Is the Covid-19 Pandemic the Catalyst for a Great Reset?

This article is adapted from the notes of my participation in the panel discussion at Liew Chin Tong’s “The Great Reset” book launch.

In 2008, the financial system collapsed in the global financial crisis, and along with it the ideology of neoliberalism. The global economy only survived thanks to massive interventions from central banks, which haven’t been unwound to this day.

After the give-or-take 50 years when neoliberalism was the foundation for most of economic policymaking, the results do not look particularly pretty. GDP has grown, but inequality and economic insecurity have increased even faster. In turn, many disaffected people have turned to political extremes, and we are witnessing rising levels of social unrest. Perhaps most damning of all, life expectancy for males in the US has declined over the past few years.

The Covid-19 pandemic has put all the structural shortcomings in our economy in sharp relief. At the same time, it has magnified and accelerated underlying trends (like digitalisation and de-globalisation) that render our economy’s structure increasingly unfit for purpose. The pandemic therefore marks the time for a great reset.

Short-term impact and response

To be clear, calling for a great reset at this stage does not mean that we are out of the woods with the pandemic. In fact, most countries are still only at the end of the so-called first wave or maybe the start of a second wave, and the situation looks uncertain for a few years to come.

Various lockdown measures across the globe affected both supply and demand, leading to job losses, furloughs and hence reduced income. Thanks to massive government intervention, the economy has been kept more or less afloat, but there is a risk of a vicious circle when these measures expire. The situation improves when the lockdown measures are relaxed, but this is generally at the expense of a resurgence of the virus, which may in turn influence consumer behaviour for years to come (e.g. travel, dining out, indoor leisure activities etc.)

For the foreseeable future, maybe the next two to three years, the economic environment will be very uncertain, with some areas (within countries and globally) going into and out of lockdown, affecting travel, consumption and investment. Government support will remain necessary as the “insurer of last resort.”

A Covid-19 vaccine and various therapies may allow a return to a more normal level of economic activity, but even if a safe and effective vaccine is found in the next 12 months, it will take significantly longer before enough people are vaccinated for it to have an effect. In addition, there will be questions of affordability, that may hinder access to the vaccine for poorer segments of the population in all countries, and competition is also developing between developed and developing economies.

Looking at more fundamental evolutions, the Covid-19 crisis has accelerated previously existing trends, like digitalisation (working from home, online education etc.), or “re-shoring” of activities that were previously moved offshore. It seems safe to assume that these trends and will not return to their baseline, with permanent changes to our economy as a result. In turn, these shifts have the potential to widen inequality, particularly as it relates to digitalisation, so the effects of this need to be managed carefully.

There are also a few bright spots: Malaysia is a world leader in the production of rubber and derivative products such as Personal Protective Equipment, demand for which obviously saw a huge boost. In addition, there are other industries that could be converted relatively easily and quickly to better meet new demands, such as a more resilient food supply.

Long-term impact and response

Some of the short-term impact will carry through in the long term. We may see a permanent decline in travel, especially business-related travel, owing to both the additional risks (or changed attitudes towards risk) and technological advances such as remote working. Inevitably, tourism and the events sector will suffer as a result, and these industries will have to go through a painful adaptation period, with significant loss of employment in particular.

Since these impacts are at play globally, Malaysians working in low-level service jobs abroad will also be badly affected. Hence we may see the return of emigrated workers to Malaysia, increasing the pressure on the domestic labour market.

Shifts in working models (working from home, virtual meetings etc.) may eventually lead to changes in urbanisation, although there is undoubtedly a long lead time for this. Conversely, the dynamics of the pandemic favour more commuting by car rather than public transport, so in terms of advancing towards a greener economy, there will be setbacks as well.

Structural issues exposed

Connected to the long-term trends are the structural issues in our economies that have been exposed.

First of all, our economies seem to be overly dependent on globalisation (i.e. export markets) and global supply chains. The asymmetric pattern of lockdowns has lead to disruption across the globe as the supply chains choke in various parts and at different times.

An immediate effect was that essential goods (and services to an extent) became scarce or unavailable altogether, including food and medical supplies for example.

