Jack Gao, Author at

Not such a Great Equalizer after all

Because it has no regard for borders, the coronavirus has been referred to as the Great Equalizer. But its impact is not equal by any stretch of the imagination. While China, Europe, and Northern America may recover relatively fast, emerging market economies are less resilient. The combined health, economic, and financial tolls they now endure may cause them to face the greatest recession in decades.

By Jack Gao | When COVID-19 hit, China’s strong state and centralized public administration allowed it to suppress the domestic spread. In Europe, welfare systems and appropriate policy responses made sure workers have less to worry about when economies reopen. The United States (despite Trump’s handling leaving much to be desired) enjoys a unique status of its own. The American economy and “exorbitant privilege” of the US dollar mean that policy responses can be put forth in short order, and with relatively few negative repercussions. For most emerging market economies, however, none of this can be taken for granted. The coronavirus is shaping up to be the “perfect storm” that many feared. It could sink the developing world into a deep economic recession.

No Doctors and No Food

Let’s start with public health. While the increase of new deaths in the epicenters—US, UK, Italy, Spain—appears to be slowing, the virus rages on in major developing nations. Russia, India, Mexico, and Brazil continue to report well above a thousand new daily deaths, and many of them are still on an upward trajectory. In India, a brief relaxation of the lockdown was met with a jump in deaths, underscoring that the fight to contain the virus will be an uphill battle.

Although health systems are being tested everywhere, the ones in developing countries were already under strain before COVID-19 reared its head. For example, the average number of health workers per 1000 people in OCED countries is 12.3. In the African region, this ratio is only 1.4.

As if the health crisis is not crushing enough, the United Nations warns of a “hunger pandemic” as an additional 130 million people could be pushed to the brink of starvation this year, with the vast majority of them in developing countries. The coronavirus may cross borders easily, but the suffering it causes is not equal across countries.

Locked Down and Out of Work

If the human toll of the pandemic is appalling, the economic damages to countries are unprecedented as well, as countries implement lockdown and “social distancing” to combat the virus. In the latest World Economic Outlook growth projections by the IMF, emerging market economies as a whole are expected to contract 1% this year, for the first time since the Great Depression. Literally all developing countries may be in economic decline as a result of COVID-19, with India and China eking out paltry growth. Still, these headline numbers mask the true extent of economic hardship.

Take working from home, for example. Economists have documented a clear relationship between the share of jobs that can be done at home and the national income level. In a developed country like the United States, some 37 percent of jobs can be performed at home—education, finance and IT being at the top of the scale. In some developing economies, less than 10 percent of jobs can be done remotely.

On top of all this, global remittances are collapsing. The amount of money transferred to migrants’ home countries may fall by 20 percent as workers see dwindling employment. This is terrible news for countries like Lesotho, where remittances are as much as 16% of GDP.

Where’d the money go?

The global financial system exacerbates these struggles with its core and periphery topology. During good times, foreign capital flows into emerging markets, looking for higher yields. But in bad times, when that capital is needed most, it swiftly disappears. This dynamic is now on full display. As investors started to realize the true scale of the pandemic and major central banks initiated new rounds of monetary easing, emerging economies saw capital flight as investors rushed to safer assets. An estimated 100 billion portfolio dollars fled emerging markets in the first quarter alone.

In the face of such severe dollar shortages and liquidity crunch in developing countries, the Federal Reserve had to expand central bank liquidity swaps and launch a new lending facility to come to the rescue. The impact of such international measures is still an open question. But with currency depreciation, higher borrowing costs, declining official reserves, and falling commodity prices, it appears that the financial stress emerging economies are under may be difficult to reverse.

The Triple Whammy

This way, developing countries face a health-blow, and economic-blow, and a financial-blow, all at once. An emerging market economy faced with just one of those would have resulted in a crisis. But amid COVID-19, all emerging economies were are confronted with all three crises at the same time. The damage done by this “triple whammy” could plague the developing world for years to come.

