May 25 2020
When people look back on the COVID-19 pandemic, some will say it led to a new world order where China and the East at large overtook the United States and the West at large. But, as it turns out, the new world order emerged many years before 2020.
Perhaps surprisingly, pandemics, depressions, world wars and major disasters hardly ever change the overall direction of things. For example, world trade had been shrinking as a share of world GDP, and the digital era has been changing industries and behaviour since 2007. However, these events do cause disruption, discombobulation and temporary changes, which are often spread over a period of between four and five years, or even longer.
COVID-19 and all other pandemics have not been exceptions. However, what has been unusual this time has been the sledgehammer treatment of economies around the world. This virus will likely not even account for 1% of the 115 million deaths that typically occur worldwide over a period of two years, or even an eighth of the respiratory deaths expected over the two years through 2021. And yet, the COVID-19 pandemic is resulting in an estimated 3% fall in world GDP, including falls of 6% or more in many countries, sending unemployment levels into double digits in most large economies. The pandemic is also expected to lead to a regrettable surge in suicides, poverty and misery for some years after the virus has been contained.
Such is the price of wildly exaggerated or bad advice, panic and the madness of crowds. History has been peppered with similar overreactions.
History shows that trends in industries, birth rates and a host of factors in the economy and society will revert to pre-disaster directions after the trauma has passed. However, two notable exceptions will remain: government ideologies and societal risk appetites. Governments have to lift their game—in this case abandon populism in favour of rationality and sizeable chunks of society will become somewhat more conservative in many aspects of their work, money management and lifestyles.
However, when it comes to the world order of nations, events such as the current pandemic can accelerate the trends that had been in place before. China’s emergence as the world’s largest economy in 2016, in real economic terms, has a history dating back to the death of Mao Zedong in 1976. During his dictatorship, Zedong had caused depressions and recessions. Over the following decades, China’s GDP growth averaged 8.5% p.a. until a few years ago, and with no recession.
In addition, even though China’s GDP growth began to slow in the 2010s, at 6% it was still three times that of the Western nations that were damaged by the 2008-09 GFC. COVID-19 is leading to a GFC Mark II in the Western world. So, yet again, China and the East will be outpacing the United States and the West throughout the third decade of this century.
All empires eventually crumble, or are overtaken by others. China and India have been the two largest nations for three millennia (except for the last century or two). However, they were ‘closed kingdoms’, unlike the subsequent ones such as the Roman Empire, the Ottoman Empire, the British Empire and the United States with its economic domination of the 20th century and the first few decades of the current century.
Now it’s China’s turn, or rather, return to dominance, but as a less ‘closed’ kingdom or empire than last time. Aggressive world trade, the Belt and Road Initiative created in 2013 and sabre-rattling in the South Sea all point to rising hegemony.
However, there are other players in the new order. Asia has other big, or biggish, neighbours in addition to China, including India (which, like China, has a population of almost 1.4 billion), and Indonesia (which has a population of about 273 million).
So, there may be some emerging Yin-Yang balance in our region during this Asian Century.
The two charts below put the emerging new world order into perspective. The first shows the likely GDP size order in five years’ time, and the second shows the regional GDP ladder, also in five years’ time.
What does this mean for Australia? Well, we are integrating into the Asian mega-region (which includes the Asia-Pacific region and the Indian Sub-Continent). About 80% of our trade occurs in this mega-region. It is also from where two-thirds of our international visitors and migrants originate.
However, balancing our alliances and connections with Asia (particularly China), the Americas (particularly the US) and Europe (particularly the UK)—being the two previous empires—will require much skill, tolerance and diplomacy. It is not going to be an uneventful journey.
A brave new world, as the saying goes.
For a printable PDF of this release, click here.