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Covid-19 is a dark cloud that has suddenly descended on humanity. But even the darkest clouds have silver coatings. In fact, the Chinese word for crisis, “weiji”, means danger and opportunity. The Black Death of Europe in the 1300s, the cholera epidemics prior to the 19th century, and the Spanish flu pandemic in 1918-19 not only shook societies and economies, but also opened new avenues for change.
There is no doubt that the Covid-19 crisis will similarly change the world in profound ways, perhaps permanently. But with that will also come the opportunity.
And all countries must be attentive to such opportunities so that something good can be extracted from so much evil.
One of those changes will be a reevaluation of the long and complex value chains that, over the past three decades, have supported dramatic improvements in manufacturing efficiency and material standards worldwide. These value chains, enthusiastically financed by investors in advanced economies, have also enabled China to become the “factory of the world.”
Efficiency and earnings shaped investment location decisions, not tail risks or black swan events. Competitiveness prevailed over resilience.
That imbalance has now turned upward. Companies will now seek to diversify their sources of supply and demand. Some analysts have urged production against it. That is obviously absurd. It would only concentrate risk, it would not diversify it. Companies need greater resilience, but without compromising competitiveness.
To strike the right balance between the two, investors will search the world for locations where strong states have proven capable of managing black swan events effectively. The Covid-19 pandemic has made it transparently revealing.
The forts dealt with the initial spread of the virus with effective measures of social distancing and blockade, and moved quickly to mitigate the economic consequences.
Show of strength
Strong does not necessarily mean authoritarian. Many states that have shown their strength in recent weeks have been democratic: New Zealand, Australia, South Korea, Finland, Denmark, Germany, Japan, etc. Strong states possess capacity and legitimacy.
Capacity enables States to make informed decisions and then implement them. Legitimacy builds trust in the State, which, in turn, can take advantage of that capacity because people cooperate and follow orders voluntarily.
Indeed, strong states also supply other important public goods that international investors find valuable: infrastructure, macroeconomic and social stability, skilled labor, and relatively open trade policies. China fulfills most of the characteristics of a (very) strong state, but lacks legitimacy. It fails another key test: Most Western and Japanese investors consider it an unreliable host country because it is known to use its economic power to pursue strategic objectives seen as enemies of most democracies.
China’s willingness to use state power to acquire technological knowledge, sometimes illegally, has not helped.
For foreign investors looking for alternative investment locations, that leaves very few countries with strong governments also capable of replacing China as a major source of cheap and skilled labor. Arguably, India and Indonesia should top the list of candidates. They are large countries located near China. On the other hand, India
It has been unusually effective in treating Covid-19 crisis so far.
It is important that India be seen to share values and interests that closely align with those of Western democracies. It has impressive entrepreneurial talent, a large internal market, and thriving private companies. Its analytical, financial and management services are world class.
Its only drawback is its inherent suspicion of foreign investors, especially in manufacturing, and its protectionist trade policy.
According to an OECD index (bit.ly/2yOPeYo) that covers 68 countries, India has the eighth most restrictive foreign direct investment (FDI) regime. A Property Rights Alliance trade barrier index calculated for 86 countries ranks India as the one with the most restrictive trade regime, without exception.
Clearly, India needs a fundamental change in its attitude towards foreign trade and investment in order to figure in the emerging post-Covid-19 calculation of foreign investors. If not, you will once again give up an opportunity
to take advantage of the expected post-Covid tsunami from companies that will choose to move away from China.
In fact, since the global financial crisis, more than 50 global companies (Apple, Nintendo, Sharp, HP, Dell, etc.) based in China were already changing, or planning to change, their production location to other countries. Most were motivated to relocate due to rising unit labor costs, as rapid wage growth in China outpaced labor
Productivity growth.
The trade war between the United States and China accelerated the exodus. Japanese companies, which have a significant presence in China, had additional momentum.
The ship sets sail soon
Companies driven by these pre-Covid-19 driving factors chose to move to Vietnam, followed by Cambodia, Malaysia, and Mexico. Almost none chose to move to India.
The post-pandemic world will see a much larger exodus from China. Tokyo has already announced that it will help Japanese companies diversify away from China, either to Japan or to other Asian countries. Other advanced country governments are also likely to require investors to follow a similar strategy.
If India complements its state capacities with more open trade and investment policies, it could be a great beneficiary of these supply chain readjustments and its “Do in India” strategy would be launched. If you choose, India could be a winner in a post-Covid-19 world.
The writer is a distinguished practitioner-in-residence, Johns Hopkins University School of Advanced International Studies, Washington DC, USA. USA
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