Economic Research Forum (ERF)

How COVID-19 could shape a new world order

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The COVID-19 pandemic is a massive shock to the world economy and its impact will be wide-ranging across all domains of life. This column examines some of the potential effects – from the household level through societies’ priorities to international relations.

In a nutshell

The COVID-19 pandemic is affecting the fundamentals of many phenomena that we have taken for granted and considered to be constants that neither theory nor practice can challenge.

Some of those fundamentals are now being heavily shaken – including macroeconomics, politics, international relations, societies’ priorities and the relationship between science and religion.

We are experiencing the birth of a new world where all the factors are variables and nothing is constant.

The COVID-19 pandemic is not only the greatest shock to the world economy in its history, but also a disaster in all respects. It is affecting the fundamentals of many phenomena that we have taken for granted and considered to be constants that neither theory nor practice can challenge. Here are some of those fundamentals that are now being heavily shaken, and which are likely to evolve into a new norm. 

Macroeconomics

Several benchmarks will be dismantled. Rules such as budget deficits not exceeding 3% of GDP and debt ratios not above 60% of GDP, as set by the European Union (EU) and adopted by international organisations, will just be jokes: the majority of countries will exceed these ratios. Similarly, the stipulation that foreign reserves should cover six months of imports will be obsolete.

The macroeconomic consequences in the aftermath of COVID-19 will be unprecedented on all levels, requiring the need of setting new ratios to fit the dismal world macroeconomy.

Politics

The rise of populism (as evident in the United States, the UK, the EU and Latin America) will be highly questioned. The prevailing populist regimes failed to contain the disaster domestically and internationally. In fact, the leaders’ reactions were regarded as a scandal in several respects. The political vacuum that such populist leaders tried to fill has in fact widened and the trust in their actions has been lost.

In contrast, the autocratic regimes performed better in containing the outbreak, hence raising their popularity. The Western model of democracy in itself has reached its limits and the South’s search for a model to follow continues.

International relations

Regimes failed to cooperate effectively and coordinate efforts to contain the outbreak. The extent of international cooperation has remained weak and in fact the actions undertaken on a unilateral basis have so far proved to be more effective.

That trend is likely to continue where the idea of international and regional allies proved to be a myth. The Sustainable Development Goals will need to be modified to set priorities. Questioning the effectiveness of international and regional organisations will be heightened.

Societies’ priorities

The outbreak indicates that countries (governments and societies as well as people) will need to revisit their priorities, which will surely have an impact on expenditure outlays, savings, investments, etc. A whole new mind set-up is likely to evolve with online life crowned at its top. 

Types of economic system

All systems failed to contain the crisis, whether we are talking about capitalism (the United States), the social market economy (Germany) or mixed economies (France). Yet what is crystal clear is that role of the government will be central in any system to follow. It has proved to be the ultimate resort in any crisis and that the market is unable to handle them (witness the same experience with less severity in the 1997-98 and 2007-08 crises).

The relationship between science and religion

The outbreak shows that we need both science and religion, and that they are complements and not substitutes. The South’s poor religious societies started to believe in science (at least by wearing masks and using sanitisers) whereas the secular rich West admitted that science has its boundaries (witness the announcement of the Italian prime minister). This is itself a new paradigm.

At the household level

The utility of what you possess has increased and the utility of what you don’t possess has decreased, contrary to the conventional microeconomic laws. Unlimited ambitions at the personal level have cascaded downwards and appreciating the minimum of life needs is magnified.

The pattern of spending and prioritisation of matters has changed dramatically. We are in a new world of consumer behaviour to be followed by a new world of producer behaviour. The consumption and business models are changing dramatically. 

In a nutshell, we are experiencing the birth of a new world where all the factors are variables and nothing is constant.

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