The Covid-19 pandemic will end. For sure, there remains much that we do not — and cannot — know about the SARS-CoV-2 virus and its future evolution. Yet, the world has to learn to live with it as an endemic disease — not ignoring it but mitigating the impact since we now have many more tools to manage the virus. That does not mean, however, that things will return to exactly the way they were, pre-pandemic. There is permanent fallout and the longer-term economic impact will differ across countries, some for better and many for worse.
We all know there is a trade-off between lives and livelihood — in managing the outbreak — on when to resume economic activities and reopen borders. And we posited that there is an equilibrium point of trade-off, which balances economic hardship (which affects health and well-being) against the risk of hospitalisation and, possibly, deaths. Chart 1 is a graphical representation of this trade-off.
In the real world, this equilibrium (or optimal) trade-off point can differ greatly, for the individual as well as for society. For some countries, decisions are, by and large, governed by choice; for others, they may well be forced upon by circumstances (unrelated to the pandemic) such as wealth, economic structure, size of the domestic market and stage of development as well as strength of the healthcare system. What is considered an acceptable trade-off is also driven by cultural background and values and, to a certain degree, politics.
For rich countries, the red line, the percentage of population suffering financial-economic stress, will be much flatter than that in poorer nations. This is unsurprising. Their citizens would be relatively better off with a higher savings buffer and more will have jobs that can be undertaken remotely. In addition, governments in the developed world have far outspent developing countries in terms of pandemic aid relief, including generous cash handouts and wage subsidies for businesses and households, thereby limiting the economic damage. Meanwhile, their central banks have a freer hand to cut interest rates to zero (or negative) and undertake massive quantitative easing programmes, without suffering material negative consequences such as capital outflows and currency depreciation. As a result, the increase in the number of people living in extreme poverty will be significantly higher in developing countries compared with developed countries, post-pandemic.
Similarly, the percentage of a country’s population susceptible to severe illness from Covid-19 (blue line) may start around the same point, but it will fall much earlier and faster for most rich, developed nations — because of vaccine inequity as well as better infrastructure, accessibility, insurance and public-private healthcare systems (see Chart 2).
Decisions on lockdowns, reopening of the economy and borders should take into account these trade-offs. The optimal tradeoff point — the time (t) at which the blue and red lines cross — for countries in the rich and poor worlds may be similar, earlier or later, depending on economics, culture, society values and politics.
What stand out are the pain threshold levels on the y-axis — which is equivalent to the price or value of life. It will almost certainly be higher for the poor than the rich. In other words, the life of the rich has a far greater value (low pain threshold) than the life of the poor (high pain threshold). While we can all acknowledge there is a trade-off between lives and livelihood, few would admit to the fact that lives have different values. Like it or not, this is the reality.
See also: Education was, is and always will be the great equaliser
Recall last week we wrote that full reopening of borders would take some time yet — especially with poorer countries, where vaccination rates are low. This is because the rich world, generally, places a higher value on life. Thus, when local populations are increasingly protected with rising vaccination rates, the opening of borders will necessarily result in more imported cases, which translates into high negative exogenous cost to society.
One of the consequences of keeping borders closed for longer would be a higher barrier to labour mobility. Countries heavily reliant on a large (cheap) migrant labour force — such as Malaysia — will be most affected, likely resulting in slower economic growth. Growth in countries that export a large number of workers and where the domestic economy is dependent on foreign income remittances would also be greatly affected.
In most developed countries, the current labour shortage — whether unavailable, unable or unwilling to work — is a catalyst for faster adoption of technology. And they will have the advantage, thanks to the availability of infrastructure (such as highspeed broadband connection), cheap capital, knowledge and talent.
Indeed, businesses across economic sectors are embracing the use of automation and robotics. Thanks to advances in artificial intelligence (AI), robots are increasingly being utilised not just on factory floors but extending to the services sectors, including in low-end jobs where labour shortage is most acute. We foresee rising investments into research and development of robotics — thereby widening the range of capabilities and leading to lower deployment costs of robotic systems.
Already, we are reading about more and more companies starting to use robots in the hospitality sector such as restaurants and hotels — in the kitchens as well as for customer-facing services such as food serving — catering and delivery, warehouses and fulfilment centres, healthcare and sanitisation jobs and security. For instance, Changi Airport and Jewel Changi Airport in Singapore have a team of cute-looking robots doing cleaning, waste management and traffic enforcement. Robots-as-a-Service is gaining popularity in the US, which will further propel many smaller businesses onto this digital transformation, thanks to the additional flexibility, scalability and lower entry costs.
And, again, how fast and efficient each country is able to adopt and capitalise on these enabling technologies (including available capital, training and education) will determine its future competitiveness.
In short, wages at the lower end may be rising today, owing to labour shortage. But the resulting increase in the application of technology will end up hurting the lower-income groups, by reducing the jobs available in the future.
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And as we have written before, prevailing disruptions to global supply chains, coinciding with huge advances in big data analytics, enabled by rapid progress in AI and smart algorithms — that will drive the shift from mass production to mass customisation — will lead to more regionalisation and reshoring of investments in the developed world. It will whittle away at the competitive advantages of low-cost labour — with serious implications for emerging countries banking on an export-driven economic model, predicated on cheap labour (for a more in-depth discussion, please refer to our previous article entitled “The next big themes: Supply chain resilience and the end of low-wage as a competitive tool”, The Edge Singapore, Issue 1008, Nov 1, 2021).
This broad embrace of technology will result in a greater wealth-income divide, between developed/developing countries and also between citizens. It would render current solutions such as regulating better working conditions for gig workers and raising minimum wage ineffective in the future, or worst. The poor will become poorer. In the future, governments may be forced to adopt more aggressive measures to help the unemployed and poor — by widening social safety nets such as income support, food and cash benefits. Such large-scale fiscal spending will, inevitably, have to be financed by higher tax collections. Higher taxes in itself do not drive away investments. But coupled with the erosion of low-cost labour as a competitive advantage, emerging countries including Malaysia must restrategise and prepare for this eventuality.
The Global Portfolio fell 5.1% for the week ended Jan 19, with all but two stocks in our portfolio ending in the red. The biggest loser was JPMorgan Chase & Co (-11.6%), after its latest earnings results failed to meet market expectations. Other big losers include Builders FirstSource (-10.5%) and Grab Holdings (-9.6%). The two gainers were BP (+2.9%) and Singapore Airlines (+0.9%). Last week’s losses pared total returns since inception to 57.8%. This portfolio is now marginally trailing the MSCI World Net Return Index, which is up 57.9% over the same period.
*Tong Kooi Ong is related to Anthony Tan, co-founder and CEO of Grab
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Photo: Bloomberg
