Post-COVID World

How would the post-COVID world look like? Though the pandemic has not yet played out fully, some plausible speculations can be made.

One rather optimistic view likes to see a parallel between the World War-II and a world war like situation created by Covid-19. By an extension of the parallel, some anticipate (or rather wish) that the post-COVID world would also see the emergence of greater international cooperation and strengthening of existing and possibly the creation of new multilateral institutions like UN, IMF, World Bank, ITO and  WHO that took place in the aftermath of WW-II. 

But the more likely scenario presents a different picture. WW-II (despite massive destruction of human life and property) created an economic boom through huge hikes in government expenditure on war-related activities in all countries which co-existed with acute shortage of essential consumer goods (including famines) as resources got diverted from ‘butter’ to ‘guns’ in an over- full-employment economy and a consequent spike in inflation (especially after war-time price controls were removed).  

By contrast, the unfolding pandemic-caused disaster first created a huge supply-side shock resulting from the breakdown of supply chains. This, in turn, led to a massive cut in production, jobs and income (particularly after widespread lockdown) which is plunging the global economy into an economic situation which, at least for the next few quarters, is likely to be similar to, if not worse than,  the 1930s Great Depression. 

The basic constraints on economic activity would come in the form of shortage of workers and critical inputs (due to disruptions to supply chains and spatial movement of labor), as well as the shortage of demand as peoples’ incomes, are squeezed. Also, more work from home (or anywhere) would be the new normal in many industries which involve brain instead of manual labor, saving commuting time, transportation, energy and real estate costs. Unlike the aftermath of WW-II, deflation, rather than inflation, would be a bigger concern in most parts of the world.  

There will be several other long term consequences. 

Business firms would look for greater automation to reduce the need for labor in future emergencies. Machines, unlike humans, are immune to pandemics and stay in the firm without extra costs. Given the ever-expanding urbanization and cutting of forests, human beings would increasingly come into contact with animals and such transmission of the virus from animals to humans is likely to increase in frequency and intensity. Greater automation, in turn, would improve labor productivity while accentuating job losses and rising inequality in income distribution. 

There would be a greater tendency to rely on domestic (where possible) and geographically closer regional supply chains, instead of far-flung ones. This would cause global efficiency loss (also loss for consumers) while reducing the risk of loss arising out of possible supply chain disruption in future emergencies.  Some China-centric countries may like to diversify their sources of supply by buying from others. (For example, the risk of over-dependence on a single source of supply to minimize cost has become painfully clear for several countries as the Chinese export of masks and protective gears got severely disrupted due to the COVID outbreak in Wuhan and China kept most of its production to satisfy the huge spurt in domestic demand.)  This, along with rising trade frictions between the US and China, may open up additional production and export opportunities for manufacturing in India. Foreign countries (including China) may also like to increase FDI into India to make use of these opportunities.  

The China-US rivalry is likely to sharpen. On top of the existing trade frictions, the fixing of the blame on China (for the initial outbreak of the virus, cover-up, the supply of faulty test kits etc) and the compensation demand by the West for the pandemic damage is sure to sully the atmosphere.  Instead of cooperation, we are likely to see more antagonism and diplomatic fights between China and the US (plus Western allies) in various global forums.  Though the US would continue to be the number one military power, the economic rise of China with huge resources to invest abroad would go on weakening US leadership, particularly in the less developed countries. China would seize the opportunity to provide additional funding to international institutions whenever the US would refuse to do so. This is on top of the beating that the image of the US model has already suffered by having the biggest death toll due to Covid-19, despite being the richest country with its much-vaunted advanced health care system.  

The price of oil would remain weak due to the global recession, despite attempts by OPEC and non-OPEC countries to reduce supply. Rather paradoxically, US – so far opposed to the role of OPEC – may also join efforts to artificially raise the price of oil by cutting supplies, in the interest of shale oil producers in the US. The low price of oil would delay the switch from conventional cars to electric cars.  However, as an investment in oil-producing capacity is gradually curtailed, the price of oil may again move towards $60 mark (the price point where extracting shale oil becomes profitable again) when the global economy fully recovers in 3-4 years.  The recovery itself may well be a prolonged W-type recovery, instead of a sharp V if there are several waves of infection. Exchange rate volatility is also going to increase as funds would flow in and out of countries recovering (and growing) at different rates.   

The anti-globalization and anti-immigration forces are likely to become more powerful. In times of government failures and economic crisis, the natural tendency would be to shift the blame towards ‘foreigners’.  

Finally, many countries may see the need for significant hikes in government expenditure on public healthcare services, as the vulnerability of the existing systems is being exposed so brutally. There would be more public pressures (including politicians championing the cause) for moving towards some kind of a universal health care system (even in the USA) and some form of Universal Basic Income (UBI). These, along with the forced awareness of the fragile balance between environment and the survival of human beings as well as the interconnectedness of different parts of the world, could be the biggest positives from this global disaster.

By Mr. Alok Ray
Former Professor of Economics, IIM Calcutta, India, and
Cornell University, USA

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