Globalisation contributed to the rapid spread of COVID to all corners of the globe. The economic cost of fighting the virus froze a number of economies and disrupted global value chains, and is likely to be followed by several years of an economic depression that will dwarf the cost of the 2008 financial and economic crisis. The dramatic events of the first quarter of 2020 challenge some of the implicit assumptions underlying the design of our economic systems, and should make us think about some of the dilemmas and trade-offs that this crisis has foisted upon us.
This piece, available as a working paper here, is not mainly about competition – instead, it is a piece that thinks widely about the implications of this pandemic for the economic architecture underpinning globalisation, which also touches on competition. This is because, in the grand scheme of things, competition law and policy plays a relatively limited role when markets are not in equilibrium, and is of limited importance in the face of increased state intervention.
The paper proceeds by looking at various elements of global economic arrangements, and investigates how the pandemic might change our assumptions about them.
A first topic is the interaction between science and politics.
Democratically elected representative have a mandate from the people; scientists are considered legitimate authorities because they know more than the average citizen. Yet, it is clear that in a period of crisis the public puts more trust in scientists than in politicians to advise on the appropriate course of action to fight an epidemic.
This raises many questions about the respective roles of scientists and politicians in public policy decision making in times of crisis. There are related questions about the responsibility of doctors in the development and containment of the epidemic, particularly given that epidemiologists are divided on the correct way to proceed. There are very different views on the best strategy to fight a pandemic of this nature (e.g. different ideas about the usefulness of masks, different ideas about what how medicines untested for Covid-19 should be used, different ideas about whether initial containment efforts were appropriate, etc). Even if it comes as no surprise that doctors can disagree, the question then is what is the legitimacy of an advisory body made up of doctors who disagree; and what is the relative legitimacy of elected representatives to disagree with them.
A second topic concerns how attitudes to human rights impact the effectiveness of tools for fighting the crisis. This is then revisited in a seventh section, devoted to the relationship between privacy, digital technologies and public health.
Non-democratic countries where individual freedom is limited seem to be better able to take adequate measures to limit the spread of the virus than elsewhere. In some western countries, there seems to have been, at the very beginning at least, more hesitation about confinement measures, and therefore a greater tendency for the virus to spread.
Another aspect of this interface is the reticence expressed in a number of countries – based on an attachment to individual freedom and the respect of privacy – regarding the use of modern invasive technologies such as facial recognition or geolocation, which could help public authorities to monitor the strict enforcement of confinement orders. It seems obvious that the use of more advanced technology might have allowed us to save scarce human resources that could have been allocated to important alternative tasks, such as the logistics of supplying hospitals and their security. This raises the question of how should we deal with the trade-off between public health and the protection of certain human rights.
In Europe, previous calls for EU data sovereignty and for protecting EU citizens’ privacy showed their limitations at this time, when the largest possible pooling of data is necessary to anticipate the expected path of the epidemic. Europe is clearly caught in a dilemma between the desire to protect the privacy of Europeans and promoting the best possible performance by artificial intelligence algorithms in the health sector – which depend, as the vast majority of AI algorithms, on the quantity of data which can be gathered to train them.
A third area is that of scientific methodology and the precautionary principle, which links quite naturally with the economic costs of public health strategies.
From a public policy standpoint, the ultimate question is: how should we deal with the risk of rare, but exceptionally destructive events (such as epidemics, major earthquakes, extreme weather events, nuclear accidents, etc.)? This raises a number of related questions. To what extent should we provide for risks that have a small probability of occurring but can have massive impacts? If we do not want to prepare for such events (both because of the cost involved and because of their unpredictability), what should we do to ensure that our economic systems remain flexible enough that they can react in a timely manner when such catastrophes do occur?
These ex ante perspectives segue naturally into the question of what is the trade-off between the public health and economic strategies used to overcome the crisis ex post, given that we failed to prepare adequately. The trade-off is made clear by the fact that confinement policies (designed to minimise the number of death from the Covid-19 and adopted in a number of countries) lessen the impact of the epidemic in terms of the number of people infected but significantly decrease economic output. The more extensive and the longer the confinement, the more severe will be the adverse effects in those sectors, and the larger will be the decrease of GDP.
