The epidemic caused by Covid-19 began to spread out to the world in March 2020. As of February 2021, more than 100 million people around the world have been infected, with the death count exceeding 2.4 million, causing an international public health crisis that continues today. Vaccines are currently being distributed and Covid-19 treatments are in the final stages of development, but we still cannot predict when the pandemic will be over.
Covid-19 is further accelerating the process of deglobalization that followed the global financial crisis and adding pace to the Fourth Industrial Revolution. In the post-pandemic era, the global economy will have to deal with many changes, such as the economic slowdown and polarization, reorganization of global value chains, accelerating digital transformation, and the increasing need to pursue sustainability and public value. These will continue even after the pandemic is over. We stand at a turning point in history, and the situation calls for collective efforts.
Most nations were forced to close their borders due to Covid-19, and the slowing effect on economic activity caused a severe crisis for the global economy and trade. The IMF forecast for 2020 estimates a 4.9% decrease in global economic growth due to the employment shock and fall in demand. This is the worst growth rate since the Second World War. The WTO predicts that annual global trade will fall by between 13% to 32% this year, after contracting by the largest and fastest rate in history in the first half of the year. This year the world economy is expected to grow by around 5%, but this falls short of its previous growth trajectory when considering the base effects.
Covid-19 will likely increase inequalities in many sectors, as exposure to health risks varies by age, race and income, and has an asymmetric impact as well. According to a Wall Street Journal article published on 5 October 2020, the employment rate of white workers in the U.S. was affected the least by Covid-19, while black and Hispanic women saw the most job losses. When looking at employment changes by income level, low-earning workers were hit the worst.
The global value chain was already showing signs of reorganization before the Covid-19 pandemic. Advances in globalization had increased the political pressure caused by economic polarization and job market troubles, leading to a new rise in protectionism. As the U.S. and China clashed over trade issues and technological hegemony, the rise in security concerns and other factors of uncertainty pushed up cross-border transaction costs. Emerging economies became more self-sufficient as the production technology gap between regions narrowed, and the rise in labor costs further drove factory automation.
Even before the Covid-19 pandemic there were partial disruptions to the global supply chain, caused for instance by the Fukushima nuclear disaster in 2011. But the worldwide collapse of supply chains caused by Covid-19 came as a shock like no other in modern history. Governments around the world reacted by bringing production and consumption to a full stop, showing how vulnerable the current global supply chain is to communicable disease or natural disaster. We expect to see changes in the global industrial structure, toward ensuring stable production even when this lowers efficiency, and reducing dependence on certain countries as value chains are realigned around core industries. Efforts are being made to ensure stability in the global value chain, moving production hubs closer to markets and sources of demand, and diversifying the supply base for components. We expect for value chains to be integrated into various regional blocs in Asia, the EU, North America, centered on nations with high technology capacity or a large consumption market, such as China, Germany, or the U.S.
Over the last few years, the ongoing Fourth Industrial Revolution has become an issue of keen interest. Digital transformation and artificial intelligence form the foundation of this revolution, calling for advances in network, computing and algorithm technologies. More recently we are seeing a rapid rise in technology and investment in the areas of 5G networks, cloud computing, semiconductor processing technology, and machine learning. Digital technology is being utilized to combat Covid-19, and so-called “untact” services have expanded, further promoting the growth of digital businesses and industries and ushering in the Fourth Industrial Revolution. We can expect new products and services to appear in the online market, as well as more digital startups in cloud services, data analysis, education services or business services. Advances in digital platforms will further integrate global markets, while data technology, software, design, and other digital services will rise as the core of new value chains. The acceleration of this digital transformation will change our everyday lives and the future of education and work. Proper education must be provided to respond to changes in the scope of work and the workplace. The issues of digital fragmentation and income polarization will present further challenges to overcome.
The current pandemic will eventually be overcome. But we must prepare for the possibility of another epidemic arising as global warming continues. Our experiences with Covid-19 are helping us to appreciate the importance of sustainability. We must mount a collective response to health threats, climate change and other challenges that threaten the environment and development of the international community.
How Will the Region’s Economy Look Like in the Short Term?
Next, we will take a look at the situation in Asia. The Asian region is leading growth in the global economy. Not just a production base anymore, the Asian market has become an important market for consumption as well. Meanwhile, economy of scales and network effects have become more important than ever in the Fourth Industrial Revolution. This means we will need an ample amount of demand if we are to overcome Covid-19 and progress with the Fourth Industrial Revolution. This is where recovery in the Asian economy becomes crucial.
