The first article highlights two impacts on global supply chains, a short-term one, and another with long lasting effects due to a divestment wave from developed countries and the collapse of global demand and production. It also tackles the rethinking call by government representatives about their national companies’ approaches in terms of international outsourcing of production. The second article focuses on the major and distinct impacts countries from North Africa will face based on the characteristics of their economic models and their own means of financing.
Managing COVID-19: How the pandemic disrupts global value chains
COVID-19 has struck at the core of global value chains hub regions, including China, Europe and the US. The pandemic has severe implications for international production networks and may leave its legacy for years to come.
By Adnan Seric, Holger Görg, Saskia Mösle and Michael Windisch
In December 2019, infections with the then still-unknown coronavirus started in the Chinese province of Hubei. The Chinese authorities reacted to this outbreak by imposing severe restrictions on movements of people, effectively imposing curfews and quarantines across the country from the end of January onwards. This necessarily also affected the economy, as many production sites closed in order to reduce possible contact between individuals.
The effect of virus containment measures is visible in data on industrial production in China, which has fallen by 13.5 per cent in January and February combined, compared with the previous year.
The effect of virus containment measures is visible in data on industrial production in China, which has fallen by 13.5 per cent in January and February combined, compared with the previous year.2 This drop in production is severe, in particular when putting it into a longer perspective: neither the SARS outbreak in 2002/2003 nor the financial crisis in 2008/2009 was associated with any such stark drop in production.
Industrial production in China
China’s position at the heart of many GVCs is illustrated by the fact that the production decline is also associated with major contractions in international trade flows. The country’s imports decreased by 4 per cent in US dollar terms in January and February combined from the same period a year earlier, while exports dropped by 17 per cent over the same time period, according to the official Chinese trade statistics.34 As seen in the chart, significant declines in imports are to be found among products that are used as intermediates in production, such as textiles, electric and electronic equipment. Similarly, exports have also experienced strong decreases in these goods.
Chinese exports and imports for selected products
Exports from China have declined to all regions across the world. This decline has been severe across the globe, with the exception of North America, where trade was already in decline for more than a year due to the ongoing trade disputes between the US and China. The picture of a steep decline in goods received from China is similar when looking at numerous individual European countries, including Austria, France, Germany, Italy and Spain. The collapse in production activity at the heart of many GVCs necessarily has implications for producers and consumers in countries further up and down the products’ value chains.
The drop in imports from China implies that vital production parts are missing. A look at data from the German statistical office on input-output relationships shows that, in the German manufacturing sector, imported inputs represent roughly a quarter of industrial production. Ten per cent of all imported inputs come from China. This reliance on Chinese intermediates for production in Germany is particularly strong in the electronics, computing and textile manufacturing sectors.5
Latest monthly data from the US on total imports shows a dramatic reduction in imports of computer and telecommunications equipment, motor vehicles bodies and trailers, and other products associated with US-Chinese global supply chains compared to February 2019. However, it is safe to assume that this data also partially reflects escalating tensions on trade between the US and China over the last year.
US imports of selected products
It is, of course, still too early to quantify fully the effects of the supply chain disruptions due to the coronavirus pandemic. However, it is clear by now that the initial decline in production and trade seen in China will have a strong impact on countries further up and down the supply chain since most of the countries have now imposed restrictions on movements to combat the spread of the virus.
The resulting drop in demand, due to the imposed restrictions on movements of individuals, combined with concerns about health and safety of employees has led to factory closures which will adversely affect operations of entire GVCs. In the case of China, the first country to go through a full cycle of the epidemic, manufacturers now have to deal with the double negative consequences (‘second shock’) of first their own lockdown and second the drop in demand from customers further up the many value chains that its economy commands and contributes to. If other global GVC hubs experience similar trajectories the cumulative effect of supply bottlenecks and falling consumer demand may indeed increase the risk of global manufacturing entering a downward spiral, possibly causing significant damages to operations of many cross-border supply chains.
