A POLYCRISIS MOMENT
The compounding effect of covid-19, Russia-Ukraine war and rate tightening by US Fed has caused unprecedented global economic stress. EPISODE #106
Dear Reader,
A very Happy Monday to you. The first of 2023.
Unlike the heady wave of optimism that normally overcomes us at this time of the year, I see 2023 as one that is pause for thought.
Ever since the covid-19 pandemic, which had dodgy origins in Wuhan, China, overwhelmed the world in 2020, there has been no respite. The once in a century pandemic, was followed by the Russia-Ukraine conflict, ratcheting up of interest rates by the US Federal Reserve and most recently by the unleashing of a fresh wave of the corona virus across China. And all this while the fallout of climate change rapidly gains momentum.
Indeed this is an exceptional circumstance. Economists have a term for this: A Polycrisis.
These seemingly unrelated events that have been unfolding over the last three years have tangled the world in a web of disasters—all of which are feeding off each other—like never before. So this week I put the spotlight on what is emerging as the most defining crisis for the world.
The cover picture this week is a perfect metaphor for a New Year. It is of a beautiful sunrise viewed from the Andamans and taken by Kapil Nanda last week. Thank you Kapil.
A big shoutout to Nimesh, Balesh, Gautam, Premasundaran, Vandana and Niranjan for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by readers. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
SHOCK WAVES
It is three years since the covid-19 pandemic, with dodgy origins in Wuhan, China overwhelmed the world. Countless lives were lost. And, many who were infected but survived, continue to suffer challenging respiratory disorders. Worse, what began as a health challenge, rapidly transformed into an economic nightmare.
Unfortunately, this once in a century pandemic was not the last disaster. In fact it was the beginning of a string of such events with global ramifications.
Barely had the threat of covid-19 peaked, the Russia-Ukraine conflict began. The global supply chains faced a fresh round of disruption, sending commodity price shockwaves across the world—at one stage, crude oil prices crossed $140 per barrel and have since dropped to $80-90 per barrel. In turn, this triggered a wave of global inflation.
It accelerated in the aftermath of the third shock: The decision by the United States Federal Reserve to undertake a rapid increase in interest rates to fend off rising domestic inflation. Not only did this dry up global liquidity, but it also caused the US dollar to appreciate against most global currencies—which only exported inflation as it raises the cost of imports to these countries.
And even before this cycle of rate increases peaked, China, following domestic unrest, abandoned its “zero-covid” policy. It is obvious that this was a desperate line of defence the establishment scrambled together, after it realised that the home-grown jab was a dud—like the Scud missiles that Saddam Hussein employed to fight the might of the American military in the war over Kuwait.
An amazing footnote is that neither was China held accountable for its failure to report the covid-19 outbreak in November 2019, nor is it being asked tough questions today on its policy flip-flop—which threatens to unleash a fresh covid-19 wave.
Never before has the world witnessed a set of catastrophic events of such enormous magnitude unravelling back-to-back and feeding off each other. Add the growing fallout of climate change—manifest in the spurt in extreme weather events—to this mix and the challenge looks even more dangerous than it already is.
In a globalised world with deep interconnections, the impact of this exceptional circumstance is amplified manifold. Academics have a term for this: Polycrisis.
A Polycrisis
Adam Tooze, the historian, is among the people who have popularised this reference in the last one year. He has argued that at such an exceptional moment, economic and non-economic shocks get entangled and feed off each other. And given that this is still a very interconnected world, the sum of these entanglements is greater than the events if they had happened in isolation.
Taking up from Tooze and writing in the Financial Times, Martin Wolf opined that a polycrisis is bringing home the point that the world no longer has the luxury of dealing with challenges in silos—focusing by turn on macroeconomics, disease, environment and so on.
Instead it has to deal with them simultaneously and as a collective to contain the ability of the crises to interact and thereby magnify their impact.
Not surprising then that most of the world, including the United States and Europe, are staring at a recession. Worse, several developing countries are on the verge of sovereign debt default and are lining up at the International Monetary Fund (IMF) for relief. This is a crisis of gigantic proportions.
In other words, the world has to overcome its deep divisions and respond collectively to untie this Gordian knot.
Spotlight on G20
Geopolitical machinations over the last few decades have undermined key multilateral bodies, whether it be the World Trade Organisation (WTO) or the World Health Organisation (WHO).
This is also a result of the rapidly closing gap among nations—shrinking the decades old hegemony of the United States. The trend is most visible in sports. Look at the just concluded world cup for football: World champions Argentina, lost only one game in the entire world cup—to Saudi Arabia, ranked so much lower. Similarly, Morocco, who won our hearts with their passionate brand of football, came from behind and almost scripted their way to a dream final.
The good news though is that the G20 grouping of countries, the new global high table for managing economic cooperation, miraculously survived this train wreck. And, interestingly, India, finds itself at the helm of this institution in what looks to be the most defining year for the world.
From the moment it inherited the job from Indonesia, it has claimed that it is possible to forge a collective strategy.
In an oped published by most papers on 1 December, Prime Minister Narendra Modi wrote:
“As India assumes this important mantle, I ask myself — can the G20 go further still? Can we catalyse a fundamental mindset shift, to benefit humanity as a whole?
I believe we can.”
And then added:
"Unfortunately, we remain trapped in the same zero-sum mindset even today. We see it when countries fight over territory or resources. We see it when supplies of essential goods are weaponised. We see it when vaccines are hoarded by a few, even as billions remain vulnerable.
Some may argue that confrontation and greed are just human nature. I disagree.
If humans were inherently selfish, what would explain the lasting appeal of so many spiritual traditions that advocate the fundamental oneness of us all?”
The clock is ticking and India’s optimism will be tested.
Unchecked, the polycrisis will devastate the world. Exactly why I began this week’s note by saying that this is the year of pause for thought. The global challenge is inclement.
As they say in Hindi/Urdu: “Aaar ya Paar.” It is now or never.
Recommended Viewing
Last week Capital Calculus was on a break from StratNews Global. Will be back later this week with a new format. Do watch and share your thoughts.
Meanwhile I am sharing an interview conducted by BloombergQuint with Neelkanth Mishra, Co-head Asia Pacific Strategy, Credit Suisse. Neelkanth is among the brightest, most outspoken analysts on the Indian economy; always a treat to listen to him.
In the featured interview, Neelkanth articulates his views on market-related developments in India. I figured that most readers are also stock market investors, either directly or through mutual funds.
And hence this conversation will be a useful tool to get a sense of the year ahead. Do listen in to this alt-view voiced by Neelkanth.
Sharing the link below:
Till we meet again next week, stay safe.
Anil Happy New Year and thanks for highlighting polycrisis , calling for caution at domestic policy levels and urging international cooperation !
Thank you Anil for yet another amazing write up. Glad you liked the picture to make it a part of this article. Thank you.