Updated: Mar 5
Cromwell was about to ravage all Christendom; the royal family was undone, and his own forever established, save for a little grain of sand which formed in his ureter. Rome herself was trembling under him; but this small piece of gravel having formed there, he is dead, his family cast down, all is peaceful, and the king is restored.
– Blaise Pascal, Pensee #176
In 1658, a small kidney stone lodged in Oliver Cromwell’s urinary tract may well have ended a ruthless man’s decades-long climb to power, changing the course of history.
In 2020, will a virus known as Covid-19 end the grand dreams of globalization?
Either way, these have been a surreal few weeks.
As a recent piece in The Boston Globe put it:
Even before the coronavirus known as Covid-19 shuttered factories in China, trade tensions and Hong Kong protests made doing business in China not only more expensive but downright difficult…. But the confluence of rising labor costs, intellectual property theft, concerns that sparked a trade war, and now a viral infection that has restricted production and travel is making companies rethink their reliance on manufacturing in China.
This rush of geopolitical events, tumbling one after the other, has revealed a world economic system dependent on supply chains that are less robust than once assumed. It’s a disorienting feeling, because for decades, America has enthusiastically exported large sections of its industrial base to Asia, much of it to China specifically.
Now, in the wink of an eye, sourcing from China appears fraught with systemic risk.
Ravi Ramamurti, a professor of international business and director of the Center for Emerging Markets at Northeastern, seems to think the US-China economic arrangement is being shaken beyond repair. “I suspect,” he’s quoted as saying in the aforementioned article, “coronavirus will be a game-changer.”
It's almost enough to make us wonder if we're living in a science fiction novel.
Which makes a recent mind-bending piece in the December 16 issue of The New Yorker seem almost perfectly timed.
The article examines the case of science fiction writer William Gibson, describing how, “Instead of fantasizing about future worlds, Gibson sets his novels in the ongoing, alarming realm of the present.” –
Gibson’s strategy of extreme presentness reflects his belief that the current moment is itself science-fictional…. The further Gibson developed his present-tense sci-fi, the more mysterious and resonant his novels became. They seemed to reveal a world within the world: the real present.
Global Sourcing: Beyond Manufacturing
When it comes to globalization, the effects of the coronavirus will affect more than manufacturing supply chains. The global outsourcing industry will have to adjust as well.
Over the past decade, western firms have become increasingly reliant on Asia as an outsourcing hub, from IT outsourcing (ITO) to business process outsourcing (BPO). By some estimates, India alone is said to hold approximately 65% of all outsourced IT jobs. As for BPO in China, I wrote about one particularly intriguing expansion within the Middle Kingdom, here.
It’s long been the case that enterprises that subcontract work to vendors abroad and those considering doing so must include what seem to be increasing risks of pandemics in their risk management calculations and scenarios. Going forward, it will become even more important to work with providers that have the experience, global scale, and flexibility to adjust sourcing methods and locations based on circumstances.
So it's fair to assume that in light of current events, agility in the face of the unexpected will be more prized than ever. As an example, when it comes to customer care BPO, companies will value providers with the ability to redirect call volumes across an adaptive, seamless global portfolio, and that offer a robust home-based agent solution. Indeed, as an analyst at IDC back in the mid-2000s, I was thinking hard about the importance of homeshoring as a risk mitigator in the context of unexpected developments such as bird flu in Asia.
It turns out that planning exercises examining business risks related to interruptions in service delivery, or significant employee absenteeism, or supply disruptions, or sudden demand shocks, are not to be underestimated. Suddenly, regulatory requirements that press providers of outsourcing services and their enterprise clients to do scenario planning around events like pandemics, make perfect sense.
In other words, top outsourcers should eventually benefit from the current crisis due to their ability to adapt to the vicissitudes of life.
Still, if things get worse in the short-term, even the best providers of outsourcing services will not be immune to the unfolding downside.
What Happens Next?