This ‘second shock’ is not confined to production and trade only, but is quickly spilling over to investments as well. Most recently, the International Monetary Fund (IMF) has reported a staggering US$83 billion of capital outflows from emerging markets, which were the largest outflows ever recorded, while at the same time an unprecedented number of more than 80 countries have requested emergency financing.6 While foreign direct investment (FDI) is usually considered less volatile, the impact of COVID-19 on investment is going to be substantial. In its most recent forecast, UNCTAD estimates a 30-40 per cent reduction in global FDI during 2020-21, based on the latest earnings revisions of major multinationals.7 Thus it is to be expected that this ‘second shock’ from the collapse of demand and production in many industrialized economies and the divestment from developing countries will have far more long-lasting effects on global production than the temporary supply chain disruptions caused by COVID-19.
What does COVID-19 imply for the future of GVCs more specifically?
If the global economy is to avoid prolonged economic distress, a coordinated policy response, as advocated by the United Nations and other multilateral policy institutions, serves as possibly the most promising path out of a looming economic crisis.8 So far, however, the discussion around current and future policy responses has seen increasing calls for national re-examination of established economic models, in particular with respect to the international production of goods. In a number of developed countries, leading government politicians have called for a rethinking of their companies’ approaches to international outsourcing of production, with a view to avoiding future supply bottlenecks while increasing resilience of supply chains. For example, the French Minister of Economy and Finance has called for EU governments to rethink their approach to value chains in order to assure “sovereign” and “independent” supplies.9 In the meantime, this view has gained further traction among some of the other high-level policy makers and commentators.
These calls for “sovereign” or “national” supply chains suggest that companies ought to re-think the spread of production across the globe. In the past, outsourcing was in many cases driven by multinational firms’ desire to optimize their operations by minimizing costs, reducing inventories and driving up asset utilization. If anything, COVID-19 shows that it may perhaps be too simplistic to base decisions about production locations solely on such easily observable economic factors. Many companies may not fully appreciate their vulnerability to global shocks through their supply chain relationships and the costs this imposes. This may no doubt be reflected in companies’ future risk assessments before they decide to relocate production or when they re-consider their location choices.
A substantive nationalization or regionalization of supply chains, however, has the risk to further reduce diversification of suppliers in the world economy and reduces opportunities for developing and emerging economies, especially those outside Southeast Asia, to benefit from GVC-associated capital flows and access to international markets, human capital and knowledge. Such a development will almost certainly deal a significant blow to developing countries’ industrialization efforts and impede the socio-economic progress that has been recorded in many developing regions over the past years. The disruption of GVCs due to COVID-19 may therefore leave as a longer-term legacy: a significant reduction in developing countries’ potential to industrialize through linking into GVCs for many years to come. The COVID-19 pandemic calls for increasing our effort towards strengthening multilateral approaches to policy making and assisting countries in opening up other ways to enable inclusive and sustainable industrial development.
A substantive nationalization or regionalization of supply chains has the risk to further reduce diversification of suppliers and reduces opportunities for developing countries to benefit from integrating into the global economy.
Adnan Seric is Research and Industrial Policy Officer at the Department of Policy Research and Statistics (PRS) of UNIDO.
Holger Görg is Professor of International Economics at the University of Kiel and Head of the Research Area “Global Division of Labour” at the Kiel Institute for the World Economy (IfW Kiel). He is also Director of the Kiel Centre for Globalization.
Saskia Mösle is a member of the Research Center International Division of Labor at the Kiel Institute for the World Economy (IfW Kiel). She is also a PhD candidate in Quantitative Economics at Kiel University.
Michael Windisch is Junior Specialist on Industrial Development at the Department of Policy Research and Statistics (PRS) of UNIDO.
COVID-19 impacts on industry: policy recommendations for the Arab region
By Massoud Hedeshi and Frank Hartwich
This piece benefited from the support and contributions from UNIDO’s Arab Regional Division and UNIDO Field Offices in the region.
