The Impact of Covid-19 on Globalization

The Impact of Covid-19 on Globalization

Google defines “globalization” as follows-

Globalization is a process by which businesses or other organizations develop influence or start operating on an international scale.

People have been trading across continents for centuries. The concept of globalization is nothing new. From time immemorial globalization has created wealth, prosperity, multi culturalism and human interconnectivity. However, through the ages humans have also paid a heavy price for globalization. From the bubonic plague of the 14th century to the Covid-19 pandemic of the 21st century the world has been ravaged by epidemics which can be attributed to a large degree to globalization. The bubonic plague or the Black Death is said to have originated in East Asia and then travelled with the merchants along the Silk Road to the Mediterranean and Europe where it is said to have wiped out 60 percent  of Europe’s population. In modern times we have encountered epidemics like the Small Pox, HIV, Ebola, Malaria, Measles, and the various corona virus diseases like SARS, MERS, Swine Flu, Avian Flu and now the Covid-19. Many would agree that  the Covid-19 pandemic would mark a chapter in human history which changed the way the world thinks and operates. Apart from the toll it has taken on human lives and the panic and hysteria it has created, Covid-19 will leave behind an economic devastation the like of which the world has not seen before.

When such major crises happen, the ramifications can pan out for long stretches of time. The result or outcome is not necessarily instantaneously felt. The financial crisis which began in 2008 with the sub prime home loan defaults in the USA was followed by the major financial collapse of the Greek economy in 2010 and the crash of the housing industry of Bangladesh in 2012. Coincidence? Maybe, maybe not. Did the Great Depression in the USA in 1929 contribute to the rise of fascism in Europe in the 1930s? It is very difficult to predict what the world economic order will look like five years from now but for sure this pandemic has dealt the liberal international order a major body blow and the world will never be the same again.

What is ominous is the rise of nationalism and populism that started even before the onset of this pandemic. Brexit, the rise of anti foreigner sentiment in Europe, the America First policy of the Trump Administration, the Hindutva nationalism of the Modi government are all indicators of a changing world order. These trends will now be accelerated with rising sentiments about border walls and trade wars.

When we look back at 2003 and the SARS epidemic, China accounted for 4 percent of the global output. Now China accounts for four times as much, 16 percent. The meteoric rise of China both economically and geo politically along with the waning influence of the USA on account of its isolationist policy under the Trump Administration has played a large part in shaping the new world order. China has gained tremendous influence in Asia and Africa. Beijing’s ambitious global infrastructure drive named the Belt and Road initiative is a thinly veiled euphemism for Chinese hegemony. The USA is openly deriding China’s expansionist agenda which aims to finance ambitious projects in poorer countries and then exercise political influence over these debt beholden countries. Hambantota port in Sri Lanka, Gwadar port in Pakistan, the multi billion dollar railway project with Malaysia and the total domination in the development of African infrastructure which includes the $12billion Coastal Railway in Nigeria and the $11billion mega port and economic zone in Tanzania are examples of China’s growing influence. What is also of great concern for the USA is Huawei’s advance in 5G wireless communication which America says is a threat to its national security and leaves it vulnerable to espionage.

The US China trade war combined with the Coronavirus epidemic will make the western economies review their over dependence on China as their main supply chain and at the same time bring a lot more restrictions on the movement of people which will mean a more closed- off world. Politicians like Trump and Victor Orban with outright hostile views of migration have very effectively exploited xenophobia to their electoral success. Whether it is the wall on the Mexican border or medical testing of immigrants or quarantining visitors from selected countries, cross border travels will be much more controlled and restricted.

