Fear has gone viral. The virus itself has been spotted in 56 countries but the psychosis of dread and anxiety has gone global, across time zones on the international dateline. Those basking in the sense of prosperity, of rising valuation of stock markets, have been jolted awake. In a short span of six days, investors across the globe have lost over $6 trillion. Investors in India lost over Rs 5 trillion in just one trading day. That the spectre of slowdown in the economy got worse, as third-quarter GDP growth spluttered at 4.7 per cent, didn’t register beyond a blip on global radars as the world is riveted to the bigger crisis.
The flight of capital to safety, the rise in bond prices and the steep slide in indices across stock markets, reflect angst. In the real economy, borrowers and lenders are signalling uncertainty as the contagion effect is erasing volume and value off the bottom-line. There is a clamour for stimulus across developed economies. The US Federal Reserve may just cut interest rates but what of those with negative interest rates! Energy prices have slid with Brent crude knocking at $ 50 per barrel. Unsurprisingly, the IMF has cut its estimate of global growth, and markets are pricing a Corona recession as the fear is that it could be worse.
Franklin D Roosevelt once said that the only thing to fear is fear itself…nameless, unreasoning, unjustified terror. But as David Hume observed, reason and all rational thinking is eventually a slave of emotions and fear is the most extreme of emotions. Indeed, Alan Greenspan, writing about risk and human nature in his book The Map and the Territory, says “if people acted at the level of rationality presumed in the standard economics textbooks I was brought up with, the world’s standard of living would be measurably higher; but, in fact, they do not.”
Fear is here and it is real. The anxiety, unlike previous crises is double-edged, is aggravated by both supply-side and demand-side shocks. Early prognosis of the crisis discounted the magnitude of disruption of the supply chain. China is the biggest supplier to the biggest retailers across the world from touch screen devices to toys – it is estimated that nearly a fourth of Walmart offerings are from China, a third of Target shelves are stocked with Chinese goods and seven of ten shoes sold in the US are said to be made in China. With a GDP of $14 trillion, it is a key driver of global consumption with imports of over $ 2 trillion. The virus epidemic has hurt both sides of the trade sheet.
On the face of it the contagion is propelled by stated causes. But the imploding anxiety is about unstated causes — about the lynchpin status of China in the global supply chain. China accounts for 12 per cent of every 100 dollars of global trade — up from barely 3 per cent in 1995. Just one consumer giant Procter and Gamble sources over 300 suppliers for over 15,000 products from China. As the world’s largest producer of Active Pharmaceutical Ingredients, it holds the key to drug production in the US and elsewhere. Europe’s engine of growth Germany and Asian giant Japan depend on imports of over $ 250 billion of goods and intermediates from China.
The dent in the balance sheets of nations and transnationals will accelerate subscription of the thesis of de-risking growth away from the centrality of China in the story. Already hawks in the US administration, Navarro Pompeo et al, riding the plank of jobs and national interests, have been clamouring to bring production outsourced to China back on shore. Indeed, states such as Alabama and Tennessee are actively wooing manufacturing jobs with dollar to dollar competitive policies.
The case for de-risking merits attention in the context of where globalisation is at — for shifting production to other centres to other geographies such as Mexico, India and Bangladesh. Yes the price economics would be daunting given the scale that drives China’s competitiveness. To start with, there are realities and trade-offs — cost vs sustainability. Again, rising labour costs have already resulted in shifting of production to locales such as Vietnam, Thailand and Mexico. A decade back, it was unthinkable for decoupling the geopolitics of the middle-east and energy economy — the US is now the largest producer of crude and gas.
Most critically, the surge of technology is towards a federated architecture of the economy — in favour of semi-autonomous, decentralised systems. The quest for de-risking could well afford opportunities for expansion of and development of new production systems such as 3D printing which offer in-situ localised production and employment, and which may deliver a more inclusive prosperity.
The crisis dictates a review of public policy and the anthem of claimed productivity gains. Architects of technology platforms build redundancy in systems to preclude the feared eventuality of collapse. With rising welfare costs, democratic governments, already under pressure to deliver relief, will seek insulation/insurance for stability of revenues and growth. The objective of sustainability demands resilience which simply translates into revising and redesigning existing templates to ensure continuity through disruptive events.
(Shankkar Aiyar is the author of Aadhaar: A Biometric and History of India’s 12 Digit Revolution, and Accidental India)