Asian countries actively conduct trade and investment with each other and are closely interconnected. While integration of the European or North American economies is institutional in nature, the integration of Asian economies is market-driven. The recent conclusion of the RCEP was an important development for institutional integration in the Asian region. But compared against the European Economic Community or the USMCA in North America, the RCEP remains relatively low in terms of market opening and scope of regulations. The agreement also fails to include India, a major economy in the region.
The Asian region has become the stage for Sino-U.S. conflict. Even in the face of a common enemy named Covid-19, the U.S. and China were not able to cooperate. The conflict is expected to continue even under the new Biden administration in the U.S. We can expect the U.S. to lower its dependence on China as the pandemic exposed the dangers of value chains concentrated on China, and as the struggle over tech hegemony intensifies between the two countries. In particular, the race to gain technological y hegemony will have an impact on the value chain of future technologies. But when considering the vast labor power and expertise in China, its enormous domestic market, interdependence between technology and industry, and efforts by the Chinese government, any rush out of China is likely to remain limited. Therefore, we are not likely to see major changes in the short term, but structural change will continue.
Now I will outline South Korea’s efforts to overcome Covid-19. The Korean economy was already struggling with a fall in growth potential due to its low birth rate and aging population, and with polarization caused by the insufficient social safety net. Covid-19 plunged the Korean economy into a severe downturn and forced it to face these major structural changes. In response, the Korean government launched the Korean New Deal in July 2020, similar to America’s New Deal policies launched in the 1930s to overcome the Great Depression. The Korean New Deal is centered around three pillars ‒ the Digital New Deal, Green New Deal, and the strengthening of social safety nets.
The demand for online, non-face-to-face solutions is adding pace to digitalization in all sectors, seen in the rise of smart working, remote working, and cyber education. Traditional service industries and small-to-mid-sized manufacturers are being hurt, while online services and platform companies are enjoying a rise in revenue. The pace of transition into the digital economy will decide the industrial and business competitiveness of a nation, making it important to invest in basic digital infrastructure.
Covid-19 has also provided an opportunity to reassess the impact and urgency of climate change, adding momentum to the transition toward a green economy. Korea has declared its goal of achieving carbon neutrality by 2050. These efforts will improve the country’s quality of life and expand global investment at the same time, creating new jobs and industries.
The transition to a digital and green economy will generate new technology and jobs in new industries, diversifying the labor market with new platform workers and various forms of remote working. At the same time, however, cases of job mismatch and the fall in demand for low-skilled labor could cause relocation of workers, and an increase in unemployment and polarization. To deal with these concerns, it will be necessary to expand and upgrade vocational training, extend legal protection to new forms of employment, and fortify the social safety net to ease unemployment and disparities in income.
The Korean government plans to spend 14.1 trillion won ( roughly 10.4 billion Euro) in this area by 2025, together with efforts to encourage investment from the private sector. Nations around the world are pouring massive funds into overcoming the economic crisis caused by Covid-19. Now measures should be taken to guide these funds into more productive sectors. The necessary policy framework and regulations must be established as well.
Which Best Practices Should Asia Be Adopting? Are They Feasible?
Now is a time to explore new directions of international cooperation to identify the new opportunities presented in the lifestyle changes caused by Covid-19 and the Fourth Industrial Revolution. As mentioned, Korea has launched the Korean New Deal to overcome the Covid-19 pandemic and respond to the challenges of digital transformation and climate change. Other major Asian economies have engaged in similar policies as well. I believe this is an area where we can find opportunities for cooperation that will benefit us all.
We must work to increase economic integration in Asia. As I have mentioned, the Asian region lacks an institutional instrument for economic integration. Therefore the concluded RCEP agreement must be brought into effect without delay. The RCEP will enable us to exchange our views and manage conflict. An FTA between China, Japan and Korea (the CJK FTA) should also be brought to conclusion as soon as possible. Compared to Europe or North America, there is a lack of discussion on new issues in the environment, labor, or data in the Asian region. Korea, China and Japan are already engaged in cooperation in a wide range of areas. These three nations account for approximately 70% of the total economic size of the RCEP, and the CJK FTA will be an important development in bringing Asian economies together.