“API Geoeconomic Briefing” is a weekly analysis of significant geopolitical and geoeconomic developments in the post-pandemic world. The briefing is written by experts at Asia Pacific Initiative (API) and includes an assessment of burgeoning trends in international politics and economics and the possible impact on Japan’s national interests and strategic response. (Editor-in-chief: Dr. HOSOYA Yuichi, Research Director, API & Professor, Faculty of Law, Keio University)
This article was posted to the Japan Times on September 6, 2020:
API Geoeconomic Briefing
September 6, 2020
A supersurveillance society and its impact on democracy
This is the third installment of a four-part series of conversations between FUNABASHI Yoichi and HOSOYA Yuichi about how the world may look in the aftermath of the coronavirus pandemic.
Funabashi: In the United States, COVID-19 deaths have topped 187,000, many of which were older people in nursing homes. The virus sent the country’s jobless rate soaring to 14.7 percent in April, and 33 million Americans have filed for unemployment benefits.
Worldwide, many deaths have occurred among older people. Nevertheless, children, who have been deprived of educational opportunities, and young workers, especially nonregular ones who lost their income, are also victims.
We expect a phenomenon similar to Japan’s “lost decades,” a prolonged period of economic stagnation that gripped the country from the 1990s, to set in around the world.
Job losses will dampen consumption and a sharp decline in corporate sales and earnings will undermine stock prices and credibility. Banks will become reluctant to lend money or actively collect outstanding loans. All of this will unavoidably depress corporate balance sheets.
The effect of this coronavirus crisis on the global economy is expected to surpass that of the Great Depression of the early 20th century. It would spark a chain-reaction cycle of crisis: The evaporated demand drags the economy down, hitting the financial system and causing a credit crunch, which puts a further chill on the economy.
Among the hardest-hit sectors is automotive. The interest rate on the corporate bond of U.S. automaker Ford Motor Co. has jumped to 9 percent, with the prospect of its debts snowballing. The risk of auto parts makers going bankrupt is also high. If this primary industry fails to sustain itself, the impact would be immeasurable.
Although world leaders are anticipating an economic recovery, the possibility that a second and third wave of infections will follow in the next year or two is undeniable.
A virus resurgence would force societies to close down again. Until the development of a vaccine ends this fight completely, governments’ generous cash handouts will not help stimulate the economy, with people being asked to stay at home and stores shut.
Where the world economy can find a growth engine remains an open question.
Some American companies have run out of cash because, until a little while ago, they were borrowing money to buy back their own stock. These companies could collapse one after another. The U.S. does not have the ability left to lead the world economy.
China cannot be expected to carry out a massive infrastructure investment on the scale of the post-Lehman shock period. The country is believed to have $135 billion in outstanding loans to countries along the Belt and Road Initiative. Many of those debt-saddled nations could default.
Djibouti’s debt to China stands at 80 percent of its gross domestic product, while Kyrgyzstan’s ratio is at 40 percent, Ethiopia’s 20 percent, Pakistan’s 7 percent and South Africa’s 4 percent. The Group of 20 nations has pledged to allow low-income countries to suspend external debt payments until the end of this year. But China resisted the move.
Additionally, neither Japan nor Europe has the potential to become the growth engine.
Taken together, these risks show how the coronavirus crisis could decidedly change the world economy and the form of capitalism.
Hosoya: I agree that there would be a significant qualitative change in capitalist systems. There are two types of changes. The first is a fundamental change in the direction of capitalism and its quality; the second is a change of its speed. What matters more in the post-coronavirus world is the former.
After the 2008 financial crisis, China introduced a massive fiscal stimulus program to invest in infrastructure, while the U.S. and Europe used the relief to bail out large businesses and revive financial institutions. These measures more or less symbolized the economy regulated by government intervention similar to the New Deal programs of U.S. President Franklin D. Roosevelt in the wake of the Great Depression.
Since the financial crisis, some people have pointed to the end of neoliberalism, a policy model which supports free market competition with little government regulation. I believe the coronavirus will accelerate this process.
Societies are ready to embrace it. Left-wing politicians who would have been labeled as socialists during the Cold War have garnered much support, as evidenced by Bernie Sanders’ strong showing twice in the U.S. Democratic presidential primary as well as the rise of the U.K’s former Labour Party leader Jeremy Corbyn.
In the 20th century, many in the U.S. supported the New Deal policy after the Great Depression, and the Soviet Union’s five-year plans for economic development, implemented by leader Josef Stalin in 1928, drew attention. In today’s major liberal democracies, massive government intervention in the economy may become the norm again.
