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The Pandemic Will Permanently Change The World: And Not For The Better

By Marvin Zonis

Arundhati Roy, the controversial Indian born novelist and essayist, recently wrote:

“And in the midst of this terrible despair, it offers us a chance to rethink the doomsday machine we have built for ourselves. Nothing could be worse than a return to normality. Historically, pandemics have forced humans to break with the past and imagine their world anew. This one is no different. It is a portal, a gateway between one world and the next.

We can choose to walk through it, dragging the carcasses of our prejudice and hatred, our avarice, our data banks and dead ideas, our dead rivers and smoky skies behind us. Or we can walk through lightly, with little luggage, ready to imagine another world. And ready to fight for it.”[i]

The pandemic will have major consequences on people, governments, countries and their relationships. But those consequences will be less the result of “imagination” and more to do with forces unleashed by Covid19.

Three such forces stand out: Petroleum, Population and Protectionism.

Petroleum

The fall in demand for petroleum – now running about 25% of pre-virus consumption – has been startling and devastating for oil prices. (A recent study found that distances driven in the U.S. since Covid19 have fallen by 30 percent.[ii])

Saudi Arabia and Russia worked out an arrangement meant to reduce the global supply of petroleum by 10to 20 percent and, in the process, boost oil prices. President Trump has pledged to diminish U.S. oil production to help raise prices, although, of course, he has no constitutional power to do so. But a promised cutback in global production has failed to arrest the slide in oil prices. Instead, as of today, oil prices have gone negative – producers are paying for potential buyers to take oil from them.

Oil prices will go positive as more producers shut down their production and, perhaps, even go bankrupt. Two factors will then continue to constrain any price increase. For one thing, production cuts are notoriously hard to implement. The higher the price the greater the incentive to cheat. A country exporting an extra barrel of oil receives that much more revenue. As a result, cheating limits the price increase from production cuts. Any oil price increase will also be limited by the depressed demand for petroleum from the global economic slowdown.

Global Oil Production -- 2020

U.S. oil production has been driven by shale drilling, which now produces some 60% of total U.S. crude oil output while crude exports hit 3.6 million barrels per day. Add crude exports to refined product exports and the U.S. has been exporting 9 million barrels per day of petroleum. That volume will diminish rapidly as marginal shale production shuts down. But robust U.S. exports will also limit oil price increases.

While the oil price collapse has benefitted large importers – India and China foremost among them – the collapse has been devastating for most oil producing countries whose government budgets rely on oil exports. Here is a chart of the oil price required to balance government expenditures with oil revenues for a number of countries.[iii]

Low oil prices will continue to punish the oil exporters. Their pain is exacerbated by a long but significant slide in commodity prices.[iv]

The governments whose coffers are so diminished will reduce public services; their economies will falter; and their populations will experience further suffering. Increased political instability, increased capital flight and increased migrant flows will follow, all which will contribute to establishing a vicious downward cycle. Already dire conditions will worsen with shattering effect.

Nowhere are these effects more pronounced than in the exporting countries of Africa. Already suffering as the result of the global slowdown, the fall in tourism, the fall of export prices and what now appears to be the threatening growth of COVID19 cases, “these economic, fiscal, and monetary challenges could greatly reduce Africa’s GDP growth in 2020.”[v]

But these challenges will have much greater consequences. They will reduce the GDP not just of African countries and not just in 2020 but the economies of most emerging market countries for the indefinite future.

Population

Yet another consequence of the global pandemic will be further decreases in the total fertility rate (TFR) – the number of children born to each woman. Many countries have long since passed this level – 2.1 -- at which their populations would be replenished by fertility.[vi]

 

COUNTRY

TFR

 

COUNTRY

TFR

Saudi Arabia

2.09

 

Australia

1.77

France

2.07

 

Brazil

1.75

Libya

2.04

 

Lebanon

1.72

New Zealand

2.02

 

Russia

1.61

Turkey

2.00

 

China

1.60

Iran

1.97

 

Canada

1.60

Ireland

1.90

 

Switzerland

1.56

North Korea

1.90

 

Thailand

1.52

Azerbaijan

1.89

 

Spain

1.50

Sweden

1.88

 

Germany

1.45

U.K.

