The reaction to the Coronavirus crisis will have more consequences and touch more lives than the trigger

How much of an impact is COVID-19 going to have on the world? Elias Papaioannou, Professor of Economics at London Business School and Academic Director of the Wheeler Institute for Business and Development was joined in conversation with Moisés Naím, an internationally-syndicated columnist and best-selling author, including The End of Power, as well as Venezuela’s former Minister of Trade and Industry, director of Venezuela’s Central Bank, and executive director of the World Bank, to discuss how the Coronavirus pandemic is going to impact the geopolitical landscape.

  • There will be a series of shifts that are accelerated by the pandemic, such as increased working from home, as well as heightened tensions between the USA and China; 
  • Frictions between China and the US are structural and permanent competition between the superpowers across a range of issues is here to stay; 
  • The interconnectedness of emerging markets with the rest of the world has grown immensely  and it will contribute to spreading  and amplifying  the economic consequences of the pandemic; 
  • COVID-19 is going to see the return of government to a lot of areas from where it had retreated in recent years – especially in the US; 
  •  Massive intervention from central banks and governments across the world has played a huge role, the size and scope of which would have been impossible for the private sector to tackle. It has also shown the consequences of not having a well-funded state capacity to deal with large scale global shocks; 
  • Companies are going to have to be more empathetic and have greater solidarity with their workers, as well as a greater sense of transparency and truthfulness; 
  • There is a risk populist leaders may use the crisis to their advantage to sustain and retain their power by exacerbating polarisation and deploying ‘post-truth’ misinformation techniques.  

According to Naím, three commonalities span the various crises that have impacted the world in recent history; the dot-com bubble burst, 9/11 and the Global Financial Crisis. These similarities include the fact that the reaction to the crisis has more consequence and touches more lives than the trigger. There is also an overestimation of the consequences, i.e. more things stay the same than are changed by these events. Thirdly, institutions and ideas we thought were permanent become transient and issues we thought were passing become permanent. An iconic example from the current pandemic that Naím cites is the spike in teleworking; he thinks a larger proportion of office workers will perform their duties from home and offices will work on a rotational basis after the pandemic is tamed. 

Naím also believes that an important trend will be continued friction between China and the United States. The relationship was not going well before the virus, the friction is mounting and it is going to be with us for a long time in different forms and manifestations. Naím considers this tension will continue even if there is a change in US President because the friction is structural and permanent. The Chinese political leadership and their approach are not going to change, while there will be ongoing competition for control of raw materials, manufacturing, data and space. While Trump has made the situation worse, the rivalry will remain whoever is in the White House. But a more intelligent, less populist and irresponsible policy on the part of a US government that behaves differently than Trump’s can be critical in avoiding escalating tensions between the two powers. It’s a priority that the inevitable frictions between China and the US do not escalate 

We are facing an emerging market crisis the likes of which not seen before

There has been a regularity to emerging markets crashing over recent years, whether it be in Latin America, Asia or Russia. While the triggers, policy reactions and context might be different, the crisis travels and its economic impact is broad and multinational.  In the current crisis, the scale of the problems for emerging markets will be unprecedented.   This is in part due to the fact that prior to COVID-19 there were pre-existing, debilitating conditions: anaemic economies, depressed commodity prices, falling remittances, high indebtedness and “sudden stops” of credit and foreign investments.  The unprecedented fall in demand and price for oil is going to make the situation even worse for oil exporting countries with these pre-existing conditions. Similarly, they need international help, in the forms of investment, credit and finance, which is going to be limited for the foreseeable future.  

Large-scale government intervention is going to lead to the public sector having a much larger role to play across the world

The required intervention from governments and central banks is going to lead to an increased presence for the public sector in a lot of areas where it has retreated in the past. This massive intervention has shown that the private sector lacks the resources to intervene to the required extent. However, in many of these emerging countries, the private sector is the provider of formal employment, growth, dynamism and expertise.  

Naím believes that the crisis is going to lead to a return for the need for technical prowess and competence at the highest levels of government. He considers that in some important countries the response to the COVID-19 has been amateurish and rife with ineptitude, improvisation, bad management, politicization and corruption. We will see a renewed appetite on the part of voters for competent people in charge of handling national emergencies.  

Naím does not suggest that private sector expertise is necessarily better, and there have been high profile debacles with business people running the public sector, but he thinks the private sector is going to have a more proactive social policy. There is going to have to be a transition in terms of mindset, expectations and rules of engagement between management and workers. The private sector is currently focussed on maximizing liquidity because they are concerned about impairments coming in the future. However, they also need to prioritise solidarity between leaders and workers, as well as a sense of empathy. Moreover, people want the truth from government leadership and the private sector, with leaders more transparent, rather than manipulating or obfuscating.  

Populist leaders may use geopolitical uncertainty and greater polarisation to extend their power and further weaken democracy

It is unclear how the pandemic will impact support for populist leaders, who should be suffering as a result in increased demand for truthfulness and competence, but they are also adept at manipulating the situation to their advantage, especially where inequality is being heightened. The challenge with populism, according to Naím, is how long it lasts. Countries can survive one term of a bad, populist leader, but when they can eliminate term limits and stay in power for a prolonged period the negative and often irreversible damages are immense. The continuity of populists undermines the checks and balances on power and bad policies; the fight should not simply be limited to fighting populism but also defending term limits and checks and balances on power.  

Naím frames this in the equation ‘P+P+P=C’; it captures the forces driving the decline of liberal democracy: populism plus polarization plus post-truth lead to ‘continuism’. Global populism has different manifestations and different consequences; populist leaders use these to expand polarization and divisions across wedge issues that become central to the national conversation. This polarization makes it very hard for governments to function, as we have seen in Spain, in Belgium, in England, in Israel, in Spain and Italy, where there are strange alliances that have a very hard time creating sufficient power to govern. Furthermore, the post-truth world, where we don’t know who to believe, what to believe, who to read, who to follow, and how to understand what’s going on makes the situation even more unpredictable. These three P’s are being used around the world by bad leaders to grab power and retain it as much as they can. 

Elias Papaioannou’s conversation with Moisés Naím is part of the Wheeler Institute’s COVID-19 series – bringing together the expertise and experience of our extended community to understand, illuminate and offer solutions to the challenges created by COVID-19. Our differentiating factor is the role of business in addressing these challenges, with a focus on the implications and actions for those in developing countries.   

If you’re interested in following the Wheeler Institute COVID-19 series, check out our previous episode below.

Elias Papaioannou is academic director of the Wheeler Institute for Business and Development and professor of economics at London Business School, focusing on international finance, political economy, applied econometrics and growth and development. 

Moisés Naím is an internationally-syndicated columnist and best-selling author of influential books including The End of Power, a startling examination of how power is changing across all sectors of society, and Illicit, a detailed expose on modern criminal networks. In the early 1990s, Dr. Naím served as Venezuela’s Minister of Trade and Industry, as director of Venezuela’s Central Bank, and as executive director of the World Bank. He was previously professor of business and economics and dean of IESA, Venezuela’s leading business school. He served as editor in chief of Foreign Policy magazine for 14 years.  Dr. Naím holds MSc and PhD degrees from the Massachusetts Institute of Technology. 

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