Part of this will be prompted by changes to our lifestyles. The coronavirus crisis will make the internet more deeply embedded in our daily life and artificial intelligence-powered robots and other technologies integrated in it.
In a world where the qualitative change in capitalism is prompted by a new lifestyle, creating a new economic model will be a challenge.
In this crisis, the level of government intervention carries significance. Beijing’s intervention goes too far, while the Washington’s and London’s are too weak. Japan’s level of intervention may be somewhere in the middle.
After the war, developed countries in the West established their security framework under American hegemony and enjoyed economic growth, and chasing advanced countries were so-called Newly Industrializing Economies, or NIEs, which achieved a rapid industrialization in the 1970s. Among them were South Korea, Taiwan, Singapore, and Hong Kong, collectively known as the Four Asian Tigers.
The four enjoyed prosperity through a “developmental state” system, modeled on the post-World War II growth of Japan.
But where the Japanese government’s active intervention enabled economic development, it has been said that these four attained development through state leadership and a powerful intervention reinforced by authoritarian regimes.
I think the four countries and regions have been the most successful in their coronavirus crisis responses. South Korea implemented large-scale drive-thru and walk-thru PCR (polymerase chain reaction) testing to stem the virus spread. Taiwan has created a system combined with an app developed by the digital minister and others that tracks inventories of face masks, while the government buys up all face masks to control distribution.
Hosoya: Massachusetts Institute of Technology professor Daron Acemoglu and James A. Robinson, a professor at the University of Chicago, coauthored a book titled “The Narrow Corridor.” In the Japanese edition, released in January, the authors argue that no country with too strong or too weak state power can generate economic growth. A dictatorship with enormous state power is likely to morph into a surveillance society in which citizens’ freedom will be curbed. By contrast, a country with weak state power would find it difficult to provide a speedy response to an emergency.
Adopting a policy that maintains a good balance between state authority and citizens’ freedom is possible in the four countries and regions mentioned earlier. Countries that cope well with the coronavirus may also be successful in bringing about economic growth. Such a country would become a model in the post-coronavirus world.
Funabashi: That those democracies that transitioned from developmental dictatorship in which the economy was prioritized over rights have shown the most resiliency during the pandemic is an interesting point. Another point I would like to add is that these countries and regions were devising policies with constant nearby threats in mind — China for Taiwan and Hong Kong, North Korea for South Korea and Malaysia for Singapore. Protecting their territory has always been their top priority.
Funabashi: When we think of the form of capitalism after a severe coronavirus-triggered recession, I am interested in what will happen to our obsession with gross domestic product?
The concept of GDP was developed by Russian-born American economist and statistician Simon Kuznets for his “National Income” report in 1934, and has been used as measure of a national economic growth.
I feel that our faith in GDP that continued through the 20th century will be shaken to the core. Deflation may become more of a structural problem.
As pointed out, people’s lifestyles will change due to coronavirus crisis. Teleworking, which has been experimented with during the crisis, and the greater use of internet in business could become the new normal. In this kind of economy, I think using GDP as a measure would make less sense.
Another point is that the post-coronavirus economy could blur the line between the public and private sectors. If countries nationalize domestic airlines and automakers, today’s capitalism may be transformed into what we may describe as a new type of state capitalism, under which the private-public boundary is not distinguishable.
In the post-coronavirus era, not only the economy but society and democracy could take new forms. The relationship between a state and its people — that the former protects the latter — that we have taken for granted might also change.
As a pandemic precaution, we are being asked to reduce human contact by 80 percent by staying at home and practicing social distancing. This means that people are the ones who protect the country, not the other way around, and individuals’ actions determine the fate of a country.
It seems shocking that an eerie monitoring society has suddenly stepped out of the shadows.
In this crisis, we are encouraged to take our temperature every day, and many places check it before allowing entry into a building. In China, citizens are assigned a color code for tracking the coronavirus — a green code signifies that you are not infected. People in the green category can even go out for a drink.
By extension, a bio-surveillance society, envisioned by Israeli historian Yuval Noah Harari, may come about.
Harari says that just as small cameras dotting towns and cities monitor people’s behavior, people’s body temperature and emotions will be able to be gauged remotely. He portrays a dystopia in which, for example, the emotion of senior officials of the Workers’ Party of Korea who listen to a speech by leader Kim Jong Un will be measured and those who are detected to harbor anger will lose their careers and even their lives.