Jack Gao is a Program Economist at the Institute for New Economic Thinking. He is interested in international economics and finance, energy policy, economic development, and the Chinese economy. He previously worked in financial product and data departments in Bloomberg Singapore, and reported on Asian financial markets in Bloomberg News from Shanghai. Jack holds a MPA in International Development from Harvard Kennedy School, and a B.S. in Economics from Singapore Management University. He has published articles on China Policy Review and Harvard Kennedy School Review.

Coronavirus Needs Not Kill Globalization

By Jack Gao | The COVID19 crisis is shaping up to be the most severe challenge the world has to confront since World War II. At present, almost 800,000 cases have been reported from virtually every country in the world, with the death toll nearing 40,000. Not only is much of the global economy frozen as we fight the virus, but national borders are also being shut down to contain its spread. As this battle goes on, many are already predicting that the world may never be the same again.

The knee-jerk reaction is to substantially roll back on the current globalization regime, so global pandemics may be eliminated for once and for all. But this reflex towards nationalism completely misses the point. Crises like this one reflect on the perversion of current globalization, not on globalization per se. We should not throw the baby out with the bathwater, but instead, take the crisis as an opportunity to improve on the version of globalization that prioritized some objectives but neglected others.

First of all, a more divided world in no way guarantees global pandemics will no longer happen. One only needs to turn to the 1918 Spanish flu pandemic that claimed 100 million lives or the even more lethal Black Death episode, both when the world was more divided, for some evidence. Periodic outbreaks of infectious diseases have plagued humanity throughout history, and, more than anything, it was progressing in science and healthcare that accounted for the gradual decline in fatality and damages, in spite of advances in globalization. In fact, we could reasonably argue that better health outcomes, nutrition access, sanitation facilities wrought by economic development are important reasons we have fewer and less deadly pandemics today, thanks to globalization. It’s wishful thinking that less globalization will result in fewer pandemics.

Second, when crises do strike, we are much better positioned to respond to them as a globally connected community. Although leaving much to be desired, information sharing has proved key to containing the coronavirus outbreak. China alerted the WHO by the end of last year of unusual pneumonia in Wuhan; within days, Chinese scientists posted the genome of the new virus, allowing virologists in Berlin to produce the diagnostic test of the disease for worldwide access. We often take for granted communications of this kind today, which we can ill-afford if balkanization was to rule the day.

Even as borders are shut to reduce human flow at the moment, global commerce continues to play a crucial role to ensure the supply of medical products and equipment as we fight the pandemic. For instance, the crisis may have already subsided in China, but Chinese companies are currently working around the clock as ventilator orders pour in from the rest of the world. Similarly, at least a few dozen pharmaceutical companies from around the world are racing to develop vaccines and treatments for the virus, knowing that they’ll have ready access to a global marketplace to recoup their investments. Just imagine how much harder this battle would be if countries were left to their domestic supply chains or scientific knowledge.

Finally, while much is still unclear about how the current outbreak unfolded, from the evidence we do have, it is national mishandling or in some cases deglobalization factors that contributed the lion’s share to its unbridled spread. China’s earlier misstep on information reporting, America’s testing debacle and obsession with travel bans, and UK’s initial flirtation with herd immunity are just a few examples of national blunders that hastened the transmission of the virus, which have little to do with globalization. Meanwhile, in a bid to have America go it alone, Trump’s elimination of epistemologist based in China, staff cuts at the CDC, and heightened tariffs on Chinese medical products may well have made this health crisis worse than it has to be.

Each crisis is an opportunity in disguise, the coronavirus is no different. It should be taken as a reminder that our disregard to some objectives and narrow-minded pursuit of others have tilted the world off-balance. In a globalization solely focused on promoting international trade and financial flows and centered around organizations such as the World Bank and the IMF, this outbreak caught the incumbent international regime completely off-guard. Either in funding, capacity, or power, the World Health Organization has been no match to its counterparts charged with commercial and financial affairs. Seen in this light, the outbreak should serve as a rude awakening to a world economy that prioritizes economic integration over public health, environmental, and climate concerns.

