How Will Covid Change the World? A Review of History
Venture Capital is a long-term game. It requires having a (correct) view of how the world of the future will look. Crises make this task difficult. They create kinks in the trajectory of history. They shake the foundations of society, accelerating existing trends while bringing underlying tensions to the fore. The world following a crisis is very different to the world that preceded it.
What follows is my examination of the potential long-term impacts of the Covid crisis. I used history as a guide — examining 35 major historical crises to understand how and why these events changed the course of history. In this section, I explore the potential political, economic and social implications of the Covid crisis. Part two will cover the behavioural and technological implications.
Covid — an archetypal crisis
A crisis is defined as “a time of intense difficulty or danger”. By all measures, the world is in the midst of a crisis.
In the US, Covid-19 has killed more Americans than the Vietnam War, Gulf War, Afghanistan War, and Iraq War… combined. The global economy is forecast to shed >$8.5 trillion in GDP over the next two years— wiping out all of the gains of the past four years in the deepest economic downturn since the Great Depression. The world is angry. Polarisation is rife. In the wake of heinous racial injustice, churches have been set alight and statues have been torn down across the world. Internationally, tensions between China and the US (as well as with India and Taiwan) have escalated to uncomfortable levels — with Xi Jinping calling for the military to “prepare for war”.
This feels intensely difficult and dangerous.
A historic moment with an uncertain outcome
The roots of the word ‘crisis’ are thought-provoking. The word is derived from the ancient Greek word ‘krisis’ which was a key term in Hippocratic medicine. It described a turning point in a disease — a fork in the road, marking either the beginning of a recovery or the onset of death.
So… we are in the midst of a significant moment. However, the outcome is fundamentally uncertain. The world will change forever. The jury is out on whether this will be for better, or for worse.
History repeats itself
How can we navigate through such uncertainty? Fortunately, history is a valuable teacher. At Rooks Nest Ventures — we firmly believe in the concept of historic recurrence — the view that history repeats itself through patterns of cause and effect.
I used this approach to better predict the long-term outcomes of this current crisis. I analysed 35 historic crises — from the Black Death to the Suez Crisis — in an attempt to identify common themes. While these crises had many notable differences, I found that their effects could be clustered into five categories.
Historically, crises have:
- Changed the established political order (Part I)
- Caused and/or contributed to international conflicts (Part I)
- Changed the socioeconomic order (Part I)
- Caused persistent behavioural changes (Part II)
- Accelerated the adoption of certain technologies (Part II)
I used this ‘framework’ to reflect on the current crisis. In what follows, I explore a range of potential second-order effects for each theme.
TLDR; I’ve summarised my predictions in this table:
Crises change the political order
Crises have historically led to changes in the domestic balance of political power. This has ranged from democratic regime change to the total overhaul of established political systems.
Changes in income or wealth often lead to political instability
Crises frequently lead to significant changes that alter a segment of the populace’s economic position. This rebalancing is often a zero-sum game — and the losers in this game are often not happy about it.
For example, the Black Death is often ascribed as being one of the key contributors to the collapse of feudalism in Europe. The pandemic led to a drastic reduction in the size of the workforce, with several European cities losing up to 60% of their population. This made it harder to find workers to plow fields and harvest crops, leading to a marked increase in wages for the working peasants. In England, in order to defend their financial interests, the Lords enacted the Statute of Labourers, which capped the wages of workers. This heightened antagonism between the working class and the aristocrats in the proceeding years — ultimately culminating in the Peasants’ revolt in 1381. The Revolt was the first time that the peasants had joined together in order to achieve political change — and is seen by historians as the beginning of the end for the feudal system in England.
Economic frustration can also manifest itself in a fragmentation of the political landscape. Typically, this has led to extremist parties gaining popularity. The biggest beneficiaries of this in modern history have been far right parties. Since 1870, they have seen an increase in their vote shares of ~30% relative to the pre-crisis level in the five years following a systemic financial crisis.
