How long will capitalism last?
Corona crisis: the end of capitalism?
It is the widespread belief that after the corona crisis, nothing will be the same as it was before as society, the role of government and the capitalism-based economy will change forever. Some predict us to have a more solidarity-based society and a new economic model that works for everyone, and perhaps a greater spirit of international cooperation, for example on climate change.
Economic constraints and a decline in production could last for several years
So far, much of the discussion about the economic impact of the crisis has centered on unprecedented national measures to suppress the virus and support the economy in the hope that it will quickly bounce back after the epidemic subsides.
But increasingly, the sharp drop in production is more like the start of the Great Depression than a brief recession. The epidemiological evidence suggests that it could take up to two years, rather than just a few weeks or months, for all serious restrictions on economic activity to be lifted.
While we don't know for sure how quickly the epidemic will recede, the lessons of history suggest that any substantial economic recovery requires global economic cooperation. If we continue to erect barriers to protect economies, as we did in the 1930s, a national recession could result in an even longer-lasting global depression in our highly integrated world economy. Will the pandemic crisis mark the turning point in globalization and what would the economic and political consequences of its withdrawal be?
In the corona crisis, belief in globalization and capitalism is waning
Since 1950, economic globalization has transformed the world economy and made a significant contribution to rising living standards, with many countries and individuals losing out. The reach of globalization extends from trade in goods and services to international labor migration to finance in recent times.
In each of these areas there was international agreement (in the case of trade) or consensus that dismantling barriers to immigration and global investment benefits all. Support for globalization was underpinned by a firm belief that international economic cooperation would reduce the likelihood of another war after the devastation of World War II. And the world's leading economic power, the USA, saw the opening of the world economy as the key to economic growth that would counteract the appeal of communism.
Globalization has produced both winners and losers. The economic miracle of European recovery in the 1950s and 1960s was followed by economic miracles in a number of Far Eastern countries, from Japan to Korea and China, in the 1990s, which raised urban living standards to near-western levels. The boom reduced global poverty by a billion, particularly in China and India. Globalization seemed to have conquered the world.
Inequality increases as economic output slows
But since 2000, the political impetus for increasing global economic integration has slowed as concerns about its impact on inequality have grown. The world trade talks that began in 2000 failed to lead to an agreement, while the counterstrike against migration played a key role in the rise of right-wing populist parties in Europe and America. And the costs as well as the benefits of financial globalization became apparent during the 2008 financial crisis.
Even if the pace of globalization has slowed and political support for it has waned, our world is more interconnected than ever. For American farmers and automakers, China is their largest market. Britain's role as a global financial center is at the heart of its economy. Developing countries like Bangladesh and Vietnam are increasingly dependent on clothing exports. And remittances from migrants are vital to the economies of many poor countries, from the Philippines to Nepal to Central America.
The sharp slowdown in the world's two largest economic zones, the US and the EU, will reverberate across the global economy and likely have the greatest impact on poor countries.
Global cooperation seems far away
But as this global economic crisis deepens, the prospects of global collaboration that could mitigate its effects seem far off. The US, for example, recently rejected an economic stimulus package proposed by the G7 because it did not use the term "Wuhan virus" to describe Covid-19. Without such agreements, the economic crisis will be longer and deeper, leading to greater inequality both within and among nations.
Taming globalization is not easy. The lesson from the 2008 financial crisis was that few countries were really prepared for international economic cooperation, despite attempts to agree on a global stimulus package at the G20 summits.
Now the coronavirus pandemic has created even more barriers and blame between nations. Within the EU, the countries have given up free movement and unilaterally set up national barriers to protect their citizens. There has been no serious attempt to share the economic burden while Britain's exit from the EU will continue to raise trade barriers. The crisis has exacerbated the trade war between the US and China, with both countries blaming each other for the virus outbreak.
Politics and the global economy are faced with difficult decisions
The lessons of history are not encouraging. During a pandemic, societies have often scapegoated individuals, blamed foreigners, and erected barriers to the outside world. Perhaps a more disturbing parallel than the wartime wartime spirit is what happened in the interwar years following the last global flu pandemic of 1918-1919.
While the pandemic did not cause the interwar slump, it was a harbinger of what was to come. The war-torn world economy sank as trade barriers, competitive currency devaluation, and the rickety structure of international finances exacerbated the crisis. Today, as our economies are even more intertwined, we cannot afford the luxury of retreating into self-sufficiency to revitalize our economies, as both the US and Germany did in the 1930s. Also, the end result back then was not what we would like today.
The world now faces a difficult decision. Either to find a way to use globalization for a common goal or to retreat into isolationism and nationalism that will crash the world economy and heighten international tensions. In the past, the US was the only country with political and economic influence that could organize a global response. Without strong US leadership, the outlook looks much bleaker.
This article was originally published in the online scientific portal "The Conversation".
Author: Steve Schifferes, Professor of Financial Journalism, City, University of London
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