By Branko Milanovic
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As of March 2020, the entire world is affected by an evil with which it is incapable of dealing effectively and regarding whose duration no one can make any serious predictions. The economic repercussions of the novel coronavirus pandemic must not be understood as an ordinary problem that macroeconomics can solve or alleviate. Rather, the world could be witnessing a fundamental shift in the very nature of the global economy.
The immediate crisis is one of both supply and demand. Supply is falling because companies are closing down or reducing their workloads to protect workers from contracting COVID-19, the disease caused by the new coronavirus. Lower interest rates can’t make up the shortfall from workers who are not going to work—just as, if a factory were bombed in a war, a lower interest rate would not conjure up lost supply the following day, week, or month.
The supply shock is exacerbated by a decrease in demand due to the fact that people are locked in, and many of the goods and services they used to consume are no longer available. If you shut countries off and stop air traffic, no amount of demand and price management will make people fly. If people are afraid or forbidden to go to restaurants or public events because of the likelihood of getting infected, demand management might at most have a very tiny effect—and not necessarily the most desirable one, from the point of view of public health.
The world faces the prospect of a profound shift: a return to natural—which is to say, self-sufficient—economy. That shift is the very opposite of globalization. While globalization entails a division of labor among disparate economies, a return to natural economy means that nations would move toward self-sufficiency. That movement is not inevitable. If national governments can control or overcome the current crisis within the next six months or a year, the world would likely return to the path of globalization, even if some of the assumptions that undergirded it (for example, very taut production chains with just-in-time deliveries) might have to be revised.
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