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Mutating Mindsets and Contagious Behaviours (Part III): Diagnosing the Geopolitical and Geoeconomic Risks of the Coronavirus Outbreak

Mutating Mindsets and Contagious Behaviours (Part III): Diagnosing the Geopolitical and Geoeconomic Risks of the Coronavirus Outbreak

Note: This is part of a larger article dealing with the effects of the coronavirus outbreak. The first part provided an introduction on the current states of affairs and set the groundwork for a comparison between neoclassical economics and behavioural economics in order to analyse the ongoing situation.

The second part picked up where the previous part left off, and was centred on an analysis of economic behaviour by comparing the tenets of neoclassical economics with those of behavioural economics.

Finally, this third and last part will deal with the geopolitical and geoeconomic consequences of the outbreak. 

In the previous parts, we argued why behavioural economics does a better job of explaining consumer and supplier behaviour in the time of the coronavirus outbreak than the neoclassical paradigm. Both approaches were discussed at a theoretical level and were then applied to the current situation as a case study. We can note that the common link between the demand-side behaviour and the supply-side behaviour is uncertainty – perhaps not so much with regards to the threat the virus poses for personal health, but rather towards the public policies and containment measures the authorities will implement which, decidedly, are not very transparent. 

The government’s dilemmas 

The government is the third actor in this triangle, and governments all over the world are facing a challenge.

= Firstly, they are confronted with a threat that is as yet poorly understood and with no specific, ready-made procedures to be applied in order to effectively counteract it.

= Secondly, the best containment measures seem to be isolation and curtailing mobility, but many states have floundered when it came to actually putting them in place due to fear of being perceived as overzealous and leaving the electorate disenchanted.

As the virus is not well understood, had stricter containment measures been applied and managed to eliminate it rapidly, the dangers of the virus would not have been made apparent, and the virus would have been seen in hindsight as a rather banal disease (recall the framing and anchoring concepts – the virus was first portrayed as a somewhat more infectious flu from Asia), so the government would then be painted by opponents as willing to encroach upon the rights of individuals over something that was not a big deal after all.

Some countries with weak or no democratic governance (e.g., China), had little problem in implementing harsher restrictive measures, and others (e.g., Turkmenistan) are ostensibly denying any cases of infection and the word “coronavirus” itself has become something of a taboo as the dissemination of any information related to it is being avoided by authorities. In countries where democracy is well represented, we can again look at Hofstede’s cultural dimensions and we will notice that there are several patterns in how the virus has been handled: on the one hand, in countries with a high tendency towards collective well-being and long-term orientation such as South Korea, Taiwan and Japan, restrictive measures were more easily applied as the population adapted to them more easily; on the other hand, governments of countries with higher levels of individualism have struggled to find the right mix of measures out of fear of being perceived as infringing on people’s basic rights and because of the occasional difficulty in ensuring compliance from citizens. Of course, the picture is much more complex, with the effectiveness of measures depending on the infrastructure, the quality of the healthcare system, the population’s approval of the government etc., but these factors may serve as pointers towards gaining better insight into what has happened.

= Thirdly, there is mounting domestic pressure in many countries from opposition forces, who seek to speculate the situation for gain. The current governments are aware that how they handle the crisis will determine their long-term reputation, and they know they must play the long game for when the crisis ends. Handling it well would greatly secure the trust and respect of the population but, should they (appear to) mismanage it, their reputation risks a hard blow. Political bickering tends to weaken efforts, weaken credibility, and increase uncertainty, causing the behavioural anxiety-driven cycle to repeat itself. On an international level, there have been spats between China, Russia and the United States, as the US accuses China of having started the outbreak, while China has sued the United States for starting it itself, while Russia has been accused by US officials of spreading fake news via social media that the US started the outbreak. While there is little reason to doubt that the outbreak began in China, these statements are meant to offset attention from any accusations of domestic mismanagement, to create a focal point for people’s discontentment in the shape of a familiar “enemy” and to weaken the credibility of the political leadership of the respective states.

= Fourthly, they are faced with the conundrum of communicating the progress of the disease effectively; some states have adopted a “fake it till you make it” approach to avoid creating a panic that could worsen the situation while a resolution is found. There is also the issue of exposing existing systemic flaws in institutional governance, which could mar the reputation of the government and support accusations of inadequacy from domestic and foreign opponents. That said, depending on each country’s socio-cultural make-up and attitude towards the establishment, this could cause people from other countries to suspect their own government of concealing information.

