Exiting the Covid-19 crisis will require more, not less, integration

Covid-19 is accelerating a backlash against globalisation already underway well before the outbreak. However, to exit this crisis, we need even closer integration and cooperation, argues Loh Boon Chye, CEO of Singapore Exchange.

Global markets had begun the new year with cautious optimism that world economic growth could be sustained, following progress in January on a trade deal between the U.S. and China, the two economic powerhouses of our time. By March, as concern of a sharp downturn resulting from Covid-19 led to one of the worst quarters for equities in over a decade, many of us are instead contemplating quite a different worldview.

The coronavirus pandemic is the most significant crisis we are facing in a generation. Within weeks of the first cases of transmission, governments have been forced to take some unprecedented peacetime steps to stop its spread: entire cities, then countries, have been locked down, economic activity has virtually ground to a halt and the movement of people severely restricted. With a vaccine still some time away, the human toll has been devastating, the economic cost unknown. Many nations have closed themselves off from the outside world and looked inwards, both physically and metaphorically, for solutions to stem the pandemic.

Yet this retreat was arguably set in motion following the 2008 financial crisis, as an uneven economic recovery led to a backlash against globalisation. The Covid-19 outbreak is now accelerating this retreat, and indeed, some economists predict that the pandemic will hasten the end of the era of open borders and free markets. It seems, precisely because the world is so connected, that the disease was able to spread with such ferocity and impact. Across Western democracies in particular, taking back control has become a compelling call to action.

More integration

In the fog of a crisis, it can be hard to resist the conclusion that globalisation has run its course. With lives and livelihoods upended, governments have instinctively turned inwards to protect their own – essentially seeking local solutions to a global problem.

However, to exit this crisis, we need even closer integration and cooperation. Global markets must stay open and accessible to facilitate a solution, to enable continued movement of basic necessities, critical medical supplies and technology, as well as increased capital flows. Financial markets can play a role here. They help to allocate capital efficiently, delivering price formation and transparency necessary to keep businesses going. This is part of safeguarding our economic resilience.

Financial markets also facilitate risk management. With Covid-19, news and information move rapidly and investors must be given the opportunity to respond and express their views in real time. Already in global equities, some markets have adopted measures to shield investors from losses amid the uncertainty, such as suspending trading or introducing a ban on short selling, to varying degrees of success. Intervention is not a one-size-fits-all solution.

To be sure, the world’s economies are of different sizes and at different stages of development. Bigger, more developed nations may do better being insular than those in emerging economies. But in order to secure a more sustainable future for all, doors must be opened for ideas to be sourced globally and for capital supporting those ideas to flow. 

Mutual trust

That is why taking an inward-looking approach comes with significant hazard. The coronavirus does not respect national boundaries. Sealing borders may help to stem the spread of a disease from country to country, but will not bring us closer to the path of real recovery. Only when all countries have tamed the pandemic will each country truly recover.

“We are all in this together” holds true when we recognise that the months and years ahead will be difficult for many. China, the first country to emerge from lockdown, has reported a 6.8% decline in its first-quarter gross domestic product, its first economic contraction since 1976.

Globalisation has been a source of stability for decades, the biggest driver of world economic growth since the 1990s, having lifted over a billion people out of extreme poverty. At its core, it has promoted a rules-based system that offers certainty and security, helping us to take on international challenges such as climate change – and health crises.

Things will change no doubt. Covid-19 has revealed weaknesses in the way the global economy has been organised, most glaringly in the international supply chains synonymous with economic integration. To this end, globalisation is imperfect and we should be under no illusion that because it has worked in the past, it will continue to do so in the future. Yet we must move forwards, not backwards, and seek to adapt rather than undo. That is the only way we can grow. And when the day comes when we succeed in overcoming Covid-19, we may well discover that the world has emerged more connected and interdependent than ever.

(This opinion piece first appeared as a topic brief on the St. Gallen Symposium website.)