As the novel coronavirus continues to spread over the world, capitalism is fraying around the edges.
Under modern-day capitalist economies, companies produce profits via market competition. But in tandem with the progression of globalism from the latter half of the 20th century, competition has intensified, and the gap between the rich and the poor has widened, notably in developed countries. In a backlash to this state of affairs, protectionist policies have spread, and the trade war between the United States and China has cast a shadow over the global economy.
Amid the turmoil over the novel coronavirus pandemic, if major countries prioritize the rebuilding of their own economies, then resistance toward globalism could grow even stronger. Some countries have already placed restrictions on food exports, and are scrambling to obtain protective clothing and masks to prevent the spread of the virus.
In Japan, funds have been set aside in the government’s supplementary budget to support a domestic return of production bases, as shortages of masks and delays in the acquisition of parts highlighted the risks of relying on China to keep the supply chain in operation.
— Efforts to avoid protectionism
From the perspective of crisis management, the move to disperse production bases away from China is understandable. But domestic production still faces risks from earthquakes, as well as wind and flood damage. If production bases are hastily moved amid the current state of confusion, it could lead to problems in the future.
Protectionism worsens the efficiency of economies and creates tension between countries. We must not forget the lessons learned from the Great Depression in the 1930s. Major countries tried to protect their domestic industries and employment by placing restrictions on trade, and as a result, the world’s economies contracted further, setting them on a path toward World War II.
Reflecting on the past, the establishment of a free trade system progressed after the war. The World Trade Organization, which stood at the core, called for cooperation among countries, pointing out that history had taught the world that opening markets would help everyone.
Leading nations should share the recognition that rebuilding a free trade system is the shortcut to economic recovery.
The correction of the gap between rich and poor is also an urgent issue. If economic stagnation from the coronavirus pandemic is prolonged, it could deal a large blow to non-regular laborers at very small, small and medium-sized companies. And if the population of poor people grows, then consumption will dwindle, and the base of the economy will weaken.
In the meantime, we are likely to see people traveling less, and production distribution declining, with greater application of digital services. The oligopoly of IT giants could grow stronger, spurring a trend in which the wealth gravitates toward certain companies and the affluent class. If this happens, the “portion” allotted to companies and individuals left behind in the wake of digitalization could become even smaller.
Managers should think deeply about how profits are distributed. The medical field, retailers and distribution networks are supporting society amid the coronavirus pandemic. Economic stability is needed so that the people working in these sectors can live with peace of mind. If the middle class expands, then society will also become stable.
Last century, Henry Ford, who founded Ford Motor Co. and brought innovation to capitalism through mass production, wrote, “The highest use of capital is not to make more money, but to make money do more for the betterment of life.”
We encourage investors not only to consider short-term profits, but to sufficiently consider the societal roles of companies.
— Spotlight on the government’s role
The government’s role will also come into question. Inspections of its function of redistributing income and of the adequacy of its social security and other safety nets is needed. People quickly need to be trained up to meet changes in the structure of industries, and labor markets need to be built swiftly.
Indeed, now is the time for the government to come to the fore to support companies and households. But if it is to bolster state capitalism by fully embracing the economy, then the side effects would be large.
Following the global economic crisis sparked by the collapse of U.S. financial services firm Lehman Brothers in 2008, the world began to rely more on monetary easing and public spending by governments and central banks, and there were fears that a surplus of money could produce the next economic bubble. In actual fact, huge public spending by China led to a quick recovery of its economy, but it also led to overinvestment, which in the end slowed growth.
An economy that the government is trying to lift with over-the-top policies cannot be called a sustainable one. If a government’s debts surpass a critical point then long-term interest rates will rise, destabilizing the economy.
In the meantime, governments have been unable to sufficiently tax IT giants operating across borders. Their global capitalism stabilizes markets with reliance on government funding, yet resists government intervention with regard to the use of data and funds transactions. Surely this is not all fair.
The global economy is surrounded by many uncertainties, from earthquakes to abnormal weather conditions, not just infectious diseases. In these times, governments and businesses need to correct distortion in capitalism and move to enhance the sustainability of economies.