The likely result of the current crisis is a faster dismantling of the neoliberal economy and a fragmentation of the international economic system, writes Glenn Diesen, associate professor, University of South East Norway. Technological sovereignty is privileged, international supply chains are repatriated, transport corridors become theaters of military rivalry and the vestiges of the financial instruments of the Bretton Woods institutions will be replaced.
COVID-19 is contributing significantly to the end of the neoliberal economy and the fragmentation of the international economic system. At first glance, it appears that the pandemic has imposed a fundamental change on the international economic system. Even if, on closer inspection, the pandemic has only intensified developments that are already transforming the international system. This is an important distinction because a return to the previous international economic system after the pandemic is apparently not possible.
Over the past decades, a neoliberal format of globalization has defined the international economic system. Increased market efficiency has made supply chains continually longer and more complex. However, the changing international distribution of power, technological innovations and social fragmentation were already driving the dismantling of supply chains and the renationalization of the economy. The pandemic is increasing this trend by weakening the relative power of the United States, encouraging the implementation of new digital technologies such as artificial intelligence and robotics, and causing a new socio-economic divide within societies based on adaptability.
A new international distribution of power
A liberal international economic system manifests itself only under hegemony.
Britain in the 19th century and the United States in the 20th relied on state intervention in the economy to establish dominance over the three main levers of geoeconomic power: strategic industries, transportation corridors and financial instruments. The concentration of economic power creates systemic incentives for hegemony to liberalize the international economic system to cement the asymmetric interdependence that defines center-periphery relationships. In a biased “dependency balance”, interdependence maximizes both autonomy and influence.
The liberal economy cements the international leadership of the strategic industries of hegemony by saturating foreign markets, because mature industries (high quality, low price) prevent the development of infant industries (low quality, high prices) in competing states . David Riccardo argued that an international division of labor based on comparative advantage determines that “corn must be grown in America and Poland, and hardware and other goods must be made in England” (Ricardo 1821: 139 ).
The laissez-faire economy also increases the value of sea dominance, as conditions can be set for reliable access to transport corridors. Finally, the financial instruments of hegemony define the liberal international system by cementing its position as the world’s banker and by internationalizing its currency.
The rising powers of the 19th century had systemic incentives to reject liberal economics to avoid overdependence on Britain. The United States, Germany, France, Russia and others rose to power by developing strategic industries with tariffs and temporary subsidies, asserting control of transport corridors and establishing financial instruments by mobilizing the capital of their middle class.
The same liberal economic cycle is now coming to an end as US hegemony fades. The Cold War brought some stability, as the main adversaries of geoeconomic hegemony were the Communist states, while the need for solidarity in the West eased tensions between the United States and its allies such as Germany and the United States. Japan who pursued aggressive industrial policies. After the Cold War, there were immense systemic incentives to embrace neoliberal economics to integrate the former Soviet Union and rising China into an asymmetric partnership with the West.
However, China and Russia have become proficient in economic policy to rewire global value chains and reduce dependence on the United States. Strategic industries are supported by the state, and a Sino-Russian high-tech partnership is formed to disassociate itself from the United States. The China 2025 initiative is obviously more powerful in terms of establishing technological leadership in areas such as artificial intelligence, but Russia is also moving towards technological sovereignty by developing its digital ecosystem and collaborating with China. China also has more capital to develop transport corridors with the Belt and Road Initiative, but Russia is advancing East-West and North-South Eurasian land bridges and a sea corridor across the Arctic in cooperation with China. Finally, new financial instruments are emerging as Russia and China develop new investment banks, payment systems, trade currencies and accumulate gold.
The economic impact of COVID-19 represents a tipping point. Some supply chain disruptions are caused by immediate security concerns, as for example the United States aims to repatriate manufacturing of medical supplies, while Russia has temporarily suspended its exports of grains and medical equipment. These minor disruptions are fueling a greater trend to renationalize the economy and the digital space.
