Michael Sohlman: Our Civilization and the Coronavirus

Michael Sohlman, the ex-Executive Director of the Nobel Foundation (1992-2011), a member of the Stockholm Institute of Transition Economies, the Royal Swedish Academy of Sciences and the Royal Swedish Academy of Engineering Sciences, analized far-reaching consequences of COVID-19. He believes that the double attack – on our health and economy – has given our Civilization Matrix a jolt. Humankind has moved into a mobilization mode in a number of areas and dimensions, to a certain degree reminiscent of wartimes, raising economic, political, ethical, and philosophical questions. Read about it in our article

The double attack- on our health and economy- has given our Civilization Matrix a jolt, the effects of which will have far-reaching consequences now and for coming years. Parallels have been drawn, not with the 2008 financial crisis, but with the much more serious pandemic of the Spanish flu of 1918-20(50 millions dead), and the financial crisis 1929-32,
and that in a combination of the two, as the pandemic of today is accompanied by the economic and financial depression.Humankind has moved into a mobilization mode in a number of areas and dimensions, to a certain degree reminiscent of wartimes, raising economic, political, ethical, and philosophical questions.

But first a Prologue.

Governments and the grand public act as if they were taken by surprise. However, there were a number of serious warnings in advance: SARS, MERS, H1N1 preceded the current outbreak. In 2005 WHO upgraded the framework for response to epidemics. Obviously too few took note of two Chinese scientists warning in 2007 about precisely the risk we now see
materialized, i.e. the migration of viruses from wild animals to humans taking place in the specific, not to say exotic food markets in China. As late as a few months before the outbreak in Wuhan, a US agency warned of the risk for a serious pandemic. When the attack came, most countries were not prepared, with some notable exceptions like S.Korea, Taiwan,Singapore, and closer to our shores, Finland. The former countries had learnt the
lessons of the previous epidemics, whereas Finland, which has not forgotten the Molotov-Ribbentrop Pact, had kept its civil( as well as military) defence capacity after the fall of the Soviet Union, and had ample care resources needed in the present situation. But most countries and their governments practised optimistic negligence, in the spirit of the
Russian “avos’ – maybe it won’t happen”.

The Health front

The advance of the enemy around the globe is reported in real-time by the John Hopkins University Covid-19 Map(coronavirus.jhu.edu) which presents the relevant variablesconfirmed cases, numbers in intensive care and deaths. The numbers reported come from national agencies, and their quality and reliability vary more or less by the openness and level of democracy in the respective country. Certain authoritarian regimes produce suspiciously low numbers of cases. But even in the democratic part of the world there remain methodological problems of coverage – hospitals only, or deaths in homes for the elderly or at home, as well as of diagnostics. Clear is that the virus advances from its origin in China to other parts of east Asia and to Europe via a bridge-head in Italy, and then
spread over Europe, over to North and South America and now, at last, to Africa.

As the virus is new and unknown until now, there are no vaccines or medicines against it. So one has had to use a an array of defensive weapons. The best known, and used many times in history, is quarantining. Almost all countries have put that instrument to use but in
very different degrees of strictness, from mandatory domestic confinement to recommendations to implement social distancing. Other means are testing, tracking and masks for the general public. For the hospitalized patients there have basically been two treatments- oxygen masks and respirators. For the medical personnel, more sophisticated protective devices are in use all the way to body-covering dresses reminding of the outfits for astronauts.

The main problem has been the inadequacy of the stocks of this material at hand in most countries, as well as intensive care units(ICUs) As a result of the globalization of a range of products of decisive importance- from masks to respirators -have been outsourced, to a great extent to China.

When China was shut down, and other countries began to close down trade in these products, the ensuing shortage triggered a race to find possible sources. Instead of a multilateral, multinational and cooperative approach, governments indulged in overbidding, acting according to the principle “Our Nation first”. A striking example is when US buyers even captured goods on the airfields, rerouting them to home destinations in a way
reminding of pirate business. But also within the EU borders were shut down and trade in medical supplies were stopped, in obvious violation of the laws governing the free movement of goods and people in the EU’s internal market.

