the state. If it happens, many in the West would consider it insidious, though given the fear created by the virus, many Chinese might acquiesce.

The second effect of the coronavirus crisis is that it is yet another event that makes visible the arteries of globalization and leaves them atrophied. That there has been little to no coordination between nations speaks to a sense of a fractured world, and the performance of the WHO reinforces the view that like the WTO, its time has come.

There will be a sharp short-term hit to world trade from the coronavirus (hotels, airlines are the obvious ‘victim’ industries though I think that ‘elite’ forms of travel and healthcare will continue to thrive), but in the longer-term it will also reinforce the sense in governments and some companies that security of production is increasingly important.

To that end, the rise of national champions and the relocation of production to ‘home’ countries (pharmaceuticals is an example) will continue. In many different ways, the coronavirus, like the 2019 trade war, will force a rethinking of globalization by corporates.

Other megatrends may also be rethought. India and many parts of Africa are the only parts of the world where urbanization rates are still relatively low, though where the rate of urbanization is now picking up. The coronavirus crisis is a very clear reminder of ‘smart’ urbanization is terms of the health, data gathering and communication implications, and in this way the lessons for Wuhan are yet to be learnt. For example, it is only emerging that 40% of the coronavirus cases in Wuhan were transmitted in hospitals – and the same may be true of both Italy and Iran. 

As this adjustment process happens, there will likely be one constant, which is the vogue of central banks to meet any threat to growth and attendant dip in markets with more liquidity. Liquidity provision and rate cuts will not solve the process of adjustment away from globalization, and in the long run they may channel this process down the wrong path because cheap money increases the risk that investment decisions are badly made.

Have a great week ahead,

Mike

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s