Stress-testing global economy

Global response to coronavirus remains uncertain

It became clear this week that the novel coronavirus, which emerged from the city of Wuhan in China, will not be brought under control swiftly. There has been a resurgence in the number of cases being found globally. For weeks, the primary location of diagnoses was China, and, in fact, Hebei province, where it originated. But in the past week, about 20 per cent of new daily diagnoses are being reported from outside China, including several new cases in countries such as Iran and Italy. It may be the case that the elaborate containment strategy that has been set up to firewall Hebei province has failed. The international institutions most aware of the possibilities have been clear as to how the risks have changed. The World Health Organization has said that countries should be “in a phase of preparedness” for a possible pandemic. 

The fact is that it is deeply difficult to control either the spread or the effects of such a virus in a world as deeply globalised as this one has become. The spread of SARS (severe acute respiratory syndrome) in 2002 was rapid, but it was in some ways less contagious than COVID-19, and the world was not as integrated then as it is now. Nor were the risks to global supply chains in 2002 as substantial. Today, Oxford Economics estimates that a pandemic-level crisis could erase more than $1 trillion from global output. Markets, particularly on the Wall Street, have noted these pronouncements and are constantly adjusting their expectations downward with every piece of bad news. Some analysts are of the view that the risk has not been fully priced in yet. 

In some ways, the coronavirus is a stress test for the current diffuse, China-led system of globalisation. Efficiencies spreading across continents to lower costs have ensured that there are few duplications built in to how companies source their inputs or intermediate goods. There is little excess capacity or alternatives in the system — as well as a great deal of inertia, and costs associated with shifting supply chains. Indeed, that is one of the reasons why in spite of wage increases in China, global supply chains have not moved away from the mainland to the degree that might have been expected.

But such over-dependence is always dangerous and insecure — and the COVID-19 virus is a reminder of that fact. There are two implications to take away. First, that many countries are underprepared for the real effect that the coronavirus might have on their economies, given the degree to which China has now become essential to the global economy. In India, multiple major sectors, including generic pharmaceuticals, depend on China for inputs, and it is not clear how they intend to manage the supply chain disruptions that a pandemic could bring in its wake. Meanwhile, the government has not made its plan clear either — a meeting with industry leaders was held by the finance minister but nothing has been made transparent about a possible response. The second implication is that the broader problem, of excessive dependence on the factories of China, must be addressed over the longer term.