The most popular manifestation of this in modern history was the rise of Nazi Germany as a result of WWI reparations and the Great Depression. Deteriorating economic conditions in the 1930s fostered anger and fear amongst the population. They sought scapegoats for the extreme hardships brought about by the crisis. This helped Hitler to find an audience for his antisemitic and anticommunist rhetoric that depicted Jews as the cause of the Depression. Fear and uncertainty about Germany’s future also led many Germans in search of the kind of stability that Hitler offered.
More recently, following the Great Recession, there has been widespread political fragmentation in Europe. Parties on the extreme right such as Front National in France or Golden Dawn in Greece have enjoyed major electoral successes. Populist or Eurosceptic parties such as the Five Star Movement in Italy, Podemos, the party of True Finns, UKIP, or the Alternative for Germany posted surprising success during recent elections — at the expense of their established centrist counterparts.
Political incumbents are blamed for causing or mishandling the crisis
Another reason that crises lead to changes in the political order is blame. By definition, crises create intense difficulties. Intense difficulties are easy to mismanage. Mismanagement leads to blame. This blame can lead to governments being overthrown.
For example, following the Great Recession, Greece came perilously close to defaulting on its sovereign debt, which reached >170% of GDP in 2011. The response of the government was to enforce sweeping austerity measures. The result of this was a severe recession that lasted for over 5 years — one of the longest recessions of any advanced economy (including the US Great Depression). There was a dramatic increase in unemployment and homelessness that still persists today.
This crisis led to a widespread loss of confidence in the government, sparking an early election. According to a poll in February 2012 the governing party PASOK — which won the national elections of 2009 with 43.92% of the vote — saw its approval rating decline to 8%, placing it fifth after centre-right New Democracy (31%), left-wing Democratic Left (DIMAR) (18%), far-left Communist Party of Greece (KKE) (12.5%) and radical left Syriza (12%). The two-party system which had dominated Greek politics for over 30 years collapsed in the double elections of 6th May and 17 June 2012, with a coalition government formed between New Democracy, PASOK and DIMAR.
In the context of the current crisis, I believe that political changes could manifest in the following ways:
1) The disintegration of the European Union
2020 may prove to be a decisive turning point in Europe’s move towards disintegration. The EU has faced four internal crises over the past decade —the debt crisis, Russia’s annexation of Crimea, the migrant crisis and most recently, Brexit. Each of these crises have brought into doubt the long term prospects of the European system. Covid-19 could well be the latest addition to this list.
Member states have mostly responded to the pandemic and its economic fallout in isolation. Internal border controls have been introduced (temporarily) between countries. Local inquiries are now questioning whether stronger border controls at the outset would have slowed the virus’ spread in its early days — threatening the very essence of the Schengen Area. All of this threatens the unity that the Union is supposed to represent.
While the fallout from Covid may not immediately lead to instances of ‘full’ disintegration such as Brexit, we may begin to see nation states pursuing ‘partial’ disintegration. This would consist of member states refusing to comply with EU rules on specific issues — such as public finances or the Schengen. In May, for example, Germany’s top court ruled that the European Central Bank’s (ECB) mass bond-buying programme intended to stabilise the eurozone was in violation of the German constitution. This was a historic moment — with Germany bringing into question the ECB’s independence and sovereignty — setting a precedent that places national legislation above that of the ECJ.
Other nations may follow suit. Currently, the ECJ is in a legal standoff with Poland and Hungary over their alleged failure to abide by commonly agreed decisions and democratic standards. These nations are already using the German precedent as an argument to defend their national sovereignty over the wishes of the ECJ.
These partial forms of disintegration undermine the very foundations on which the European system was built. I fear that Covid-19 will add further fuel to the pervasive isolationist ideology that has swept the continent over the past decade.
2) An increasing number of weak or failed states
In many fragile countries, prolonged periods of unrest and/or corruption have left health systems under-prepared to deal with the current outbreak. Libya has seen an outflow of foreign medics during the war, which has left its health system highly vulnerable. In Venezuela, tensions between the Chavista government and the opposition have created a similar vacuum. In Iran, a slow and inadequate response by the government has caused major disruption in an already economically fragile state. Meanwhile, in Gaza, where the healthcare system was already struggling to serve its dense population, the government is under severe pressure to prevent a system wide collapse.
