Economic Research Forum (ERF)

How COVID-19 could shape a new world order

14503
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.

Most read

Sustaining entrepreneurship: lessons from Iran

Does entrepreneurial activity naturally return to long-term average levels after big economic disturbances? This column presents new evidence from Iran on trends in entrepreneurship among various categories of firm size, sector and location – and suggests policies that could be effective in promoting entrepreneurial activities.

Happiness in the Arab world: should we be concerned?

Several Arab countries have low rankings in the latest comparative assessment of average happiness across the world. But as this column explains, the average is not a reliable summary statistic when applied to ordinal data. The evidence from more robust analysis of socio-economic inequality in happiness suggests that policy-makers should be less concerned about happiness indicators than the core development objective of more equitable social conditions for citizens.

Financial constraints on small firms’ growth: pandemic lessons from Iran

How does access to finance affect the growth of small businesses? This column presents new evidence from Iran before and during the Covid-19 pandemic – and lessons learned by micro, small and medium-sized enterprises.

The economics of Israeli war aims and strategies

Israel’s response to last October’s Hamas attack has led to widespread death and destruction. This column outlines the impact thus far, including the effects on food scarcity, migration and the Palestinian economy in both Gaza and the West Bank.

It’s too early to tell what happened to the Arab Spring

Did the Arab Spring fail? This column presents a view the consensus view from ERF’s recent annual conference in Morocco: careful analysis of the fundamental drivers of democratic transitions suggests that it’s too early to tell.

Arab regional cooperation in a fragmenting world

As globalisation stalls, regionalisation has emerged as an alternative. This column argues that Arab countries need to face the new realities and move decisively towards greater mutual cooperation. A regional integration agenda that also supports domestic reforms could be an important source of growth, jobs and stability.

Gender differences in business record-keeping and planning in Iraq

Only one in every ten informal businesses in Iraq is led by a woman. Yet as research summarised in this column reveals, those businesses are more likely to set budgets and sales targets, and to keep business records. This may be evidence of the role of social exclusion in motivating greater reliance on the formal bureaucratic system.

Self-employment in MENA: the role of religiosity and personal values

How important are individual’s values and beliefs in influencing the likelihood that they will embrace the responsibilities, risks and entrepreneurial challenge of self-employment? This column presents evidence from 12 countries in the Middle East and North African region on the roles of people’s religiosity and sense of personal agency in their labour market choices.

Reformed foreign ownership rules in UAE: the impact on business entry

In an effort to stimulate economic growth and diversify the economy, the government of the United Arab Emirates has recently implemented regulatory reform that allows 100% foreign ownership of companies operating in the country. This column examines the implications of the reform for entry of new firms in Dubai, using unique data on new business licences in the emirate.

Conflict and debt in the Middle East and North Africa

With the global economy is in its third year of deceleration amid declining inflation and oil prices, the Middle East and North Africa grew by just 1.9% in 2023, with a forecast for growth in 2024 at 2.7%. In addition to heightened uncertainty brought on by the conflict centred in Gaza, many countries in the region are also grappling with pre-existing vulnerabilities, including rising debt levels. This column summarises a new report that unpacks the nature of debt in MENA – and explains the critical importance of keeping rising debt stocks in check.