So what does all this mean for Bangladesh? Without a doubt the foreign exchange remittance from our migrant workers is going to be affected. Over 10million Bangladeshis work abroad and remit over $16 billion annually. Considering that the total annual export of Bangladesh is about $39 billion, the remittance from our migrant workers is a very important metric in maintaining our foreign exchange reserves. Moving on to a more global perspective it is important to understand that China is the world’s largest production base. Of the world’s 10 largest ports, seven of them are in China. And China today is at the epicenter of the transformation of the world order. Whatever happens to the economy of smaller countries like Bangladesh will be a ripple effect of what happens to the western world’s relationship with China. The west has suddenly woken up to the fact that its supply chain is totally, unreasonably and irresponsibly reliant on China. The dependence on foreign countries for essential medical supplies has caused Americans even greater anxiety. During this pandemic the Americans learned that 72 percent of the facilities producing pharmaceutical ingredients for US consumption are located abroad. 97 percent of the antibiotic consumption is imported and that only one company in America manufactures the swab which is needed for the Coronavirus testing. The situation is not much different with European countries. From car parts to computers and from smart phones to shoes China is the manufacturer for the world and with a domino effect one after another industry in Europe and America had to shut down due to the work stoppage in China. In the days ahead even the most globally oriented politicians will avoid touting the benefits of open borders, trade and international engagement.

Although there will be some degree of localization where companies will find national suppliers and stick to them even at a higher cost in order to minimize the risk of global volatility, we are unlikely to see the demise of globalization now or anytime in the future. The world is far too deeply integrated and therefore a complete disengagement is not going to happen. Rather, the world is likely to see a different, more limited version of global integration than the one we have known over the past three decades where the boundaries have been barely perceptible. There will be a conscious objective of reducing the dependence on China. This would mean that for some international companies the production bases will be relocated from China to countries like Bangladesh, Vietnam, Philippines and Indonesia. On the other hand there would be a greater movement towards “regionalization”. European companies may be inclined to look at Turkey, Morocco or Eastern Europe for relocating their production base and American companies may look to enhance their presence in Mexico and other Latin American countries. Arguably the process of regionalization had already started before the Covid-19 pandemic as we have seen regional trade agreements like the so called USMCA Agreement between US, Mexico and Canada. Post Brexit the EU nations have also shown a greater resolve towards cooperation and economic sovereignty. This resolve will now gain more traction in Brussels as the EU tries to decrease its dependency on third countries- particularly in sectors vital to public health, security and public order.

As the world tries to reduce its supply chain’s dependence on China many companies would now be thinking of relocating their production base from there. In fact due to its relentless growth and prosperity over the last few decades China’s labour cost has increased significantly where it no longer offers an unbeatable proposition to industries involved in the production of general consumer goods. This offers the Bangladeshi entrepreneurs an opportunity to bring a share of this FDI into our country. We do however have a very formidable competitor in Vietnam which is also vying for the same FDI. Because of its close proximity and cultural similarities to China, Vietnam is likely to be the major beneficiary of the exodus of investors from China. It is up to our entrepreneurs to negotiate and win over the potential investors and for our government to provide good governance and an investment friendly environment. However, as we have  seen in this crisis, being dependent on the garment sector for 87% of our exports makes our economy more vulnerable to volatility in the world economy. Diversification of our export portfolio and focusing on import substitution industries should be our overriding objective.

There is also a flip side to this proposition. Though global trade and FDI does bring rapid growth and prosperity to a developing country like Bangladesh, it also has its perils which became most evident during the current global economic crisis. Countries with economies reliant on the global market are also more vulnerable to global economic turbulence. A case in point is our textile sector which is almost fully dependent on exports. As a fall out of this global crisis our garment industries have order cancellations of about $3billion. Many of the garment factories will not be able to cope with this calamity and will have to either close down thereby creating job losses for thousands of workers and leaving a mountain of delinquent loans or else the government will have to come up with a bailout package for them which our economy can ill afford. Even so Bangladesh will fare better than some other countries. Our export constitutes 11 percent of our GDP which is a lot lower than that of Thailand whose export constitutes 46 percent of its GDP; add to that Thailand’s dependence on tourism which contributes a whopping 18 percent to its GDP and it is easy to deduce that the Thai economy is looking at a very bleak future.

For as long as I can remember, setting up export oriented industries has been considered as the singular road to our economic emancipation. All government policies have been designed to encourage export oriented industries. One after another Export Processing Zones have been created across the country. The sectors serving the local consumer have been neglected in every government policy. Today even without considering the industries providing essentials to the local market like pharmaceuticals or agricultural products, businesses which are wholly serving the domestic consumption like the construction sector and its allied industries, local FMCG companies, local home appliances producers and similar businesses would be much less adversely affected than the export oriented industries. Hotels catering to local clientele will be back in business much faster than the international brand hotels which are catering to the overseas visitor. Textile mills and garment factories producing for the ever growing middle class of our country will be relatively unscathed.