A longer-term effect, that has actually already been underway for a long time, is that integrating and competing in the globalised model has led to a “race to the bottom”, meaning that countries compete against each other on wage levels. The result of this is that income from labour has been depressed, and this, combined with a rising cost of living, led to economic insecurity even before the pandemic. With the acute disruptions of the last few months, economic conditions for these groups of the population will have worsened significantly.

This increase in economic insecurity has led many Malaysians to work several jobs, often in sectors with little regulation, such as the gig economy. Having to work longer hours just to maintain a standard of living inevitably leads to a decline in wellbeing, and potentially has knock-on effects, for example on children’s education or the participation of women in the workforce.

Another consequence of the stagnant income levels is an increased reliance on private debt to fuel consumption. This puts many households in a precarious financial situation, and makes them liable to tip over into poverty, in case their income is suddenly reduced, as may happen because of the pandemic.

At a macro-level, traditionally buoyant sectors, such as oil and gas, are starting to decline, which may lead overall GDP growth under pressure. This is another trend that was already underway before the pandemic, but which may have been accelerated.

As their name implies, these structural issues were not caused by the pandemic, but it has shown them in stark relief and it has worsened their impact.

Fixes for the long term

Similarly, the remedies are not new either, but acquire new urgency.

The highest priority is to increase wages, by moving to higher added-value production. One of the ways to accomplish this is by incentivising automation, so that productivity increases. To this carrot, it may be useful to add a stick, in the form of a higher minimum wage requirement, that may to an extent ‘force’ firms to invest in human capital.

Inevitably, a transition to higher-paying jobs and new sectors will require significant reallocation of the workforce. Hence, providing a social safety net to affected workers during the transition is essential.

Another measure that should be considered is to activate larger sections of the working-age population, specifically women, by putting in place the appropriate support structures (e.g. childcare).

The government will have a key role to play in enabling this transformation. They will have to direct the economy, through an industrial policy or through mission-oriented policies, to stimulate new, higher value-added sectors. All government bodies should work towards that goal, including GLC’s, innovation agencies, the education sector etc.

Policies will also need to aim towards a more resilient economy, one that is better able to cope with exceptional events such as this pandemic better. Put succinctly, the objective should be to move away from the “just-in-time” model to a “just-in-case” model.

On the fiscal side, budget deficits and public debt will inevitably rise, if only because of the “life support” measures that were required during the lockdown periods. This may not be as big an issue as is often implied. Other countries are in the same boat, hence comparatively Malaysia is not worse off. Other countries have survived with considerably higher public debt levels, although foreign ownership of the debt is a constraining factor. It may be more useful in the future to focus on primary surplus to ensure good governance, instead of debt-to-GDP ratios.

One caveat however, any injection of public funds in the economy should obviously be controlled, to ensure that these injections don’t inflate asset bubbles or promote socially “less desirable” sectors.

More importantly, a shift in mindset of all stakeholders in the economy is required, where we move away from GDP growth for its own sake, to the creation of good jobs and economic security for all.

The New Normal — are we there yet?

Now nine months in, it is clear that “pandemic fatigue” is setting in. The danger of this can be seen in the rising cases and fatalities in countries that chose to reopen too quickly, or where there was no strong initial reaction (either wilfully or because it was impossible, for example due to fiscal constraints.)

It is striking reading the strong sense of urgency in the book, especially in March and early April. Luckily, those urgent calls for action were heeded, and now it may appear as if we overreacted and the strict measures weren’t really necessary. It’s important to ensure that this does not lead to a risk of complacency.

To conclude, a warning. Overall, the economy is the aggregate expression of the individual decisions we all make, and these decisions are influenced by constraints and by our beliefs. The pandemic will have affected those beliefs, particularly a re-assessment of the risk of external events, such as this pandemic. This will therefore inevitably impact the economy, and a novel response is needed.

However, there is always a danger in situations of uncertainty that we fall back on old habits and old knowledge, and decide to continue doing more of the same.

Hence, a “Great Reset” cannot be taken for granted, and it will take the effort of all of society to make it happen. The consequences for missing this opportunity could be dear.