The Covid-19 pandemic will transform the global economic order for worse, with a “market subverting” China emerging as the alternative pole to the US, says a background note of the Niti Aayog, India’s official economic policy think-tank, on the long-term economic impact of the pandemic. The note, which has been reviewed by HT, paints a grim picture of the global economy going forward, does not rule out something like the Great Depression of the 1930s, and sees a rise in poverty, unemployment and debt. It will take large-scale policy co-ordination for “suitable realignment of strategies” against China’s growing clout to prevent this from happening, the note says.
“The global economic order will undergo material transformation” and “market subverting forces will now have an unprecedented impact on world trade and economies, greater in magnitude and pace than at any time in history”, as the post-pandemic world economic order changes from unipolar to bipolar, the note says.
To be sure, the global economic order has been moving away from a unipolar state for a long time as China has gradually increased its share in global GDP. According to data from the IMF, the share of India and China in global GDP was just above 1% in the 1960, while the US accounted for almost 28% of the world GDP. In 2018, US’s share had come down to 21.6%, while China’s, ranked second, had increased to 13.1%. India, while it is ranked fifth in terms of GDP had a share of just 3.4% in global GDP in 2018. While the covid-19 pandemic originated in China, it has been able to mitigate its economic impact in very little time. According to the Global Eoconmic Prospects released by the IMF in October, China is the only major economy which is expected to escape an economic contraction in 2020.
“The significant concentration risk of China within critical foundational blocks of the global economy from APls to metals became amply evident. Diversification of manufacturing or supply concentration risk became a priority for global corporations and for the first time in recent history even for governments around the world. This could potentially result in a sharp rise in protectionism and a realignment of trading partners globally, favouring some but a material risk to most”, it adds.
{{/usCountry}}“The significant concentration risk of China within critical foundational blocks of the global economy from APls to metals became amply evident. Diversification of manufacturing or supply concentration risk became a priority for global corporations and for the first time in recent history even for governments around the world. This could potentially result in a sharp rise in protectionism and a realignment of trading partners globally, favouring some but a material risk to most”, it adds.
{{/usCountry}}The note sees China as a source of disruption to free market and fears that the Chinese state will use its influence to undermine multilateralism. “The uncertainty of whether the new leader will embrace a market economy and resurrect the multilateral order or subvert free markets and the multilateral order through monopolistic state-sponsored strategies becomes an increasing risk as the new leader gains greater share of the global economy and dominates an increasing number of segments of the global economy”, it says.
The global economy was already struggling even before the pandemic, and it never really recovered from the impact of the global financial crisis in 2008, the note says. Covid-19’s impact will only make things worse; it says. It is also extremely harsh on the ongoing bull-run in global financial markets. “Whether the current positive sentiment and momentum in global markets is sustainable is not as much of the question, as when will it end”, it says.
It does not even rule out something like the Great Depression of the 1930s “that followed the Roaring Twenties (1920s) if loose liquidity conditions persist al a global level, particularly for the largest economies, and the global economic growth leader pursues policies that are deflationary for the global economy”.
To be sure, the note does not see China as the only problem facing a global economic recovery. Profit led innovations are likely to put a squeeze on mass incomes which are in keeping with the World Bank’s projections of rise in global poverty. “Productivity increases will likely continue despite subdued economic activity, as enterprises continue to adjust to yet another new normal while focusing on earnings growth, dampening employment prospects”, it says.
The imminent crisis is not completely unavoidable though. “Perhaps a global pandemic unprecedented in scale and speed like the current covid-19 crisis is what is required to get global economies to work in crisis mode together to get the global economy out of its recent funk, The long-term impact of Covid-19 is likely to be greater risk, lower rewards, and slower growth for global economies, trade flows, and financial markets - unless it proves a catalyst for resetting of the world order and suitable realignment of strategies in global interest”, the note says.