There is little doubt that the Covid-19 crisis will similarly change the world in profound ways, perhaps permanently. But with it will also come opportunity

Covid-19 is a dark cloud that has suddenly descended on humanity. But even the darkest clouds have silver linings. Indeed, the Chinese word for crisis, ‘weiji’, signifies danger as well as opportunity. The Black Death of Europe in the 1300s, pre-19th century cholera epidemics, and the Spanish flu pandemic in 1918-19 not only shook societies and economies, but also opened new pathways to change.

And all countries need to be alert to such opportunities so that some good can potentially be extracted from so much bad.

One of those changes will be a re-evaluation of the long and complex value-chains that have, over the last three decades, supported dramatic improvements in manufacturing efficiency and material standards across the world. These value-chains, financed enthusiastically by investors in advanced economies, have also allowed China to become the ‘factory of the world’.

Efficiency and profits shaped investment location decisions, not tail risks or black swan events. Competitiveness prevailed over resilience.

That imbalance has now been upturned. Firms now will be looking to diversify their sources of supply and demand. Some analysts have urged onshoring production. That is patently absurd. It would only concentrate risk, not diversify it. Firms need greater resilience, but without compromising competitiveness.

To achieve the right balance between the two, investors will be scouring the world for locations where strong States have shown themselves capable of managing black swan events effectively. The Covid-19 pandemic has made that tellingly transparent.

The strong ones dealt with the initial spread of the virus with effective social distancing and lockdown measures, and moved swiftly to mitigate the economic fallout.

Show of Strength
Strong does not necessarily mean authoritarian. Many States that showed their strength in recent weeks have been democratic — New Zealand, Australia, South Korea, Finland, Denmark, Germany, Japan, etc. Strong States possess capacity as well as legitimacy.

Capacity enables States to make informed decisions and then implement them. Legitimacy engenders trust in the State that, in turn, can leverage that capacity because people cooperate and follow orders willingly.

As it happens, strong States also supply other important public goods that international investors find valuable — infrastructure, macroeconomic and social stability, skilled labour, and relatively open trade policies.

China fulfils most of the characteristics of a (very) strong State, but it lacks legitimacy. It fails another key test — it is considered an unreliable host country by most Western and Japanese investors because it has been known to use its economic power to pursue strategic goals seen as inimical to most democracies.

China’s willingness to use State power to acquire technological know how, sometimes illegally, hasn’t helped.

For foreign investors looking for alternative investment locations, that leaves very few countries that have strong governments also capable of replacing China as an important source of cheap, skilled labour. Arguably, India and Indonesia should top the list of candidates. They are large countries located near China. Moreover, India
has been unusually effective in dealing with the Covid-19 crisis so far.