Could COVID-19 Lead to the End of Globalization?

by Iliana Olivié and Manuel Gracia, Elcano Royal Institute and Universidad Complutense de Madrid, Spain

The current globalization process, which dates back to the 1970s, includes phases of growth, contraction, and mutation. Many of these correspond to structural changes in the global economic and geopolitical order, including the rise of emerging powers in Asia and the associated shift of the epicenter of global activity from the Atlantic to the Pacific.

The Great Recession at the end of the 2000s and the start of the 2010s has largely resulted in the acceleration and consolidation of these changes, a trend reflected in the Elcano Global Presence Index. The current health, economic, political, and social crisis will also leave its mark on international relations and the process of globalization itself.

While it is still too early to predict the whole impact, we are already seeing some of the consequences of the crisis, such as interruptions in production and consumption (and thus trade). It is also possible to anticipate some of the effects from the dramatic reduction in the international flows of people.

The world was already de-globalizing before the COVID pandemic

The policies of economic liberalization implemented throughout much of the world in the last three decades of the twentieth century resulted in a rapid increase in international economic exchanges. The various waves of economic globalization have always been accompanied by different forms of internationalization (military or soft) involving cross-border movements of people (troop deployments, migrants, tourists, students, sports players in international competitions, and international development workers) and ideas (exchange of information, culture, science, technology, and education). While the academic conceptualization of globalization has always recognized these other non-economic aspects, analyses of the process of internationalization have tended to focus on the economic dimension.

This focus on the economic dimension was partly responsible for predicting that globalization would slow down, end, or even enter a period of “secular stagnation” during the financial crisis of 2008 and the Great Recession that followed.

And yet while there was a slowdown – and even a reversion in certain variables and in certain years – in economic internationalization for specific trade flows and foreign direct investment, the Elcano Global Presence Index shows that, despite slowing down significantly and mutating towards softer forms of internationalization, globalization did not go into reverse.

Indeed, the added value of global presence (including all 130 countries, variables, and dimensions) reflects the volume of world exchanges and, therefore, can be used as a proxy for globalization.

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Based on this Index, we can observe phases in globalization: (a) Between 1990 and 1995, coinciding with the geopolitical reconfiguration of Europe, aggregate global presence fell by an annual average of -1.6%. (b) This was followed by a second period of sustained globalization between 1995 and 2011, with a cumulative increase of 57%. (c) A post-Great Recession phase, with moderate increases and decreases, resulted in an average annual increase of around 1%. (d) Then followed a sharp increase, of over 5% (so back to pre-crisis numbers). (e) Most recently there has been a -2.6% decline, which is the largest annual drop recorded in our 30 year-time series.

The different variables and dimensions (economic, military, and soft) have also contributed in different ways to the speed of globalization, depending on the phase. Between 1990 and 2005, the main vector of globalization was the economic dimension. The soft dimension made a positive albeit modest contribution during this period, while the military showed a certain retrenchment. However, these trends changed significantly in the 2000s, when the soft dimension began to lead globalization. As for the last couple of years, both the rise and drop of aggregate global presence are mainly due to the performance of the economic dimension.

The effects of COVID-19 on global exchanges

It is important to stress that the Elcano Global Presence Index captures structural trends, meaning transient financial turbulence or political changes are seldom reflected in its results. There is also a lag of around two years before changes in the dimensions and variables are reflected by the Index. The effects of the 2008-09 crisis do not show in the Index until 2011 and the effects of the COVID-19 pandemic are not expected to register in the values of the Index until 2021 or 2022.

Although the short-, medium-, and long-term impact of the pandemic on different fronts is already being estimated and forecast by different authors and institutions, the picture, in terms of globalization, is still incomplete. One way to explore the future impact of the health crisis (and the political responses adopted by countries and globally) is to observe different scenarios, based on the effects of the Great Recession on the added value of the Elcano Global Presence Index.

Scenario A: A crisis like 2008

If the current health emergency and its economic, political, and social consequences are on a similar scale to the former crisis, we would expect the change in the aggregate of the Elcano Global Presence Index to be similar to the period 2010-15, for all variables and dimensions.

Scenario B: A crisis worse than 2008

Some analysts argue that the economic, political, and social consequences will be more devastating and deeper than those of the 2008 crisis. In such a scenario, the figures for the various components of the Index would, perhaps from 2022, register the worst possible decline for each of the indicators seen during the period 2010-18.

Scenario C: A different crisis to 2008

Finally, the particular features of this crisis and the differences with respect to 2008 may mean that variables behave differently. Forecasts and estimations predict an impact on economic variables similar to that of the Great Recession and a stronger impact on soft variables, as a result of the dramatic reduction of cross-border movements of people (affecting variables such as troops deployed, education, migration or tourism).

Under this scenario, the expected performance of each of the 16 variables (the rationale for which is detailed here) would lead to a third scenario, where the impact of the current crisis on globalization is different to that of the 2008 crisis.

Just one of the three scenarios (scenario B) would result in effective de-globalization, with aggregate global presence of all 130 countries falling by 1% with respect to 2019 values. This would affect all dimensions, especially the economic (in absolute terms) and the military (in relative terms).

However, if the transformational effects are similar to the previous crisis (scenario A), we could expect continuity in the process of globalization (+1.7% total global presence), with cumulative increases in the soft dimension and, to a lesser extent, the economic dimension.

Finally, the scenario based on different transformational effects from the previous crisis would see a near standstill in globalization, with the aggregate global presence increasing by 0.7%. This would be the result of a more dynamic soft dimension, offset by a slight fall in the economic dimension.

In short, similar to the crisis at the end of the 2000s, the current crisis will have an impact on international relations. We can expect to see an acceleration in the structural changes that we have already been seeing in the process of globalization.

Direct all correspondence to:
Iliana Olivié <iolivie@rielcano.org>
Manuel Gracia <mgracia@rielcano.org>

, Spain, Volume 10, Issue 3

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