By Parag Khanna
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| The world may soon pass “peak virus.” But true recovery will take years—and the ripple effects will be seismic. |
| If we are lucky, the world will pass “peak virus” within the next six months. But the economy, governments, and social institutions will take years to recover in the best-case scenario. Indeed, rather than even speak of “recovery,” which implies a return to how things were, it would be wise to project what new direction civilization will take. That too will be a bumpy ride. The next 3-5 years will remind us that COVID-19 was the lightning before the thunder. |
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| It will be a long emergency for the economy ….. The most obvious tail-risk scenario to consider is that the numerous existing strains of COVID-19 encircling the world continue to ravage societies and the search for a vaccine proves more elusive, extending beyond the currently forecast 12-18 months. At the moment, all countries are self-isolating, but in this trajectory, some countries would be indefinitely ring-fenced from physical exchange with others. We should therefore be cautious about forecasts suggesting we face only a U- or V-shaped recession. Domestic unemployment is reaching Depression-era levels, and the current relief packages don’t yet amount to the stimulus that many Western publics may need for years to come. Precautionary savings and muted consumption will govern household spending decisions, and business investment will sag. A long-drawn-out W shape is therefore the most likely economic scenario for the years ahead. |
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| Petro-states and the “Suez scenario”…. Outright state collapse is not an implausible scenario for petro-states from Ecuador to Iran. Much as the 1980s oil trough hastened the disintegration of the Soviet Union, the combination of oil prices cratering and the likelihood that the hajj will have to be canceled eviscerates Saudi Arabia’s two largest sources of revenue. The high virus infection rate in Iran has been compounded by the stranglehold of American sanctions. Petro-states and developing countries have flocked to the IMF to access its emergency lending facility and have also drawn down their USD reserves to buttress their financing and stave off capital flight. It would be too simplistic to suggest that China will fill the void. Beijing has held back from extending generous credit to its usual client states such as Iran and Pakistan. Yet a “Suez scenario” remains plausible. With U.S.-China trade trending sharply downward and China angling to re-price oil into renminbi, a fragmentation of the global monetary order is a possibility for which all countries should prepare. |
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| Migration has stopped, but refugee crises could return….Global economic fragmentation and diminished international lifelines all but ensure that people will continue to flee failing states. Turkey has made clear it wants neither to house four million Syrian refugees in perpetuity nor to tolerate a mass virus outbreak. Dwindling Gulf support for Egypt and Sudan could spark an exodus from those states as well. Thus we should expect the migrant crisis from Central America into Mexico and the Middle East into Europe to surge again. More broadly, if and when the pandemic restrictions on cross-border mobility lift, millions of other people will seek to escape “red zone” geographies with inadequate healthcare in favor of “green zones” with better medical care. Those with skills and “immunity passports” may well gain entry as some wealthier countries seek migrants to contribute to a consumption rebound and fill labor shortages. Within countries, the flight from expensive tier-one cities to more affordable provincial areas will likely accelerate. |
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| What about nationalism…? Before many countries contemplate jump-starting migration, however, they will likely first undertake a serious review of their food and medical supplies and perhaps engage in the kind of stockpiling or “food nationalism” that Russia has done in limiting grain exports and Vietnam with restricting rice exports. A decade ago, the agricultural price volatility exacerbated by Russia’s banning of wheat exports helped push Egypt and Tunisia over the edge. We should not be surprised for this recent history to repeat itself in numerous countries. It would be wildly optimistic to predict, even to hope, that multilateral institutions will be upgraded by great powers to better cope with future shocks. The most optimistic scenario, then, is a revival of regional organizations. The EU has a chance to bring about the fiscal union it needs more than ever, but it remains unclear whether it will take it. Asian countries have just passed a Regional Comprehensive Economic Partnership (RCEP) and will need to deepen their internal trade to cope with the global demand shock. North America’s three states already trade more with each other than with China or Europe. Regionalization will be the new globalization. |
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| Accelerating technological disruption….. What investments can we make or deepen today to blunt the impact of the coronavirus pandemic and steer the future in a more stable and sustainable direction? Biotechnology and healthcare are obvious places to start—but not in their current form. Cost-effective universal provision can only be achieved through a model that emphasizes telemedicine and localized clinics and treatment centers. The push being made in this direction even in poor countries such as India and Indonesia may be instructive for much of the world. Along similar lines, private education will receive substantially more investment given its strong performance during the crisis, but with a focus on digital delivery. This in turn should demonstrate how broad innovation in public education can be achieved cost-effectively as well. Digitization of financial services, which had already mushroomed prior to the pandemic, should be pushed to every living person in its wake. Neither widening inequality nor anemic consumption can be overcome without it. |
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| A civilizational challenge The coronavirus has proven to be a greater test for leadership than 9/11 and the financial crisis combined, a sobering shock that has shattered complacent assumptions that progress always moves “up and to the right.” Evolution, both biological and civilizational, is a much more haphazard and indeterminate process. Incentives will have to be realigned, with governments subsidizing investments in sustainability—and markets rewarding those firms that achieve revenue with resilience. If we are at “war” against the pandemic or future civilizational threats, we should act like it. |
Parag Khanna
Geopolitical Thought Leader
Parag Khanna is a leading global strategy advisor, world traveler, and best-selling author. To book Parag for a speech, visit his page “Book Parag Khanna.”