Even if the international cooperation between Governments and in the international organizations has been clearly insufficient, there is positive news from the world of Science. In contrast with borders being shut down and trade ín goods being limited, the intellectual exchange globally has expanded vigorously. Networks of scientists around the globe have
been established. This cooperation covers both the analysis of the characteristics of the pandemic and the race to develop vaccines and potential remedies. The usual secretiveness surrounding projects with huge lucrative potential has given way to open collaboration. These efforts have recently been given support by an unique “alliance” under the aegis of
WHO consisting of international organizations, among them EU, individual Governments, NGOs,private Charities and Belinda and Bill Gates.The participant pledge to help to accelerate R&D of Covid19- vaccines and medicines.

The Economic Front

As the virus affects both supply and demand in the world economy at the same time, it is almost impossible to make any meaningful forecasts built on probabilities based on previous similar episodes in the past, for the simple reason that there are no such experiences. The future behaviour of our enemy – will immunity develop as with earlier viruses and /or will it
come in new waves – and the ways in which Governments of the world will react, these are some of the major unknowns and uncertainties.

So instead scenarios are constructed. The IMF, with its impressive expertise, has presented such projections. In a baseline case, the World GDP shrinks by 3 per cent this year followed by expansion by almost 6 per cent next year. But in more probable scenarios with longer periods of lock-down of the economies, a second wave of the virus, and a combination of the two gives a level of global output 8 percent lower in 2021. Worse outcomes are certainly possible if the virus mutates, immunity of “veterans” might not last, and vaccine might take longer to develop and produce.

Much will also depend on how Governments in developed countries will respond to the situation, both domestically with monetary and fiscal policies, and internationally in helping the developing countries, where reserves are very scarce to fight the virus. The poorer countries’ indebtedness is so high that new credit facilities with international financial institutions are urgently needed. Negotiations, agreements and implementation can take fatally too long.

Since this base projection was presented in early April, the situation has deteriorated further. And the other scenarios are more negative.

In European countries, both the monetary and fiscal armoury has been brought into action. At the national level, all EU countries are supporting demand and income some combination of increased transfers,public consumption as well as lowered taxation. Substantial sums have been devoted to helping businesses to maintain activity and employment.
A number of EU rules and taboos have been broken in terms of supporting national businesses and breaking the red lines of budgetary deficits and public debt-to-GDP ratio.

At the level of the European Union the ECB has repeated its promise to “ to do whatever it takes “ to stabilize the shaky eurozone, which means that the weaker Southern countries will be able to borrow at much lower interest rates than what the market on its own would be willing to lend at. In economic terms, it means that the monetary policy informally and
indirectly transforms into fiscal policy by subsidising the debt service of the borrowers.

Furthermore , a support package for the short term of 545 bn.€ has been decided with three safety nets for workers, businesses and member states. At a digital meeting on the 23rd of April a decision of principle was also taken to establish a recovery fund of considerable magnitude for the medium term,1-2 tera.€ have been mentioned. The Fund should assist the
regions and sectors most affected by the virus.

The design of the fund, however, is still not decided and has led to strong tensions between the poorer and financially weaker South, which wants the fund to disburse grants, and the richer North, which will have to foot the bill and therefore is only prepared to give loans. The Commission is now tasked with elaborating a compromise shortly.

In EU Member countries, both the monetary and fiscal armoury has been brought into action.All EU countries are supporting demand and income with some combination of increased transfers,public consumption as well as lowered taxation. Substantial sums have been devoted to helping businesses to maintain activity and employment. A number of EU rules and taboos have been broken in terms of supporting national
businesses and breaking the red lines of budgetary deficits and public debt-to-GDP ratio.