Last week, the IMF imagined a scenario where the negative effects of coronavirus are temporary. IMF Chief Economist Gita Gopinath asserted that while a pandemic remains possible, she is not currently forecasting sustained negative impacts from the outbreak.
“There is a scenario where all the hit takes place in the first quarter and by April, like a v-shape, China is back to normal,” she said.
But Gopinath hastened to offer another forecast around Covid-19, because, “The epidemiology surrounding it is still unclear. The question is: whether this will move outside of China and become a pandemic. And so we can think of… dire scenarios where things could go bad.”
That seems to be what economist Mohamed El-Erian was warning investors about back on February 3, 2020, when he predicted the coronavirus would probably “paralyze China,” and that it could “cascade throughout the global economy.” By this past Tuesday, El-Erian was urging investors to hold off buying plunging equities altogether.
“I stress, this is different,” the Allianz chief economic advisor said.
El-Erian pointed out that disruptions to corporate earnings and economic growth from “shock” events such as the coronavirus tend to stick around longer than more fundamental downturns. “We’re going to have a lot of risk-aversion on the part of economic actors. It’s going to take time. Economic sudden stops are hard to restart.”
Sure enough, it’s become clear that cases of coronavirus are spiking far beyond China.
Meanwhile, as the stock market shudders, one also wonders how the economy itself may be hit. As economist Dean Baker put it in a Patreon post this weekend:
While the drop in the market by itself may not be bad news, the prospect of the spread of the coronavirus certainly is. In addition to the very serious health risk it poses to tens of millions of potential victims, it also could have a very large economic impact.
There already has been much written how the efforts to contain the disease in China have led to the shutdown of many factories, leading to shortages of important production inputs here. This can force factories to curtail production until alternative sources of supply can be found or Chinese suppliers are back up and running. But this is just the beginning of the sorts of economic disruptions that we may see if the coronavirus spreads quickly across the United States.
While many will be able to work from home, one might start to wonder how much business there is to do if knock-on effects accelerate.
As a weekend piece in The New York Times puts it:
The core of the economic problem emerging from coronavirus is a 'supply shock,' meaning a reduction in the economy’s capacity to make things. Companies in China that have shut down because their workers are quarantined are not making goods. That could eventually mean shortages of certain items for which there are few sources of elsewhere in the world.
According to Nada Sanders, professor of supply chain management at Northeastern University:
That means American companies that rely heavily on Chinese suppliers might begin facing shortages of key goods in the weeks ahead. I believe we’re going to have a massive shortage of goods. Two weeks ago I told people this was coming. The big problem was economists don’t understand how global supply chains work, how intertwined and interconnected they are.
How much of a hit will the economy take? China offers an obvious example. The services sector in China has grown from being 41% of the economy at the time of the SARS outbreak back in 2002, to 53% of the economy today. As a result, Covid-19’s effects on the economy will almost certainly be significantly worse than those of SARS.
And as the above The New York Times piece puts it, "If coronavirus were to spread widely in the United States, and officials decided to impose widespread quarantines, the economic impact is hard for economists to model. What happens to a service economy if people can’t safely travel, go shopping, or even go to work?"
As the supply shock threatens to ripple into a demand shock, and consumer spending is affected, some businesses around the world are in something resembling a state of limbo. Many have curtailed or forbidden business travel for their employees, with Amazon being one prominent example.
Not even armies of work from home agents will be able to make up for significant drops in things like consumer spending.
A non-linear risk scenario seems the most confounding. The topic of exponential technology has been a hot topic the past few years, but the exponential dynamic can work in negative ways as well.
In this scenario, the coronavirus, an exogenous shock to the world system, rumbles through the stock market, the economy, politics, and society in surreal ways.
For example, an opinion piece in The Guardian warns about a specific situation threatening to unfold in the United States: “when you combine a for-profit healthcare system – in which only those wealthy enough to get care actually receive it – with a global pandemic, the only outcome will be unmitigated disaster.”
Seen from this perspective, it becomes easier to imagine globalization, our metaphorical Oliver Cromwell, groaning louder as it stumbles and pitches forward, lacking coverage for a dangerous condition nobody seems to have anticipated.