China appears to emerge from the pandemic stronger, while the United States has weakened its relative power. The United States is therefore urged to repatriate its supply chains, re-nationalize its industries and target Chinese companies that challenge the technological leadership of their strategic industries. Without a stake in an increasingly unfavorable status quo, the United States is increasing its protectionism, withdrawing from major international institutions and becoming increasingly comfortable with the use of economic coercion against its allies and adversaries. . The narrative information war escalates as China’s response to COVID-19 is used to mobilize geoeconomic alliances against China.
Competition on transport corridors is also intensifying in the context of the pandemic. For example, the United States is increasing its measures against the Arctic transport corridor. In May 2020, US warships entered the Barents Sea for the first time since the 1980s and NATO is moving towards a more active role in the High North. The competition for control of the South China Sea is also affected by the reduced combat capabilities of the United States due to COVID-19 infections within the military.
COVID-19 is also fueling competition in financial instruments. The economic fallout from COVID-19 is worse than the 2008-09 global financial crisis, a crisis that was only resolved temporarily by adding more debt instead of imposing fiscal discipline. Bailouts and stimulus packages distort market forces and make debt levels in the United States and the wider West even less sustainable. The decrease in the willingness to rely on the US dollar as a bargaining chip and as a reserve will therefore manifest itself in new innovative fiscal policies led by Beijing and Moscow.
The EU and Russia will have to respond to the unfavorable development of a bipolar Sino-American distribution of power. The bloc’s politics are precarious for the EU and Russia as it undermines the ability to diversify economic connectivity, which creates an over-reliance on a more powerful state. After COVID-19, Europeans will find themselves more divided between either establishing collective autonomy or withdrawing under the patronage of the declining United States with a greater interest in China. Russia will also need to step up its initiative for the Greater Eurasia by cooperating with China to reduce its dependence on the West, and simultaneously improve economic connectivity with all states of the Eurasian supercontinent in order to avoid overdependence on the West. with regard to China.
Domestic socio-economic disintegration
The neoliberal economic system that defined the post-Cold War era has also been unsustainable at the national level. Trade deals organized in the late 1980s and early 1990s enabled the United States to consolidate its comparative advantage in the digital sector by expanding intellectual property rights and strengthening enforcement. In return, the United States opened its manufacturing sector to foreign competition, much like the British repeal of the corn laws in 1846 to establish consent to center-periphery relations.
As you might expect, America’s digital companies flourished and the manufacturing base was devastated. Creative destruction has intensified with digital technologies that have shifted economic power from labor to capital. Traditionally, the redistribution of wealth canceled out economic inequalities and growing social disparities. Yet in the neoliberal economy, the state gives up its ability to balance market efficiency and social responsibility. The political left could no longer redistribute wealth, and the political right abdicated the ideological mission of defending traditional values ââand institutions against unfettered market forces. New political alternatives in the form of populism have predictably emerged to fill the void.
COVID-19 amplifies socio-economic tensions, polarization and the demand for political alternatives. The quarantine has pushed small businesses into bankruptcy, while large companies such as Amazon, with more robust infrastructure and able to attract government bailouts, absorb their market share. Blue collar workers and the poorest in society who suffer the most from the pandemic are more likely to oppose quarantine, while the rich who are able to weather the economic crisis and work from home often speak out against the poor which do not respect the new powers of the State. Politicians, without the tools to solve economic problems, will be prompted to divert attention to superficial, divisive and often distorted social issues and identity politics. The socio-economic disruptions of COVID-19 will likely push polarized societies towards more radical and revolutionary politics.
Predicting the impact of COVID-19 on the international economic system is problematic due to the multitude of unknown variables. For example, if the virus mutated to become more deadly and spread more easily, the entire international economic system could falter. However, the likely result is a faster dismantling of the neoliberal economy and a fragmentation of the international economic system. Technological sovereignty is privileged, international supply chains are repatriated, transport corridors become theaters of military rivalry and the vestiges of the financial instruments of the Bretton Woods institutions will be replaced. States will also need to reduce market efficiency to restore social responsibility as societies collapse.