World Economy That Took Elevator Down Faces Steep Stairs Back Up

Enda Curran, Bloomberg
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In the wake of what the IMF has called “The Great Lockdown,” the world has suffered from the worst economic crisis since the Great Depression. While we’ve seen a bit of a rebound, World Bank chief economist Carmen Reinhart warns against confusing rebound with recovery – the world has a long way to go before it can return to where it was before the crisis. Whereas the IMF in January estimated that 160 countries would end 2020 with growth in per capita income, that same forecast now predicts that 170 countries (nearly 90% of the world) will have per-capita income reduced by year’s end. In Asia, where the first-order effects of the pandemic have largely been contained, the recovery remains a mixed bag, with re-emerging virus clusters spooking consumers. EU Chamber of Commerce in China president Joerg Wuttke describes the recovery as being shaped “like the top of a chainsaw…Up and down and up and down and painful all the way.” Indeed, labor markets have been hammered by the pandemic – the International Labor Organization estimates that the world lost the equivalent of 400 million full-time positions in Q2. With central banks wrestling with how to balance short- and long-term interests in providing stimulus and managing debt, the landscape of recovery remains uncertain.

Down but not out? Globalisation and the threat of Covid-19

The Economist Intelligence Unit
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While global trade has taken a hard hit from the pandemic with disrupted supply chains and restrictive nationalistic policies, the core forces behind globalization – cost advantage, policy uncertainty, and the potential of extended markets – continue to drive the trend forward. The target-rich environments for foreign direct investment (FDI) – hospitality, tourism, retail, entertainment, transport, energy, and manufacturing – have suffered from a precipitous demand drop as restrictions damper economic activity, which could reduce FDI flows by 40% or more for the year. Many countries have placed limits or entirely stopped foreign investments, and global trade volumes are expected to drop by about 23% for the year. 

Nevertheless, the costs of de-globalization remain high – strategies such as reshoring, stockpiling, and regionalization present significant real and opportunity costs. The most likely result is a hybridized approach – trimming and streamlining international connections while advancing interest in strategic domestic endeavors. Companies with strong balance sheets are best-positioned to navigate these changes, as they have the short-term flexibility to build redundancy and ensure investments will pay off in the long term. While the foundations of globalization have been shaken by the coronavirus pandemic, there remains a viable path forward to a future of a better global economy.

The Pandemic and Political Order

Francis Fukuyama, Foreign Affairs
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Crises, such as the Great Depression, the 9/11 attacks, and the Great Financial Crisis, all had unforeseen consequences. What will the consequences from the Covid-19 pandemic turn out to be? So far, it is clear that some countries have handled the pandemic better than others. Successful pandemic responses have been the result of state capacity, social trust, and leadership. There are a multitude of articles out there that predict the economic consequences of Covid-19, but we must not forget the political consequences, which could be even more significant. 

The combination of deep job losses, prolonged recession, and unprecedented job burden will inevitably produce tensions that lead to political backlash. The trends of nationalism, isolationism, xenophobia, and attacks on liberal democracy will only be accelerated by the pandemic. The pandemic will compound the effects of displacement caused by climate change, leading to a new wave of attempted migration which will be met with more resistance than before. Covid-19 has exposed the inadequacies of institutions everywhere, highlighting and even deepening the gap between the rich and the poor. On the other hand, the crisis has also revealed the government’s ability to provide solutions and boost social solidarity in some countries. Hopefully, the crisis will ultimately spur renewed international cooperation which will be necessary to overcome Covid-19’s “unforeseen consequences”. 

Covid-19 and Chinese manipulations hide the likelihood that the global distribution of power will continue shifting eastward. Though the US has an impressive track record over previous epidemiological crises, it needs to contain the spread of the virus. Democracy, capitalism, and the United States have proved resilient and capable of transformation in the past, but unity and strong leadership will be required.

The bitter dispute over Africa’s largest dam

The Economist
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The Grand Ethiopian Renaissance Dam is half a century in the making. The hydro-electric dam is Africa’s largest and is expected to produce 6,000 megawatts of electricity which is double Ethiopia’s current power supply. The project could connect millions of Ethiopians to the grid, some for the first time ever. While it is a source of national pride for Ethiopia, it is seen as a source of national danger for Egypt. Egypt fears the dam will choke off its primary water source: the Nile River. 

Talks between Ethiopia, Egypt, and Sudan over the years have failed to produce a deal. Ethiopia wants to start filling the dam’s reservoir during this summer’s rainy season and plans to do so with or without a deal. On June 26th, after years of stalled talks, the three negotiating countries pledged to reach a deal in the next two weeks. Diplomats say most of the issues have been resolved but a process on how to handle a drought has not yet been agreed upon. The outcome of the talks will have major political consequences for Egypt and Ethiopia, possibly pushing the two countries to the brink of conflict. Egypt has portrayed Ethiopia as a thief determined to dry up the country while Ethiopia has painted Egypt as a neocolonial power that denies national sovereignty. Furthermore, neither leader is in a comfortable political position when it comes to domestic affairs. As the author puts it, “The technical details of a deal can be worked out, but neither leader has a deep reservoir of political capital to make it a reality.”