In the USA the Federal Reserve acted swiftly by lowering interest rates, and the Congress decided on a huge fiscal “anti- Covid-19” programme. The IMF has calculated the monetary and fiscal policy initiatives in terms on GDP for the G20-countries:

The uneven effects of the crisis

It is clear that the combined health and economic effects of the Covid19-crisis will affect the richer countries in a very serious way. However, the consequences for the developing and least developed countries will be far worse. Their health systems are often wholly inadequate in normal times, and will be totally overwhelmed by a pandemic.Quarantining is often impossible because of overcrowding in the households. Ventilators and respirators are not in short supply, they are just non-existent. The macroeconomic situation is often very weak and the Governments heavily indebted. In the present turmoil in the international financial markets, international capital tends to be withdrawn to safer harbours. These
problems are particularly pronounced in Africa, where poor harvests and outbreaks of locust invasions are creating conditions for mass starvation.

The international community has identified these difficulties,and IMF has set aside an additional 1 trillion USD in to help the weakest countries. Proposals are advanced to use SDR allocations specifically for the LDCs. In April the G20 agreed on a moratorium on all government debt supposed to amount to over 20 bn. USD. Private debt, however, is not covered by this agreement, and the private creditors do not show any enthusiasm for the
voluntary contributions proposed by G20.

In any case the level of assistance now discussed is far below the urgent needs.

Political and ideological mobilization

The great upheaval of the world economy due to the virus and the lockdown of countries has changed the political landscape in many countries . The need and demand for an active state, which can guarantee health services,safety from the disease and economic subsistence, has increased dramatically. In times of stress, nations need efficient institutions and leadership, and the value of different systems of welfare insurance is made clearer than in ordinary times. A lively discussion has developed about the rationality of globalization and of exaggerated trust in the “invisible hand”of the unregulated market.

Libertarian, neo-liberal or plain populist ideas are meeting head-winds, at the same times as heads of Governments in executive charge are benefiting from rising support (with the exception of the resident of the WH in WDC,USA).

The economic hardship and social and psychological stress from the pandemic has exposed the inequalities which have risen in the world over the last decades. The burdens of fighting against the virus is very unevenly shared. Some are comfortably working from home with a safe income, others are either battling at the medical frontier at risk of their lives, or laid off without any means of subsistence.

The neo-liberal legacy of Reagan and Thatcher has come under growing criticism. An example of this new trend was an editorial (April 3, 2020) in the Financial Times, one of the most important media bastions of the liberal “ Weltordnung”:

Another voice in the same direction is the economist, philosopher and Nobel Economics Laureate Amartya Sen. He raises the opportunity the crisis offers to build a less unequal world. As a historic example, he reminds us ( FT April,15) about the positive effects in the UK during the WWII of common and shared sacrifices leading to a remarkable increase in
life expectancy thanks to better and more even distribution of food, and of improved health care through the new NHS.

Also a prominent representative of the European Centre-Right, the President of the Bundestag, Wolfgang Schäuble points to the increased inequalities in our countries. The relationship between State, Business and Society must be calibrated anew. According to Schäuble, the discussion about the “ Social Market Economy”- the German formula for a well-functioning Society – must ,in the circumstances we are in, also include stronger redistributive and regulating mechanisms( ( Tagesspiegel April 25).

But other are more sceptic about the post-Covid19 world will change that much. Dani Rodrik, like Sen a professor at Harvard, presents a distinctly more pessimistic vision of the world continuing along the previous tendencies:

In short, COVID-19 may well not alter – much less reverse – tendencies evident before the crisis. Neoliberalism will continue its slow death. Populist autocrats will become even more authoritarian. Hyper-globalization will remain on the defensive as nation-states reclaim policy space. China and the US will continue on their collision course. And the battle within nation-states among oligarchs, authoritarian populists, and liberal internationalists will intensify, while the left struggles to devise a program that appeals to a majority of voters.

Rodrick points to the decisive question when it comes to the prospects for a turn towards a less unequal society in the West : who will forge an alliance in the Centre/Centre Left which will be able to carry through a more progressive program? Where are these forces, and why have they not come forward much earlier? The effects of the neo-liberal decades have, after all,been obvious for quite some time. Eventually what happens might be decided, as often has been the case in the past Century, by developments in the USA. A Democratic victory this autumn might change the international trends in a profound way.

Фото к публикации — выступление Михаила Сульмана на международной конференции «1989: Драма ожиданий: Демонтаж коммунизма и посткоммунистическое тридцатилетие» в Юрмале. Источник

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