What started as a microbe virus in Wuhan in China, has within a few months brought the world to its knees- shutting down national borders and restricting the global population to their homes.
Never before in human history has there been an event of such a global economic magnitude. World War II claimed more lives (at least the tally so far) but it did not result in such a massive shake-up to daily life for an average person. As the breadwinner, I may lose my job. As a home-maker, I can't find bread and milk, or domestic help. As an industrialist, I'm being confronted with mounting losses and shutting down my business. As a student, I am being forced to adopt faceless learning. And if I am sick, I might not get the healthcare services because the health systems are buckling under the effect of the pandemic.
On the one hand, a little down time for the world's population, otherwise in a manic hurry, is a good thing.
On the other, sealed borders and limited movement have profound implications on the global economy. Every day, the news is filled with multiple projections on the expected slowdown of global economic growth. Closer home, the Indian economy is expected to crank down its growth to 2-3 per cent from previous 5 per cent rates.
Why is this economic slow-down anticipated? Partly, because more than 50 per cent of global income comes from trading of goods and services criss-crossing the countries. And when these can't move, the economic engine starts slowing down.
Let's take a simple example. If you were in the business of manufacturing potato-chips, some basic raw materials for your business would be potatoes, oil, salt, machinery, packaging and people.
If these were available to you locally, from around the factory, then COVID or no COVID- you could continue operating assuming workers can still travel. If however, your production relies on potatoes from Bihar, salt from Gujarat, oil from Indonesia and packaging material from China, the sealed borders mean that at some point very soon, you will have to shut your plant because the raw materials simply can't make it to your factory- and a shut plant means no production and no income.
This is because you are part of a distributed supply chain.
In today's world, 70 per cent of trade happens through these types of global value chains. Name something that you use 24/7 and chances are it is a sum of pieces that have been made in dozens of countries, crossed many borders and has been assembled in another.
A smart phone like the Apple has components manufactured and traded across more than 40 countries. A passenger car could have more than 60 per cent of its parts coming from other countries from the place where it is manufactured.
The food industry is less integrated, but even then, something like Nutella, our favorite hazelnut spread, is made from hazelnuts from Turkey, palm oil from Malaysia, cocoa from Nigeria, sugar from Brazil and vanilla essence from France, all imported and put together in Italy.
Some countries like China are at the heart of these value chains because it has historically been cheap to make things there.
Impact on value chains
So what has COVID done or could do to these chains? It is expected that global trade could fall by one-third this year.
Today, it is estimated that 85 per cent of Europe's automotive industry is shut.
India's automotive sector has also been severely hit with 70 per cent of respondents in a study saying they have been impacted by inability to import and export. The garment sector in Bangladesh, the second largest hub in the world, faces collapse as demand orders from firms like Nike and Gap plummet.
It could be that when the world opens up for business again, this current algorithm for a global value chain could start changing. This trend in de-globalization to help manage risks had already begun before the pandemic struck. It could be that such long and extensive supply chains spanning multiple countries could start contracting as firms think about looking closer to home for raw materials, diversify exports to more markets, move away from reliance on specific countries like China to others, and most likely, a combination of the above.
The bottom-line will be that firms will want to ensure that they can continue to make their goods and sell them, should this sort of a global disruption happen ever again – which, as Mr Gates has been reminding us, is a given in the coming years.
Consumer trends
Finally, the pandemic could also accelerate the changing consumer trends and buying behaviour, which has also been in the making for a while.
People, especially the millennials and Generation Z, are more aware about climate change and sustainability, about the sharing economy, about eating healthier.
Technology is an integral part of their consumption and buying patterns. The pandemic could accelerate some of these. The call for supporting the local 'kirana stores' in place of the 'Reliances and Walmarts' has been amplified in the last two months. Demand for new cars could be further replaced by use of 'shared mobility' like Uber.
Electric vehicles will find a larger place in society. Even more shopping could happen online, including consumption of services like entertainment and news, as we are seeing in the last two months.
These changes mean that firms will further need to think about what they make, and how they sell them. And so, COVID-19 may be the beginning of the end of the traditional way of producing, selling and consuming things.
(The author is a Senior Economist with the International Finance Corporation. Views expressed here are personal)
