The New Economy

By Katsiaryna Serada – Research Fellow & Policy Analyst at Tondo

The pandemic COVID 19 has questioned the foundations of our global economy, demonstrated the weaknesses of our current economic model in facing real and potential global challenges, revealed the excessive and risky dependency on the global value chains and a single largest supplier. The COVID 19 demonstrated that the largest supply of the essential medical items, almost three-quarters of blood thinners imported by Italy, 60% of antibiotic components imported by Japan and 40% imported by Germany, Italy, and France, and largest amount of the medical masks come from China. (Javorcik, 2020)  Before the COVID-19 crisis, China produced around 20 million masks per day. By early March 2020 the production increased to 120 million per day, including through deploying idle productive capacity and repurposing other sectors such as automotive and electronics. Despite deploying additional productive capacity both in China and worldwide, the global spike in demand for medical and other supplies   during the COVID 19 crisis far exceeded both material stocks and available capacity to produce. The global value chains were hit in several dimensions – demand, international transportation networks, productive capacity — and were not able to respond the global health crisis. The governments of the exporting countries have addressed the increasing shortage or scarcity (risk of scarcity) in the domestic markets by imposing the numerous export restrictions on medical and other items. More than 70 economies, including the US, China and the EU, have introduced export restrictions to allocate domestic supplies to national healthcare systems and citizens first (Hoekman, Fiorini, 2020). Therefore, the COVID 19 crisis has explicitly demonstrated that the price mechanism and the markets have failed to accomplish social optimum and efficiently provide and allocate the resources. The crisis has explicitly demonstrated that the resources remain with those who have the resources. 

This massive disruption in supplies during COVID 19 crisis along with the export restrictions has revived the anti-globalization sentiments, enhanced the talks on developing self-reliance and reshoring the businesses, has brought up the issue of the importance of maintaining the local productive capacity and questioned the efficiency of the real-time and strategic management of own resources. 

The containment measures to respond global health crisis undertaken by the governments to halt a fast spread of the virus (quarantine, physical distancing, shutdown the economic activities) caused the economic crisis. The entire sectors of national and global economy were deeply affected, particularly, agriculture, tourism, hospitality, international transportation. Our economic system got broken again, revealed new and old weaknesses, risks and fragilities.

To fix the economy the governments across the world have adopted economic stimulus packages to support economic recovery. At the same time, the crisis like this one cannot be easily fixed by the money surplus to the markets and people to ensure the smooth back to the pre-crisis “normal” ways we worked, lived, produced and consumed. There is a clear recognition among businesses and policy makers that restoring the same economic model will expose people, institutions and businesses to the same or other new risks in case of another global crisis. 

The policy experts and trade analysists suggest that COVID 19 crisis is likely to produce significant impact on global value chains in the years to come, encourage and accelerate diversification (regionalisation) of supply chains and building up stocks of essential supplies for cases of the emergency. Of course, our global economy will remain interlinked, though its principles will be revised, particularly in part of the multilateral digital, scientific and trade cooperation, but the trend towards greater self-sufficiency and resource-independency in developed countries will accelerate. However, we will also likely see a paradigm shift from cost-based reasoning in organizing our international production networks to a more resilience-centred perspective on arranging our global value chains to reduce the probability of shortages resulting from similar exogenous shocks in the future.

Beata Javorcik (2020), Chief Economist, EBRD, University of Oxford and CEPR suggests that the compound effect of trade tensions between the US and China for the global leadership in the global marketplace and the disruption in global supplies during the health crisis, “will force businesses to re-engineer their global value chains” and take into their decision-making more factors. Javorcik underscored that the current “just-in-time manufacturing” approach is also not fit for purpose in the situation like pandemic; it was not able to secure the supply of the amounts needed in the time of the COVID crisis or a similar event of the global character. 

Indeed, no shortage of lessons to learn from COVID 19. The current situation has demonstrated the systemic weaknesses in our highly internationalized systems of production and consumption. With respect to supply chains, the countries discovered high costs of dependency on non-diversified supplies from a single geographical location and weak reliability of the markets. The need to enhance the instrumental role and capacity of the national and local authorities has been widely understood. Digitalization has proven to be an important element of the economic system that helps to keep it functional, efficient and circular; it facilitates efficient allocation of the resources within the communities and encourages local economic exchanges; facilitates the exchange in vital medical data and information.  

It is increasingly evident, that we need to reconsider our dissembled internationalized production and consumption, build more resilient and sustainable economic system. Today we have a unique opportunity to make a broad systemic change. The UN (UN, 2020) has underscored the necessity to include the transition to more sustainable, circular and climate-resilient economies into the economic recovery strategies to build stronger economies which will be more sustainable and resilient to shocks. 

Circular economy, based on the resource efficiency and the use of the secondary resources available in the economy, in increasingly regarded as a promising and a more inclusive model for building greater resilience and driving sustainable recovery and economic growth both in developed and developing economies.

  • Circular economy suggests shorter and more efficient circuits from producers to consumers. It can provide a more resilient economic model to protect societies from shocks and supply disruptions, preserve the supply in sectors vital to the economy. 
  • Circular economy offers significant environmental benefits such as a smaller carbon footprint resulted from the reduced international freight transportation and a smaller material footprint due to the reduce in extraction and use of the primary resources. 
  • Circular economy, built on the efficient markets of the secondary resources, is capable to ease the resource pressure and secure the supplies of the essential production inputs, help to develop a balanced approach to the allocation of the resources within the domestic markets and exporting them abroad. 

The global transition to a global circular and sustainable economy faces many hurdles due to significant differences in development paths. The resource-rich economies traditionally have a lower level of economic diversification and poorer export baskets to support a shift to more circular and greener economies, their budgets to a significant degree depend on the revenues from trade in resources. Their economies are traditionally exposed to price volatilities on the commodity markets. In the absence of strong economic diversification policies, the developing countries, dependent on the trade in resources will be heavily affected by the green and circular transition in developed and technologically advanced economies, which have stronger institutions, capacity and leadership to make a shift.      

On the regional level, the EU has been gradually introducing a circular and sustainable economy in its economic DNA. Five years ago, the European Union decided to shift away from take-make-consume-waste model to a circular economy with the aim to focus on the resource efficiency, regeneration of natural systems and to reduce waste and pollution. In 2019, Circular Economy became central concept of the European Green Deal, a new economic growth strategy, aimed at building globally competitive, circular, digitalized and sustainable European economy. Although the COVID 19 and an economic recession have questioned the ability to maintain new priorities and implement new growth strategy, the Commission has reaffirmed that the transition to a circular and digital economy should play a key role in economic recovery and building more resilient and sustainable economic model. European Green Deal, promoting both digital and circular transitions, became one of the core elements of the economic recovery strategies of the EU. At the EU Summit held on March 26, European leaders called for a “green recovery plan” that would include the digital and green ambitions and goals. In line with this, the environmental ministers from Austria, Denmark, Finland, Italy, Latvia, Luxembourg, the Netherlands, Portugal, Spain, Sweden, France, Germany and Greece submitted an appeal for a green recovery and urged the European Commission to support green recovery and an appropriate transition, notably by scaling up investments in sustainable mobility, renewable energy, building renovation, the circular economy, research and innovation and recovery of biodiversity and, therefore, to ensure the course towards carbon-neutrality in 2050. The EU has committed to maintain the course taken in the Green Deal in economic recovery. It provides a unique opportunity to demonstrate the potential of a circular economy and build resilient, innovative, just and sustainable economic system.  

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