= Fifthly, this entails a diplomatic paradox that may require some geopolitical realignment: on the one hand, countries petition each other for help with equipment and technology; but, on the other hand, they themselves suffer from shortages in varying quantities – medical supplies, for instance. Giving up medical supplies now, even for sale, is bound to generate a harsh backlash from the population and the opposition who would accuse the government of supplying other countries instead of first ensuring domestic hospitals are well-equipped to treat their own citizens. Medical supplies and aid are now practically national security assets; therefore, to allow them to flow out of the country is to compromise national security. Germany has adopted strict measures involving the ban of facemasks, which has already drawn criticism from its neighbours. 

Charm offensives 

Russia has taken advantage of the situation to engage in positive diplomacy. For instance, it has recently sent aid to Italy and the United States to fight the coronavirus. The aid to Italy may well be a hint to Russia’s intentions to revive the South Stream pipeline project; as for Russia’s aid towards the United States, while it was seemingly a normal diplomatic act of goodwill, it was also a clever geopolitical move. For once, it signals to everyone that either the virus did not hit Russia hard enough that it finds itself in the same situation as most other Western countries, or that its infrastructure and healthcare system are much stronger than had been anticipated. Not only that, but Russia has often been the subject of many jokes regarding its less than stellar economy and qualitatively lacklustre output, both before and after the collapse of the Soviet Union, and now it is extending a hand towards the United States, its powerful economy notwithstanding, also widely regarded as the victor of the Cold War, and the United States’ acceptance of the aid validates at the very least Russia’s economic progress. Furthermore, Russia has shown itself willing to help even a geopolitical rival in times of need, which means that American politicians (especially presidential candidates) who would criticize Russia’s policies can be presented as Cold War-mongers who have been unable to move on with the times.

Russia has also made another geopolitically intelligent decision – namely that of not cutting back on its oil production. In all fairness, from a supply-demand perspective, decreasing production would have made sense as it would have lent some support to energy prices and also eliminated some costs associated with producing more than necessary as economic activity worldwide slows down, more and more people go into self-isolation to ward off the virus and thus demand for energy decreases. Despite that, its decision to continue production at the same quotas yields several long-term economic and diplomatic advantages. One aspect is that it weakens its competitors, several of which are economies that rely heavily on oil exports. As a result, Russia’s decision forces them to lower their prices as well. At the same time, Russia is signalling that it is capable of facing the impact of decreased oil demand and prices on its economy; whether that is true or simply a bluff is another issue – its willingness to uphold its decision gives Russia a greater advantage in negotiations. Diplomatically, it improves its image by showing that it does not seek to take advantage of the crisis for its own benefit. Lastly, despite fears that Russia’s economy would take unforeseeable hits, its depreciating rouble would improve its exports especially towards Asian markets when the economy picks up after the coronavirus outbreak is over. 

The tightrope act 

Each government needs to balance an economic problem: with businesses shutting down, they no longer have companies and employees to collect taxes from but have a rising number of unemployed people who will require aid during the time they are out of work and probably professional reconversion programmes to be able to find work in sectors that have not been as hard hit economically. On a more macro scale, the Harvard Business Review raises an alert regarding several liquidity and financial dangers in the aftermath of the outbreak, warning that if the supply-side damage is high enough, it leads to unemployment and loss of skill, thereby slowing down recovery. The authors stress that a prolonged coronavirus crisis would bring the real economy to a halt, which not only would be mostly unknown territory for states as far as economic crises go, but would be worsened by a lack of credit from a crisis-stricken financial sector.

Moreover, governments of countries that were dependent upon imports of essential goods and have seen their imports dwindle as a result of the outbreak would likely face an even greater challenge – that of societal stability and preventing crime rates from going up as people grow anxious for necessities, alongside a black market that not only would end up damaging the economy, but in the absence of proper decontamination procedures, would only risk furthering the spread of the virus within their borders and prolonging the social, political and economic crisis. However, the outbreak is very detrimental to the economies of those countries that rely mostly upon the exports of goods and tourism, as their economies are not sufficiently well diversified, thus, as supply lines are cut and inbound tourism dries up, so does those countries’ income. These countries also tend to have other problems as well, such as persistent emigration of competent workers in search of better opportunities, ineffective public management, weak infrastructure, corruption, ineffective bureaucracy etc., so, in their case, a crisis would hit particularly hard as they would need either strong stimuli to restart the economy, or convincing economic diplomacy to change investors’ view. Even policies designed to encourage investment, entrepreneurship, professional reconversion or any kind of reforms would likely entail considerable debt and austerity measures, all of which could represent a direct (geo)political liability and further erosion of public trust in their governments.