What the trade-off between health strategy and economic strategy actually, is and how we should consider this trade-off when determining public policy, are questions that raise both empirical questions (requiring assumptions about the severity of the economic crisis in different policy configurations, the speed of recovery, etc..) and ethical questions (such as whether, when it comes to health policy, one can or should put an economic value on lives).
The fifth and sixth topics are globalization, global supply chains and national sovereignty – particularly how they impact the pursuit of effective industrial policies.
The benefits of economic globalisation have been much discussed. One view is that the decline in trade and foreign investment obstacles and the development of new communications technologies have allowed an international reallocation of resources through a restructuring of production processes. This process benefited developed countries by allowing them to secure their consumption needs at a lower cost, and allowed developing countries to benefit from economic opportunities thanks to the development of export-oriented activities.
In the eyes of those sceptical of the benefits of globalization, there are several ways in which trade and investment liberalization limits the ability of Nation States to pursue independent domestic policies. Amid various criticism of globalisation, the current pandemic reinforces the argument that the development of international trade, together with a number of recent technological developments in the communications and transportation sectors, has led to an excessive internationalisation of supply chains. When combined with just in time policies of keeping stocks at the lowest possible level in order to reduce costs, globalisation makes firms very much dependent on the smooth functioning of the international value chain. Such smooth functioning can break down when an external shock affects the economy of any of the countries where firms contributing to the value chain are located.
In a world characterised by economic globalisation, disruptions due either to a natural catastrophe affecting another country or to a political decisions by a foreign government can hinder the ability of firms to serve their domestic markets. As a result, European and North American countries now depend to a large extent on foreign countries, such as China, for their supply of a number of essential medical products. This dependency became a major source of concern when some countries where the sourcing firms are located were hit by the epidemic and decided to follow a strict confinement policy which halted production.
The difficulties experienced by a number of countries (including France) to have an adequate supply of simple things such as masks or active ingredients for tests will be – and in some places already is – seen as a result of failure to have an appropriate industrial policy. Globalisation seems to be at the root of the apparent inability of market-oriented countries to pursue an effective industrial policy which is both pro-competitive and allows countries to keep fundamental strength in strategic industries, and resources which can be called on (or quickly activated) in a time of crisis. What has been gained in efficiency by relying on markets to direct the economy has created a loss of ability to mount a coordinated response to an unanticipated economic disaster.
Besides the fact that the spread of the Covid-19 epidemic may have further eroded the faith of some in the benefits of economic globalisation, the adoption of necessarily far reaching measures to alleviate the economic crisis which will follow the pandemic is also likely to lead to a retreat from the logic of globalisation. It is clear that national governments will need to inject massive amounts of money into their economies in the hope that firms will, with this financial help, survive long enough to weather the disruption caused by the epidemic, the confinement measures and the subsequent economic depression. The bailout of our economies will require financial measures that are orders of magnitude larger than those taken in the aftermath of the 2008 financial crisis. Moreover, one of the lessons we learned from that financial crisis is that, when national governments use economic stimulus to shore up their economies following an exogenous shock, they should make sure that their stimulus does not end up shoring up other economies through a surge in imports. To ensure that there is no leakage, such countries tend to resort to protectionist tools; this is what occurred after 2008, and it is difficult to see how it will not happen again now.
The last section is devoted to the consequences for competition policy.
There are a number of questions concerning if and how the role of competition law and competition policy should be redefined in a time of deep economic crisis.
In the very short term, the main issue to be confronted is the brutal disruption in the value chain of a number of products, leading to shortages either because of insufficient production or because of difficulties in product distribution due to confinement measures. The issue for consumers is not, as it is in a normally functioning economy, to be able to choose the best price/quality ratio among products offered by competing suppliers but simply to be able find the product (even if in smaller quantity than what would be desirable).
In such circumstances, cooperation between suppliers (and/or government intervention) to identify both the needs and the existing stocks may be necessary to permit an adequate supply of essential goods and services. Second, consumers need to be protected against abuses resulting in price gouging of products in short supply. This requires two adjustments for competition authorities. First, to take a more nuanced approach with respect to cooperation among competitors than the approach they have taken in the past, and, second, to focus on exploitative abuses of market power rather than on exclusionary practices.