Waves of populism
Hosoya: To predict what post-coronavirus democracies will look like, I would like to clarify problems with a democratic society before the coronavirus.
What we have seen over the past 30 years since the end of the Cold War may in fact be an “excessive democracy.”
One of the leading intellectuals on political thought in Britain, John Dunn, has said that claims that have been justified in the name of democracy today are excessive and clearly harmful. The emeritus professor at the University of Cambridge went on to say that the only way we can stop the harm is to understand a democracy for what it is.
His observation is an important indicator when we consider the perils of an excessive democracy that exist in populism.
We have seen the emergence of a political circumstance in which people’s emotions are easily moved by the combinations of elements such as the expansion of nationalism, resistance to the advancement of economic globalization and outrage over the widening income gap. In many countries, people tend to criticize a leader who calls for a rational and moderate policy in favor of a populist leader who stirs up their emotions.
It is important to understand that the United Kingdom’s exit from the European Union came about against such a political backdrop. Britons opted for it, even though an opinion poll showed nearly 70 percent of respondents thought it would have a negative effect on the country’s economy.
Voters are swung more by their emotional inclination than by their rational judgement.
The fact that the coronavirus crisis started in this political climate further complicates problems. Given that making a political decision based on emotions has become the norm, there is an increased possibility that people will seek an authoritarian bio-surveillance society amid the crisis.
There must be resistance to the movement, however. The original purpose of setting up security cameras in urban areas was the rational need for criminal investigations and prevention. Similarly, bio-surveillance on body temperature stems from the rational need to stop the transmission of the virus.
Those with authority will invariably abuse the government’s power to watch people. What was happening in Taiwan and Hong Kong before the coronavirus exactly manifested the resistance against such a move.
Once the crisis ends, a movement for freedom and people’s rights may resume.
Balance between powers
Hosoya: As I already mentioned in relation to a developmental state, post-coronavirus democracies will be required to keep the right balance between the powers of state and people. In other words, the future challenge is to explore the best mix of reasonable and effective governance by expert groups, as well as citizens’ rights and freedom. In cases of successful implementation, it will become possible to conduct high-quality politics and ensure sustainable economic growth.
Countries that fail, however, could slip into economic downturn, civil war or revolution.
Funabashi: Looking back on the history of post-war American democracy, I think liberalism and democracy became integrated in 1952, when the Republican Party embraced the social security program that had been forged by the Democratic administration since the New Deal. Under Ronald Reagan’s presidency (1981-89), liberalism led to an overgrowth of neoliberalism. Subsequently, society shrunk as inequality increased and communities vanished.
During the Bill Clinton presidency (1993-2001), fierce disagreements between the Democratic and Republican parties bred intolerance between the two sides, while racial intolerance grew during the Barack Obama presidency (2009-2017). And what followed was President Donald Trump.
Populism in the U.S. and Europe, arguably represented by Trump himself, can be described as an illiberal democracy’s revolt against nondemocratic liberalism. Neoliberalism, which I call the liberal fundamentalism virus, prevailed in the world, prompted by globalization.
It is certain that the populism that’s erupting in Western society comes with resistance.
That populism seems to take on despotic characteristics, more so due to the coronavirus crisis. In the era of social distancing, banning protests and the gathering of demonstrators is an easy task, while authorities can send what they view as unfavorable opposition party politicians and journalists into self-quarantine.
Funabashi: Populism is a type of politics that divides people between friend and foe. To counter this, we will need to narrow the gap in economy, education and health, revive a “Big Society” and re-establish the governance of a multiparty democracy, among other measures. Perhaps we will also have to dwell on how we regain a sense of unity among people.
The catalyst should not be the exclusive ethnic nationalism that is added on top of the collective identity. We will need to ingrain civic nationalism — which shares universal values that respect individual identity — or the like in society. That is the kind of nationalism that makes much of history, tradition, family and community and lets people fight together against a crisis. It can be identified as patriotism, but it is more deeply rooted in civil rights. It is a democratic system that realizes unity in diversity.
Such an open nationalism should be able to contain ethnic nationalism. The nationwide effort to fight through the pandemic will have a big impact on the new way we build our nation. I hope that a sound civil nationalism comes out of it.
Disclaimer:The views expressed in this API Geoeconomic Briefing do not necessarily reflect those of the API, the API Institute of Geoeconomic Studies or any other organizations to which the author belongs.