There are, of course, some policies that can be applied to enhance entrepreneurship and investment in these countries, such as decreased bureaucracy, a better measure of protection and fiscal stimulus, or an encouragement of savings through “nudges” (another concept from behavioural economics), insofar as the country’s particular economic crisis is not demand-side. The challenge with the first suggestion is that it involves significant reform of the public apparatus and incurs the wrath of various interest groups, which, depending on the country’s configuration, could lead to either political instability (and as a result, greater country risks and decreased confidence from investors) or a slowdown of progress; the issue with the second is that it necessitates a great degree of cooperation, coordination and confidence from the banks. Another solution might be to attract foreign investors to invest in those countries, but, as is the case with countries that tend to have insufficiently sophisticated economies and systemic problems, this could also engender a new cycle of corruption. Fund embezzlement, money laundering and a lack of transparency are typically the number one risks to look out for. 

Systemic changes 

At any rate, in several of the affected economies, regardless of prior performance, this crisis will quite likely retrigger a debate on the pros and cons of protectionism versus open trade, and some countries would rethink their outsourcing strategy, especially for industries such as manufacturing. While many schools of economic thought openly condemn protectionism as a market-distorting, illegitimate intervention by the state, the crisis will make many policymakers reconsider whether it is in fact wiser to implement protectionist policies in certain key industries that are crucial to national security, in this case medical supplies, equipment and essential goods. Even assuming a perfect, fully functional, fully democratic government that adopts a laissez-faire attitude towards the market, for as long as it is democratically mandated to safeguard their electors’ interest, it will put national security ahead of anything else, and ensure it can respond should such a crisis renew itself. In case open trade comes to be seen as a liability should foreign suppliers fail to provide the necessary items, the governing institutions would seek to enhance domestic production capabilities for certain goods as a buffer. The same goes for outsourcing, only this time it is mostly a matter at the level of private economic agents: since many businesses had to cease activity on the grounds that their foreign partners are unable to provide the necessary input, attention will be redirected towards more reliable options – e.g. seeking partners that are less at risk of being confronted with such a lockdown or, where possible, automation. The confinement policies have also provided employers who can afford it with an opportunity to test the performance of their businesses when all or most of the staff are working remotely and thus may yield hints towards changing the business model.

Geopolitically, one of the greatest risks is the erosion of trust and the accentuation of fault lines among communities and between communities and their leaders. On an interstate level, the European Union’s reaction has been heavily criticised for being too slow and for its member states’ individualistic, every-state-for-itself responses, which is precisely the exact opposite of the goal of the European project to create a cohesive economic union wherein problems could be solved via concerted effort. This is certain to generate increasing disgruntlement and add fuel to Eurosceptic rhetoric towards the EU, both from its member states and from potential candidates and rivals. It also calls into question whether the EU, after more than six decades since its seeds were planted, can hope to achieve the level of collaboration or solidarity it was meant to ensure, or whether this goal has now been shown to be either unrealistic or in need of a redefinition in light of what the current situation has revealed about its member states’ priorities and inherent geoeconomic asymmetries.

Within nations, a more dangerous consequence of this is the revival of secessionist tendencies especially as uncertainty increases, specifically in countries where there are conflicts between the diverse ethno-cultural or religious groups that make up its nation, or which have witnessed attempts from various regions or groups to separate from it into autonomous communities. In those states, these tendencies would be further accentuated if the authorities are perceived as ineffectual or unreliable. Where political leadership is lacking and the societal climate is riddled with graver systemic issues (e.g., poverty, conflicts, food shortages), this may well escalate to civil wars, nearby spill-over and instability, or lead to the perpetuations of other risks (e.g. capital flight, brain drain). 

Conclusion 

Easter celebrations are ongoing in many countries where there has been an outbreak of the virus. The silence in the streets and in markets forms a rather wistful contrast with the buzz merely a year ago. It is worth noting that, while confinement measures would prevent churchgoers from physically attending the Easter Vigil as is customary, people will doubtlessly be more united than never in their prayers for a quick resolution to the crisis. Now, humanity is facing an enemy unseen, mysterious and pervasive. As Easter celebrates the resurrection of Christ, it also celebrates the triumph of life over death. Thus, it is important to understand that, serious as the virus may be in and of itself, the greatest threat to us is the very apprehension and panic that the outbreak has generated. As life triumphed over death, so must resoluteness triumph over doubt and hope must triumph over fear. In lieu of a conclusion, let us remember Franklin Delano Roosevelt’s famous remark that the thing we have most to fear is fear itself. 

 
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OEconomica No. 1, 2016