The severity with which the COVID-19 crisis will hit Arab countries is determined by the degree of political stability and resilience inherent in the structure of their economies.
Service-oriented, oil export-dependent economies are particularly vulnerable to COVID-19.
A predominantly young population faces the risk of pronounced unemployment, but may also constitute a potential resource for effective national mobilization in recovery.
Regional structural weaknesses can be turned into recovery opportunities for cooperation in sectors such as hospital equipment, manufacturing inputs, infrastructure, agriculture, fisheries and water supply.
Recommended policy options:
Immediate: ‘Targeted’ and ‘blanket’ fiscal/financial support for all citizens and business entities,
Medium term: Alleviation of structural imbalances through economic diversification,
Continuous: Mass mobilization of youth in the sectors identified above.
The Novel Coronavirus crisis has shocked and impacted the world in an unprecedented fashion, confining people to their homes while halting or otherwise negatively affecting most global production and trade for an unknown period. As a consequence, and further exacerbated by a poorly timed oil glut in the market caused by a 3-way price war’ between the largest global oil producers, global demand for fuel and energy has plummeted, slashing crude oil prices by 70 per cent in the first quarter of 2020. At the same time, tourism has virtually collapsed, and other industries face decreasing demand and supply. The combination of these interrelated dynamics has hit the Arab region particularly hard (though unevenly), despite COVID-19’s relatively low prevalence there as of 12 April 2020 (see Table 1). This paper discusses the specific characteristics of the crisis in the Arab region and their resultant policy implications and recommendations to enhance the region’s resilience to such shocks, and reinitiate the development of industries.
COVID-19 impacts in the region
In comparison with other regions, the total recorded COVID-19 cases and deaths in the Arab region remain relatively low, though their numbers are increasing (see Table 1). Nevertheless, all countries have already enacted or are about to enact some form of social distancing, curfew or lockdown. North African Arab nations appear to be most severely affected, followed by Iraq, Qatar and Saudi Arabia, while the situation in war-affected countries like Yemen, Syria and Libya remains unclear.
The crisis will place an additional substantial burden on the capacity of the public sector, particularly the healthcare system, while at the same time spreading infection rates may reduce medical staff and the availability of healthcare. For countries such as Algeria and Saudi Arabia, the pandemic is a double whammy: it has cut their major source of income at a time when social safety net costs are rising exponentially.
The impact on SMEs and their employees follows the global pattern: immediate closure of non-essential production, widespread loss of jobs and income, loss of remittances, repatriation of migrant workers and lower trade across borders. Informal sector workers and vulnerable groups with little savings, and the tourism industry as well as virtually all other non-medical exports of goods and services are bearing the brunt of the pandemic’s negative impact.
The region’s high unemployment and under-employment rates among youth will intensify during the COVID-19 crisis, particularly for daily labourers, underpaid (women) workers with irregular/informal contracts and migrant workers. On the other side of the coin, however, a younger population may prove more resistant to the adverse health effects of the pandemic.
Food security and safety are likely to become a significant concern if the current global situation continues, particularly in the region’s net food-importing countries. This could lead to urban-rural ‘reverse’ migration, coupled with rising costs of food staples.
War-torn countries in the region may benefit from a deviation away from war of those who fund, train and supply fighters, allowing them to refocus their efforts on fighting the pandemic. Overall, we should see a significant fall in arms trade and warfare across the region with a concomitant potential peace dividend.
At the same time, there will be a fall in demand for national currencies in lower-income countries and greater demand for real estate, gold and other precious metals as well as hard currencies. Some countries could also see bartering as an option for keeping up foreign trade as hard currencies may be in short supply.
