Valdai Club

The biology of the global economic crisis of 2020 is new. Almost none of the politics of the crisis is new, however. Within the developed world, a populist backlash—against globalization, European integration, China’s return to the center of the global system, political establishments, business elites, and immigrants—has been growing more powerful for the last decade, writes Rawi Abdelal, Herbert F. Johnson Professor of International Management, Harvard Business School and Director of Davis Center for Russian and Eurasian Studies, Harvard University.

The COVID-19 pandemic is being refracted through those already existing patterns of politics. It is also magnifying the societal fissures and accelerating the trends that created the backlash in the first place.

The Straightforward Economics of the Crisis

The global economic crisis of 2020 is a result of the combination of a natural disaster and a man-made response to it: a novel coronavirus and varieties of quarantine. This sudden stop of so much economic activity has led to a disruption of global supply chains, a collapse of demand for goods and services, the complete cessation of revenues for many firms, and resulting pressure on financial sector lenders.

China’s centrality to lean, fragile global supply chains will likely lead their being remade to become either more resilient or more insular. As China shut down, so, too, did production around the world.

In an era of unprecedented leverage for households, firms, and sovereigns, the global economic system already was prone to potential disruption. The most vulnerable sovereigns in the developed world are in southern and central Europe. Emerging-market sovereigns are in even more dire straits, as the crisis has deprived them of liquidity at, as usual, precisely the moment in which they need it most.

Although central banks in the developed world have scrambled remarkably quickly to bring interest rates to zero and resume both quantitative and qualitative easing, the crisis of 2020 is spreading from the real economy to the financial sector. 

This means that the most important economic policy responses in developed countries must come from national, regional, and local governments. Some governments, the German for example, have delivered an effective response that limits both the failures of firms and mass unemployment. Other governments, like the American, have failed to limit the economic devastation faced by small- and medium-sized firms and vulnerable households. Although some state and local governments have tempered the American devastation, those efforts collectively cannot constitute a national approach.

This is a serious disaster, but it is neither biologically nor economically complex. This is a novel virus about which we know how to learn and for which there will eventually be a vaccine. A quarantine that shuts down the economy and disrupts trade and finance has effects that are not mysterious.

The Complicated Politics of the Backlash

The resurgence of anti-systemic populism on both the Left and the Right of the political spectrum in the West was a long time in the making.

Anxiety about the decline of the West—and the return of China to the center of the international system—is part of the story. The peak of American and European share of world output was approximately thirty years ago. Since then the increasing share of emerging markets in world output—accompanied by the ascent from poverty of perhaps 800 or 900 million people in the developing world, all of which was part of the point of having globalization in the first place—has led in the developed world to more consternation than celebration. Nostalgia for the Western predominance of the past has emerged as a powerful theme in the populist movements that delivered the Brexit and, among many examples, politicians such as Boris Johnson, Donald Trump, Marine Le Pen, and Matteo Salvini.

Mistrust between the U.S. and Chinese political establishments already was on the rise before the viral pandemic: an emergent trade war, tensions over the South China Sea, and mutual recriminations were rife. The pandemic has escalated those tensions, as many in the West blame China in a wide variety of ways, some of them conspiratorial, for COVID-19.

Insofar as globalization was created by the declining importance of the borders of sovereign states for markets for goods, services, and capital, the pandemic has become a political metaphor for the putative borderlessness of the current era. Governments in the United States and Europe had already strengthened controls over their borders before the crisis. Today the pandemic has almost shut them down completely, and it is difficult to imagine that we will regain our borderlessness any time soon.

The European project faced a legitimacy crisis before the pandemic. For some, Europe was both symbolic of and an agent for “neoliberalism” and market integration. The Brexit was as much a referendum on globalization as it was on membership in the European Union. On the continent, the fissures between an indebted, financially fragile southern Europe and a judgmental, financial stable northern Europe had been growing since the Eurozone crisis exposed both the divergence and the underlying vulnerabilities. Europe’s inability to achieve solidarity in the face of the pandemic has brought the legitimacy crisis of the European project in Italy and Spain, for example, almost to a point that will be impossible to repair.

The populist backlash has also emerged from resentments about how national economies have functioned during this era of globalization. Essential to the logic of globalization is that workers with similar skills and training would experience pressures for the convergence of their wages. For labor in the developing world this was, of course, upward pressure, but in the United States and Europe this convergence implied declining wages. In some developed countries these trends were counter-balanced by public-private partnerships to create economic stability for the middle class. Most developed countries, however, experienced sharp increases in income inequality. Inequality as a material fact did not by itself create the backlash. But an increasing sense of unfairness and a loss of dignity—as social facts—created powerful feelings of resentment toward political and economic elites.

The viral pandemic has brought these social implications of rising inequality into horrifyingly stark relief. For decades it has been true that higher incomes are correlated with better health outcomes and longer life expectancy. In the United States it has always been true that race was correlated with better—or worse—health outcomes as well. The economic sudden stop created by quarantine policies has magnified these divides grotesquely.

For social distancing is, we now know, a luxury. By some estimates, nearly two thirds of jobs that deliver wages in the highest quintile of the income distribution can be undertaken remotely, while less than ten percent of jobs in the bottom quintile can be accomplished while staying at home and working on a computer. In societies such as the United States, where the government’s policy approach to the quarantine has pushed millions of workers into unemployment or under-employment, several consequences are evident. Those who earn relatively modest incomes but are only able to do so by leaving their homes are literally risking their lives by continuing to work out of necessity. Meanwhile, high-income earners can isolate themselves at home, continue to work, and also have almost everything they need delivered by the working poor. Those thrust into isolated unemployment without income and limited support will endure other potential crises unrelated to exposure to the novel coronavirus: substance abuse, domestic violence, mental health disorders, and other, less novel ways to get sick or die. Thus the emergent backlash against quarantine policies is reproducing some of the same politics that already represented years of frustration with the economy and its management by political and business elites.

Finally, our era of mass migration, institutional decay, and large flows of refugees had already caused cultural conservatism, nationalism, racism, and xenophobia to surge in parts of the United States and Europe. The rise of populism on the Right in the United States, France, Italy, Spain, Austria, the Netherlands, Sweden, and the United Kingdom—just as a few examples—was a response in part to these fears about how national identities might be undermined or transformed by immigrants, and particularly those with darker skin tones, unfamiliar names, and different religions. The pandemic has both heightened these fears of “the Other” and emboldened politicians to pursue long-desired policies that would have been difficult without the pandemic. President Trump’s decision to suspend immigration into the United States for sixty days would have been less politically feasible before the pandemic, but it is merely a further extension of the administration’s general policy stance.

Pandemonium

Thus the current pandemonium surrounding globalization is not primarily a direct result of the pandemic. Our pandemonium has emerged, instead, from the ways in which the pandemic and quarantine magnified the fissures and challenges that have been increasingly threatening the stability of the current era of globalization over the past several decades.