We have to accept that viruses are a part of our eco system and we have to learn to live with them. They will continue to mutate and every now and then a strain will appear which will wreak havoc. Maybe this is mother nature’s way of telling us that we have to change our ways. We cannot destroy nature but nature can destroy us if we cross the limits. We need to rein in our mad pursuit of materialism. The world is finally coming to terms with this harsh reality. “Environmentalism” “Localism” and “Regionalism” are now the global zeitgeist.

Bangladesh should also act as a responsible global citizen with respect for the environment. We need to recalibrate our strategy for the future so that we are not caught flat footed ever again. The focus should be on encouraging the development of industries catering to the growing demands of the local market and on setting up industries for import substitution. This will afford us some insulation from future global turmoil and would also be a positive step towards the reduction of greenhouse gas emissions linked to international business travel.

 

Comments (8)
  • It’s an informative & educative article. Will help , think and fight for economic viability.

  • This Article should reach to our policy makers. Sometimes, such epidemic could be blessings if we can capitalize it smartly, as a hard-working nation we have the maximum opportunity to come back fast: quoting some important part of the article-

    “The focus should be on encouraging the development of industries catering to the growing demands of the local market and on setting up industries for import substitution.”

    “Today even without considering the industries providing essentials to the local market like pharmaceuticals or agricultural products, businesses which are wholly serving the domestic consumption like the construction sector and its allied industries, local FMCG companies, local home appliances producers and similar businesses would be much less adversely affected than the export oriented industries. Hotels catering to local clientele will be back in business much faster than the international brand hotels which are catering to the overseas visitor. Textile mills and garment factories producing for the ever growing middle class of our country will be relatively unscathed.”

    “However, as we have seen in this crisis, being dependent on the garment sector for 87% of our exports makes our economy more vulnerable to volatility in the world economy. Diversification of our export portfolio and focusing on import substitution industries should be our overriding objective.”

    “As the world tries to reduce its supply chain’s dependence on China many companies would now be thinking of relocating their production base from there. In fact due to its relentless growth and prosperity over the last few decades China’s labour cost has increased significantly where it no longer offers an unbeatable proposition to industries involved in the production of general consumer goods. This offers the Bangladeshi entrepreneurs an opportunity to bring a share of this FDI into our country. We do however have a very formidable competitor in Vietnam which is also vying for the same FDI. Because of its close proximity and cultural similarities to China, Vietnam is likely to be the major beneficiary of the exodus of investors from China. It is up to our entrepreneurs to negotiate and win over the potential investors and for our government to provide good governance and an investment friendly environment.”
    Thanks for such enlightment.

  • Very informative, with analyttic perceptions by the writer.

  • Yes, there’s no doubt that the world economy is headed for the deepest recession.

  • Beautifully crafted and well-analyzed, your blog attempts to show the fragility and vulnerability of globalization, and where Bangladesh stands within that framework. However, it would be great to hear your views on how ‘ import substitution’ goals could be achieved in a country with limited natural resources and a massive population. Perhaps, you will address in your next blog?

  • Mr. Arshi,
    I would expect you to please contribute one elaborate article on post-Covid-19 epidemic.
    There is no denying the fact that epidemic is inevitable and if it is added with early flood then the situation will be horrible. Modi may open Tista to cause sufferings to the northern districts of Bangladesh. (what is your opinion?)
    Besides Dengue is another threat .
    Kind Regards
    Mufti

    • I find your writing very informative, educative with analytic perceptions.
      With regards,
      Engineer Md Jamshed Saqiam

  • India could emerge as an alternative investment destination for US companies doing business in China in the aftermath of the Covid-19 pandemic, a view that the US government’s Department of State is supporting.

    US government wants to get more investment into India, with ministries such as road transport, highways and MSMEs eager to fast track permissions to companies wanting to shift their operations from China to India.

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