1.88

 

Japan

1.41

U.S.

1.87

 

Romania

1.35

Norway

1.85

 

Poland

1.35

Vietnam

1.81

 

South Korea

1.26

Netherlands

1.78

 

Taiwan

1.13

Belgium

1.78

 

Singapore

0.83

 

The population of these countries has already begun to shrink. With a further fall in the birth rate, their population declines will accelerate. One result will be lower rates of economic growth. Population growth is a major driver of domestic demand – more people means greater demand for shelter, education, transportation, and on and on.

This growth slowdown will deeply affect the United States. For not only has the TFR fallen below 2.1, but the Trump administration has slashed immigration.[vii]

Fewer babies also mean a smaller workforce to pay the taxes necessary to support increasingly aged populations and lower rates of  innovation from the decrease of creativity brought by young people.

The smaller workforce will generate a drive to automation and a reduction in the pressures on employment, especially as economies switch from manufacturing to services.

Many countries have the contrary problem. Here is a chart showing the number of babies born per woman in sub-Saharan African countries and Afghanistan. Any reduction in the TFR will be of immediate benefit to them.[viii]

 

COUNTRY

TFR

 

COUNTRY

TFR

Niger

6.49

 

Mozambique

5.08

Angola

6.16

 

Nigeria

5.07

Mali

6.01

 

Liberia

5.06

Burundi

5.99

 

Ethiopia

4.99

Somalia

5.80

 

Tanzania

4.77

Burkino Faso

5.71

 

Congo (Rep)

4.59

Uganda

5.71

 

Congo (Dem)

4.39

Zambia

5.63

 

Togo

4.38

Malawi

5.49

 

Chad

4.34

Afghanistan

5.10

 

Senegal

4.28

 

The TFR has been declining in Africa but at a much slower pace than was the case in Asia and Latin America.[ix]

As a result, these states and others, mostly in Africa, have seen their populations skyrocket. For them, any accelerated decrease in the Total Fertility Rate would be a great good. Their generally inept public bureaucracies – public health and education in particular -- will be less strained while the pressures on their people to flee – the young in particular – will be somewhat reduced.

Early indications from lockdowns in some African countries suggest a quite different fertility effect from the U.S. and Europe. Births are predicted to increase rather than decrease as faltering governments no longer birth control or abortions.

The coming decline in African economic growth rates – and actual collapse in some countries -- along with staggering population pressures driving political instability will motivate many millions of their citizens to flee to more stable and more prosperous countries. A migrant crisis unlike anything we have yet witnessed is inevitable.

There is some limited additional evidence about the effect of the pandemic on fertility rates. In general, diminished rates of economic growth and domestic trauma depress fertility. In the U.S. other factors associated with diminished fertility are increasing:

  • Substance abuse, a lack of physical stimulation and unhealthy diets are beginning to take a toll.
  • Alcohol sales were up 55% in the week ending March 21, according to Nielsen, which measures consumer markets in addition to media. Spirits were up 75%, followed by wine up 66% and beer up 42%. Online alcohol sales were up 243%.
  • People are eating more. With consumers relying mostly on non-perishable foods, like pasta and canned food, many are concerned about gaining weight — the "COVID-15" or the "quarantine 15." 
  • And they're exercising less. According to data from 68,000 fitness trackers, Americans are moving less and sleeping more under quarantine, per CNBC.[x]

On balance, despite so many “sheltering in place,” it would seem that developed countries will see an accelerated rate of population decline. High TFR countries, particularly in sub-Saharan Africa, will see continued outflow of migrants to the developed countries.

The result will be slower rates of economic growth and more inter-state hostility and conflict.

Protectionism      

Before the Covid19 virus generated a global pandemic, nationalism and populism were on the rise across the globe. President Trump’s “America First” policies were being replicated in many other countries.

The global pandemic put the rising protectionism on steroids. The United States refused to export medical equipment to other countries while global supply chains broke down from the shutdown orders.

Furthermore, the countries whose responses to the spread of the virus were deemed inadequate sought escape from the political fallout by blaming other countries – none more so than President Trump with his insistence on referring to the “China virus.”