As the fight to contain the coronavirus continues, many believe this crisis will bring an end to globalization as we know it, some may even work hard to make sure this is so out of self-interest. However, it bears emphasizing that a balkanized and disintegrated world is neither feasible nor desirable. The coronavirus does not have to kill globalization, instead, it is our chance to rebalance the world economy to better serve collective social goals and tackle future challenges as a coordinated global community.

Can Trade in Services Deliver for Developing Nations?

Industrialization was long considered the path to economic development. But as the global south stands to lose its competitive edge to increasing levels of automation in the global north, this trajectory is no longer obvious. Some developing countries have leveraged the digital age to offer low-cost services, rather than manufacturing. Is that a promising strategy?

By Jack Gao | For the vast majority of countries, growing rich meant learning to make things. In the 19th century, Britain produced half of the world’s cotton cloth; manufacturing sector in America was a quarter of its gross domestic product 50 years ago; Japan’s post-war economic miracle ushered in a generation of powerful keiretsu from Mitsui to Mitsubishi; China, currently the largest manufacturer in the world, perfected the tactic by moving hundreds of millions from farmland into factories. In short, development equaled industrialization.

And for good reasons. The manufacturing sector boasts unique properties—scale, trade-ability, existing technology, and employment intensity—that makes it stand out as the coveted national development strategy for low-income countries. India, Vietnam and much of Africa have all tried to emulate the rise of Chinese industrialization and hop on the escalator to achieve economic development, with varying degrees of success.

When the latest digital revolution brought in automation and industrial robots, many feared that the path to prosperity for developing countries might be short-circuited. Machines that produce goods more cheaply and efficiently in rich economies might make trading with poorer countries unnecessary. McKinsey Global Institute sees the forces of automation particularly impacting lower-income countries; Harvard economist Dani Rodrik uses the term “premature deindustrialization” to describe ever earlier and lower peaks of industrial output and employment shares already observed in many countries. As automation erodes the cost-advantage of developing economies, the prospect to grow one’s way out of poverty through industrialization has become bleak.

Some scholars, however, don’t think things will turn out so badly for the developing world. In a new paper, Richard Baldwin from the Graduate Institute in Geneva and Rikard Forslid from Stockholm University argue that trade in services presents ample opportunities for poor countries to catch up even if manufacturing were to become jobless. The dramatic fall in the trade costs for services brought forth by the latest technologies, coupled with vast wage differences between rich and poor countries, will make a wide range of previously localized services tradable across national borders and could turn out to work to the advantage of low-income countries. Think call centers, data analysis, and medical billing.

The authors back their sanguine prediction by the experiences of two large developing counties—India and the Philippines. After modest success in the attempt to modernize its manufacturing industry, India embarked on the service route partly through the liberalization of investment restrictions in the 1980s. Research and development departments of multinational companies, call centers, as well as other business administration services flooded into India to take advantage of the low-cost but skilled labor force. Kaushik Basu’s explanation that India’s overproduction of engineers throughout the decades matched Silicon Valley’s demand for tech workers is an illustration of how services were exchanged between India and the US. The Philippines has developed a similarly booming service sector since 2000, becoming a preferred destination for IT-based business process outsourcing from global banks and tech companies. Experience from both countries highlighted the rise of trade in services made possible by computerization and the internet, while an educated workforce with specialized skills, including English-language communication, captured the opportunity where services became geographically unbundled.

The prediction made by the authors, if true, is certainly good news for low-income countries facing the dual challenges of a digital revolution and a reduced appetite for global trade in goods. Technological advancement is only poised to continue and render more services potentially tradable, given trends in “telemigration” (online service workers employed by foreign-based companies) and “telecommuting” (the use of collaborative online platforms for business meetings).

However, there’re reasons to be skeptical. The current share of global trade in services is still far smaller than that of trade in goods, and developing countries as a whole remain net importers of services from developed countries. Perhaps more importantly, while countries such as the Philippines, India, and Bangladesh have participated in global trade in services, it is not clear that other developing economies are as well-positioned to partake in this trend, especially given the woefully low level of human capital widely observed today.

Economic development has always been a challenging task and the challenge evolves as circumstances change. Countries will do well by focusing on improving binding constraints at home while keeping an open eye on new opportunities presented by a changing global economy, but many questions remain.