A recent piece in Wired magazine by Matt Stoller is particularly thought-provoking:
…the coronavirus is going to introduce economic conditions with which few people in modern America are familiar: the prospect of shortages. After 25 years of offshoring and consolidation, we now rely on overseas production for just about everything. Now in the wake of the coronavirus, China has shut down much of its production; South Korea and Italy will shut down as well. Once the final imports from these countries have worked their way through the supply chains and hit our shores, it could be a while before we get more. This coronavirus will reveal, in other words, a crisis of production—and one that’s coming just in time for a presidential election.
And Stoller is not kind to the vision of globalization that has held our imagination for decades now:
Under the siren song of affluence, we began offshoring critical production capacity in the 1960s for geopolitical reasons. In 1971, economist Nicholas Kaldor noted that American financial policies were turning ‘a nation of creative producers into a community of rentiers increasingly living on others, seeking gratification in ever more useless consumption, with all the debilitating effects of the bread and circuses of imperial Rome.’ Still, Bill Clinton and George Bush accelerated this trend throughout the 1990s and 2000s.
With the banking collapse in 2008, the election of Trump in 2016 and his mourning of empty factories, and now with Bernie Sanders dominating the early primaries, that era may at last be passing. A pandemic disease outbreak would only hasten this progression and force us back into the politics of production.
Putting aside Stoller’s political leanings, his ultimate conclusion should give readers pause, as he makes a prediction that transcends politics:
We came to these realizations once before in 1932, and created a vibrant democratic state over the following few decades—one that rapidly expanded our life spans, defeated the Nazis, and helped create Silicon Valley. The convergence of the Covid-19 outbreak and the presidential election will force us to do it once again. We've lived in the world of unreality for far too long.
Sure enough, this past week Senator Josh Hawley of Missouri said he’d be introducing legislation to bring medical supply chains back to the United States from China. According to Hawley, too many vaccine- and antibiotic-related supply chains are too far from America’s shores. China makes much of our medical equipment and pharmaceuticals and precursor chemicals, a process that happened over decades.
Now, Hawley says, “we need to bring them home.”
A World Within the World
When we eventually emerge from our current crisis, will things revert to “normal,” will offshoring be viewed the same way it has been for decades? Will the economy rebound vigorously? Will the stock market roar back to life?
Or will the globalization we’ve grown so familiar with end up being seen, in retrospect, as resembling some kind of latter day Oliver Cromwell, careening forward at a decades-long blistering rate, tallying great economic victories while also ravaging certain industrial landscapes, until, in a twist of unexpected fate, it died from… a virus?
If so, it might feel like we’re wandering ever deeper into a William Gibson science fiction novel. Then again, Gibson himself tells us that he learned years ago that, “The world outside the window was beginning to look considerably stranger to me than the ones I was imagining for my fictional futures.”
As one of William Gibson’s characters so pithily concludes:
For us, of course, things can change so abruptly, so violently, so profoundly, that futures like our grandparents’ have insufficient ‘now’ to stand on. We have no futures because our present is too volatile…. We have only risk management. The spinning of the given moment’s scenarios. Pattern recognition.
Ultimately, it shouldn’t surprise us when a host of U.S. companies explore supply chains outside of China with renewed urgency, most obviously across South East Asia, in places such as Vietnam. In some cases, we’re almost sure to see some of those companies bringing work back to the United States entirely.
How strange then, if a tiny, unexpected virus – globalization’s kidney stone – triggers a process whereby the entire global economic system is utterly rearranged.
The paradox is almost too strange to imagine. Amidst all the wonders of our electronically hyperconnected world, is it possible globalism lies on its deathbed?
Nobody can predict the future. We should all remain humble in our assessments of where events of the past few weeks will bring us.
But for right now at least, we seem to be living in a sci-fi world, a world within the world.
Image: Oliver Cromwell leading his army of “Ironsides” back from the Battle of Marston Moor, July 2, 1644.