By Tim Harcourt
April 01, 2020 09:45:55
This is the biggest global health pandemic in just over a century — since the Spanish flu outbreak of 1918, just after the World War 1.
Much of the media’s interest has understandably been in the public health aspects of the crisis. But there is growing concern about its economic consequences as the issues involved in fighting wars on both fronts become entwined.
The outbreak of this coronavirus has been traced back to the wet markets in the Chinese city of Wuhan, but has since spread around the globe, highlighting the potential risks and dark sides of an interdependent world.
But even after the crisis is contained, the global economy will never be the same, and neither will Australia’s.
So, how might the world change as a result of the pandemic, for the better and for worse? What have we learnt so far?
The end of globalisation as we know it?
Globalisation will never be the same and will experience a kind of reset.
The difference between this crisis and SARS — or even the global financial crisis (GFC) — is that major economies have been hit almost at once.
It’s done damage to global supply chains in manufacturing and even more to people-based industries like education, tourism and other services-based exports.
When the crisis eases, nations will want to rebuild with a revitalised interest in economic self-sufficiency — especially in medical equipment and technology — and never again have to be reliant on imports in an emergency.
That China currently dominates global medical equipment supply chains is not helping matters.
The nation state is back
Despite talk of supranational governance, citizens are primarily looking to their national governments to deal with the crisis.
Borders have been shut within the European Union as well as to the European Union, and nations as diverse as New Zealand, Singapore, Japan, Norway and Australia were quick to close their borders, including internal state borders.
Meanwhile, public ownership of key industries is back on the agenda. We will see partial nationalisation, starting with airlines, which has been proposed in the UK, Europe and Asia (the main carriers in the Middle East are already state-owned).
We’ll likely see similar moves with ports and airports, though we may not see bank nationalisation.
In Australian terms, we’ll be seeing a bit more of the economic flavour of Ben Chifley and a little less Paul Keating.
Wither foreign investment?
The days of fully mobile capital are gone, along with state-owned enterprises buying up distressed assets offshore.
Treasurer Josh Frydenberg has already announced sweeping changes to Australia’s Foreign Investment Review Board guidelines that will mean all foreign direct investment bids will be scrutinised with the threshold abolished.
At first it was said this would apply to free-trade agreement partners, but was quickly clarified as applicable to all. Why?
Clearly the Treasurer was not worried about a flurry of investment from Chile or Thailand; it was obviously directed at Chinese state-owned enterprises looking to pick up distressed assets.
News media images of medical equipment being sent from Australia back to China on charter flights by Chinese-owned companies didn’t help perceptions.
So, what’s the wash-up? Australia has relied on foreign investment since Governor Phillip first brought convicts to these shores, and we were a trading nation well before that, when the indigenous people of Arnhem land traded sea cucumber with the fishermen of Makassar.
That will continue. But Australia may need to be more careful to ensure foreign ownership is not dominated by one country, but also with strategic assets and geo-political risk.
Fiscal stimulus: Go early, go households, go again and again?
During the GFC, the Australian Treasury secretary Ken Henry was the mastermind of the “go early, go hard, go households” approach that enabled Australia to avoid recession.
Now the Federal Government is rolling out several stimulus packages targeting households, small business and selected industries adversely affected by the coronavirus like the arts, sports, tourism and aviation.
One difference between now and the GFC, though, is that there was no social distancing or lockdown in 2008, it was purely an economic crisis, not a public health plus economic crisis.
While it is important to bolster the safety net and keep money in the economy, a big stimulus during lockdown — when global supply chains are log-jammed — may not work.
The Federal Government may choose to wait until a vaccine for the virus is developed before introducing a stimulus to help kick-start recovery.
The Reserve Bank of Australia, for its part, has let interest rates fall to almost zero and has bought back bonds to help inject cash into the economy.
Labour pains: Will a wage subsidy do the trick?
The Federal Government has also introduced a wage subsidy that allows workers to remain on the books even if they’re stood down, and eases the burden on employers by picking up part of the payroll tab.
Countries like Denmark have implemented similar initiatives with some success. This can help ease anxiety in the labour market and keeps workers attached to their employer without bankrupting the company.
It also helps in recovery as employers just put workers back on and we avoid the transaction costs of firing and re-hiring.
Your questions on coronavirus answered:
It can’t possibly do everything, but it is a necessary if insufficient policy in dealing with the coronavirus.
The constructive relationship between the trade unions and the Minister for Industrial Relations has been a positive to emerge from the crisis.
The tyranny of social distance
Australia’s great economic historian Geoffrey Blainey wrote The Tyranny of Distance to describe Australia’s place in the world, as well as the vast distances within — and beyond — our borders.
Now, half a century on, we are grappling with a different “tyranny” of social distance which prevents people from gathering in crowds and increasingly smaller groups.
These physical distancing measures may be temporary but they could have vast economic implications and may even change how we work in the post-corona economy.
Will we find we can work at home, without staff meetings (thank goodness)? Will the reduction in road traffic and carbon emissions give us some guide as to what may work in the future?
This pandemic may provide a controlled experiment on how human beings adapt to change when we have to.
Footy-nomics and the arts end of the world
Of course, the Tyranny of Social Distance has also adversely affected everything involving crowds — from sports to the arts and culture and even religion.
It has revealed the economic value of sport, too, as the AFL and NRL, Australia’s two major football codes, were very reluctant to postpone their respective seasons.
It also took a while for Japan to move the Tokyo Olympics to 2021.
All sports and arts institutions will be very different after the crisis subsides, and the rediscovery of outdoor pursuits (even simple ones like playing with your kids in a city park) could transform sports and recreation completely.
The post-war reconstruction of the 21st century
During World War II, the Curtin/Chifley Labor Government was fighting a war in the Pacific and preparing for possible invasion while setting up the nation for a post-war world of industrial development, full employment and mass immigration.
This was known as post-war reconstruction, one of the biggest social and economic programs the nation has ever undergone.
Planners began to think changes in the wartime economy — for example, women working in munitions factories — could work in times of peace, along with other expansion.
Similarly, some of the temporary measures being brought in to deal with the coronavirus could also be an opportunity for Australia to remake itself by developing new industries, new ways of working and learning, and new ways of life.
Tim Harcourt is the J.W. Neville Fellow in Economics at UNSW Business School, and host of The Airport Economist and The Airport Economist Podcast.
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