Oil-dependence and regional characteristics at play
Inequality and uneven development are the hallmarks of the Arab region as a whole. As global stock markets continue to crash at a time when demand for oil is at the lowest it has been in decades, longer term prospects for oil exporters appear uncertain. Despite a recent OPEC++ agreement in principle to cut oil output by 10-15 million barrels per day, oil prices may continue to slide as global demand continues to fall even further.
Oil export-dependent and relatively rich countries with enormous financial resources and a highly educated citizenry have a relatively small population, and have struggled to diversify their economies as they lack the capacity to produce goods for local consumption and are highly dependent on foreign labour and expertise and the import of basic goods. However, these countries have the financial assets coupled with skilled manpower that together represent a significant resource for economic restructuring and much needed regional investment efforts, particularly in low-income and war-torn states.
While oil-importing, lower-income countries in the region may also have well educated populations, they have large numbers of underemployed and an overwhelming majority of young workers, lack financial resources, infrastructure, investments and employment opportunities, and, in some cases, suffer from political instability. For countries such as the Republic of the Sudan, Yemen and the State of Palestine, the loss of remittances from their migrant workers in the Persian Gulf countries and elsewhere constitutes a significant and immediate adverse effect. However, for these countries, as with most others globally, the availability of cheaper oil coupled with lower internal demand for heavily-subsidized fuel during an extended period of social distancing and immobility may, in fact, represent a windfall that may help widen the social safety net at a crucial time.
For labour-exporting economies potentially faced with a mass return of their skilled/semi-skilled migrant workers, the current oil glut presents an opportunity for stockpiling their energy reserves and redirecting scarce resources towards productive investments with low labour costs. This could result in reconstruction, employment generation and a reduction of imports of basic and intermediate goods, thus enhancing the countries’ economic diversification and resilience.
Countries such as Lebanon, Syria, Morocco and Egypt, which have developed basic to intermediate local agriculture and manufacturing capacity, are more diversified and amenable to structural transformation, and are expected to weather the COVID-19-crisis challenges better in the longer run. Furthermore, the existence of a large pool of underemployed and young population presents an opportunity for low-cost national mobilization in the face of adversity.
All categories of countries described above share the characteristics of poor access to arable land and drinking water, varying degrees of food insecurity and dependence on tourism and services, and are heavily impacted by the pandemic due to shortages in local medical goods and services as well as essential basic goods. Furthermore, they are losing industrial jobs at an alarming rate while their industrial output is drastically shrinking. Finally, a number of countries are affected by protracted, endless wars to varying degrees, be it in humanitarian, security, psychological or financial terms.
Economic response strategies
The current COVID-19 crisis has been caused by a sudden, virus-imposed collapse in the supply of labour in production and trade, coupled with the confinement of consumers, leading to a breakdown in demand for several goods and services. The nature of the current crisis therefore differs considerably to the 2007/8 financial crisis, and is widely expected to have a more profound and longer lasting negative impact globally.
Most economic response strategies (see IMF policy tracker) initiated in March have been fairly uniform, aiming at maintaining market demand through government-backed cash and credit support for households and SMEs, lowering the costs of utilities and regulating the price of basic necessities, with special attention to safeguarding the operations of banks. However, largely in line with the response strategy prescribed by the IMF during the 2008 ‘global financial crisis’, these recovery measures are likely to take months to translate into actions, particularly as they are prescribed as being ‘targeted’, which would necessitate ‘means testing’ at a time when public service offices and staff has been reduced or are otherwise compromised by lockdowns, illness and social distancing measures. They are also discretionary in nature, leaving much decision-making power in the hands of banks.
While essential, short-term liquidity in the market alone cannot be expected to help industries escape the crisis, and they will certainly not help diversify the region’s economies to make them more resilient to shocks from disruptions in global value chains. Additional measures to support manufacturers, especially SMEs, are needed for that purpose. Interesting cases have unfolded, for example, in Lebanon and Bahrain, where the measures that have been introduced are concrete, immediate and non-targeted, directly benefitting SMEs and recipient households and without overbearing means testing or targeting.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).