In the medium run, say over next two to three years, our economies will be depressed, with the risk of a large number of bankruptcy of firms either directly hit hard by the Covid-19 epidemic or affected by the disruption of their supply chain, rising unemployment and dwindling demand. In such an environment, the important goals are to quickly stimulate economic growth, to engage in the kind of redistribution mechanisms which will alleviate the economic suffering of the poor, and to ensure that the economic framework that we create will be more resilient in the future. It will thus be necessary to stimulate employment and to help firms in the sectors affected by the crisis, particularly SMEs but also a number of larger firms. Massive amounts of state aid, tax deductions or deferments and subsidies of various kinds, or even the nationalization of entire economic sectors, will be necessary.
In this context, it is clear that there is a possibility of conflict between two different policies. One the one hand, one finds the necessity to artificially keep a large number of firms going bankrupt in the short run, in order to kick start the economy in the medium run and to allow it to retain its footing in the long run. On the other is a policy of competition law enforcement which assumes that the economy is already in a stable equilibrium with full or near full employment, and that the most important problem is to ensure that the competitive process in the short run guides the allocation of resources to maximise consumer welfare.
The author concludes that, in this environment, the promotion of competition may not be as central an economic preoccupation as it was during the first two decades of the 21st century. To the extent that competition law is still useful, we will have to think again about the trade-offs between static efficiency, reallocation of resources through industrial policies, dynamic efficiencies and economic resilience. At the very least, competition authorities will have to take a longer and more dynamic view of the process of competition than they have until now; and adapt their reasoning with respect to state aid, crisis cartels or mergers in circumstances of economic disequilibrium caused by an exogenous shock to the economic system. In the even longer term, competition policy must be better integrated with other economic policies to meet the challenges of the 21st century.
This is a typically wide-ranging piece, which takes the widest view possible, even if in this case that perspective is eminently European – and, may I say so, rather French. For a number of reasons it is not appropriate for me to comment on the content of this piece in detail. It is sufficient for me to say that I think the points raised by the author are valid, even if some of them could be made a bit differently. For example, regarding the interaction between science and politics, I think the point the author is making is that the crisis is bound to change the balance between politicians and experts in the design of public policies, but that is not immediately obvious.
As his concerns regarding human rights, my personal impression is that concerns about privacy and the use of technology have only really arisen where they were already present (i.e. Western democracies). Elsewhere, mainly in Asia, there are vibrant democracies that are much keener to embrace technology and much less anxious about privacy. Those democracies have adopted the measures the author is concerned about without any particular concern arising about rights being infringed. Even where concerns about human rights arise, in this case the matter can conceptually be dealt with in line with the basic constitutional principle that rights and liberties can be abridged in a state of emergency – the real question is how solid the underlying political system is, and what is its ability to return to the status quo when the emergency has passed.
As regards the trade-off between public health and economic outcomes, I tend to disagree with the author. Economic literature shows that pandemics, not the efforts to contain them, cause economic crashes; and it seems that those countries that decided to prioritise the economy have mostly had to adopt the same stringent health policies as elsewhere, potentially at higher health and economic costs.
As regards competition law, I am in broad agreement with the author: I think it will play a minor role in the crisis, and the outcome of the crisis will likely reduce its prominence in public affairs. In the short run, we are already observing interventions against price gouging and greater tolerance of cooperation between competitors (in line with the OECD papers on excessive pricing and cartel crisis I circulated a couple of weeks ago). In the medium- to long-term, I tend to agree with the author as well – after all, two weeks ago I mentioned competitive neutrality and merger in the context of bankruptcies as areas which were bound to come up. However, and unlike the author, I do not think we will have to wait two to three years for these consequences to become apparent. In effect, greater integration of competition law into wider economic policies may be accelerated by the pandemic, but it also strikes me as being the natural development of trends that are already in place – even if at the moment it has taken mostly the form of competition agencies venturing ever further beyond their original/exclusive remit.