Inevitably, the rise of nationalism coupled with governments’ seeking to divert the political fallout from their own failings will vastly increase the adoption of more aggressive and assertive foreign policies with the risk of actual conflict.

Global supply chains will be rebuilt but will be far less global than previously. More production will be domestic. (In the U.S., Peter Navarro, the Secretary of Commerce, has been charged with overseeing the disbursement of some $500 billion in aid to companies. As the government’s leading anti-globalist, he will do as much as possible to prevent a return to the dependence on global supply chains, particularly supply chains leading back to China.)

The global supply chains of the future are likely to be far more diffuse and spread over far more countries. They will also be far less efficient and, therefore, costly.

China will be hurt from the diffusion of global supply chains. But it will be hurt in other ways as well. Its Belt and Road Initiative will suffer a rash of defaults as the countries which had benefitted from Chinese loans find themselves painfully unable to keep current on their interest payments. China may choose to take possession of those projects. But that step would diminish its global stature. More likely, it will choose to extend repayment terms.

On balance, global trade will not return to the high levels as a percent of GDP reached before the crisis. Since trade drives economic growth, the slowdown will diminish growth.

Conclusion

The Federal Open Market Committee of the U.S. central bank has postponed the issue of projections for the U.S. economy. As an old Persian expression goes, I cannot attempt to be “a bowl which is hotter than the soup.” But I can reach some conclusions from this discussion of Petroleum, Population and Protectionism.

No matter when the virus will be beaten; when “shelter at home” orders will be rescinded; when life returns however obliquely to “normal;” this pandemic will have powerful lasting effects:

  • a continued decline in births with falling populations everywhere except Africa;
  • widespread political instability, particularly in Africa;
  • a further increase in global migration;
  • a widespread retreat from globalization;
  • an increased probability of inter-state and intra-state violent conflicts; and
  • a great and persistent slowdown in global economic growth.

These consequences of the global Covid19 pandemic will live on indefinitely irrespective of the fate of the virus..

 

Marvin Zonis is Professor Emeritus at the Booth School of Business, The University of Chicago


[i] Arundhati Roy, Financial Times, April 5, 2020 https://digital.olivesoftware.com/Olive/ODN/FTUK/Default.aspx

[ii]The Economist, April 4, 2020, p. 19

[iii] Council on Foreign Relations, Amy M. Jaffe and Gabriela Hasaj, Oil Price War: Is U.S. Shale The First To Blink,? March 19. 2020

[iv] https://markets.businessinsider.com/commodities. The real price of a basket of commodities is now 8% below the low achieved in the 2009 crisis.

[v] https://www.mckinsey.com/featured-insights/middle-east-and-africa/tackling-covid-19-in-africa

[vi] https://www.cia.gov/library/publications/the-world-factbook/rankorder/2127rank.html

[vii] “Trump administration immigration policies implemented in 2017 and 2018 may in part explain the decline in admissions, including additional vetting procedures for certain groups, the travel ban barring individuals from seven countries (an expanded list of countries was added in 2020), and greater discretion for consular officers to deny visas. All applications from North Korea were denied in FY 2019. Other countries with high denial rates were Libya (89 percent of all visa applications), Iran (87 percent), Somalia (81 percent), Yemen (78 percent), Syria (75 percent), and Venezuela (60 percent). Although Chad was ultimately left out of the final iteration of the travel ban, 70 percent of B visa applications by Chadians were denied in FY 2019, an 18-percentage point increase from FY 2017. Between 2017 and 2019, visa refusal rates went up for visitors from some major non-travel ban countries as well, including Mexico (from 23 percent to 27 percent), China (from 15 percent to 18 percent), and India (from 23 percent to 28 percent).” https://www.migrationpolicy.org/article/frequently-requested-statistics-immigrants-and-immigration-united-states#Immigrants%20Now%20and%20Historically

[ix] See, for example, John B. Casterline, Prospects for Fertility Decline In Africa, https://onlinelibrary.wiley.com/doi/full/10.1111/padr.12055

[x] AXIOS AM, By Mike Allen, April 05, 2020

 

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