The risk of these failed states is exacerbated by a growing resistance across the developed world to accept refugees. This trend is likely to continue — in part due to a perceived risk of importing disease, but more likely, due to a hostility towards accepting immigrants during a time of significant unemployment. This has historical precedents. For example, during the Great Depression, the majority of Americans opposed increasing immigration to the United States, citing economic concerns. President Herbert Hoover enforced the “likely to become a public charge” (LPC) clause from a 1917 immigration law. This clause was designed to exclude any immigrant who lacked the economic means to be self-sufficient and who could potentially become a financial burden on the state.
The combination of these factors may result in even more weak or failing states. Aside from the devastating humanitarian cost of this, I worry that this could further de-stabilise the already fragile Middle East — creating a fertile breeding ground for extremists groups to thrive.
Crises lead to international conflicts
Throughout all of recorded human history, only 10 percent of humanity’s time on earth has been free of war. Crises are often the catalyst for these international tensions.
The Black Death is cited as prolonging the 100 years war between England and France. Although the war had already begun in 1337, many scholars suggest that it lasted as long as it did due to the economic benefits that it afforded the noblemen — who were financially squeezed as a result of the plague.
In the 19th century, severe recessions frequently preceded wars. For example, shortly after the 1797’s economic deflation, a war erupted between the US and France (1798 -1800). The war between US and Great Britain in 1812 came soon after the depression in 1807–1808. Meanwhile, the long depression of 1873–1879 arguably laid the foundations for the Spanish-American war, and subsequently, the First World War.
More recently, during the Great Depression, US President Hoover signed the 1930 Smoot-Hawley Tariff Act, intended to protect American workers and farmers from foreign competition. In the subsequent five years, global trade shrank by two-thirds. Within a decade, World War II had begun.
I expect the current crisis to escalate existing international tensions in the following ways:
1) US-China decoupling
U.S.-Chinese relations have been deteriorating for years. Just before the outbreak, the two nations had begun to alleviate a two year trade war with the unveiling of the so-called “Phase One” trade deal. However, the pandemic has significantly diminished the prospects for cooperation — adding a new dimension to long-standing frictions.
In Washington, many hold the Chinese government responsible for the spread of Covid. They point to weeks of cover-up and a failure to promptly initiate a lockdown. Trump has publicly smeared China by persistently referring to Covid as the “Chinese Virus”. Contrastingly, China’s Communist Party are using their supposed relative success in dealing with the virus as international propaganda — using this as an opportunity to expand their influence globally.
The idea of “decoupling” the two economies had already gained traction within the Trump Administration, even before the pandemic. Many in Washington pointed to the long-term consequences of an over dependence on a country with a spotty track record of espionage and IP theft.
Post-Covid, the motivation to separate the two economies will continue to grow. The value of newly announced Chinese direct investment projects into the US fell to just $200m in the first quarter of this year, down from an average of $2bn per quarter in 2019, $2.7bn a quarter in 2018 and ~$8bn a quarter in the 2016 and 2017. Lawmakers are already debating a series of measures to further separate the two nations — including bans on sensitive exports, additional tariffs on Chinese goods and a forced re-shoring of US companies. Within the private sector, there will be a renewed focus on protecting supply chains from future disruptions — stimulating the motivations for re-nationalisation.
I believe that a de-coupling would be a net negative for the world, worsening global economic growth prospects and markedly de-stabilising international relations. However, I also fear that we have reached an irreversible stage in the de-coupling.
2) A ‘post America’ world
One notable characteristic of the Covid crisis has been the marked lack of US leadership. I believe that this could be the catalyst that accelerates the decline of American hegemony.
Since the end of WWII, the U.S. has been the central player in the international system. During the Cold War, it successfully rallied the world under the shared goal of tackling communism. It led the creation of international organisations such as the UN, NATO, the IMF and the World Bank. It was essential in orchestrating global agreements on trade, climate change, regional security and arms control. Americans were at the epicentre of the so called “rules-based international order.”
However, the US’ influence on the international stage has been declining since the end of the Cold War — a trend that has accelerated over the past two decades. Not the decline of American power — the country remains economically and militarily dominant — but a decline in its desire and capacity to use that power to influence global affairs.
President Obama led a pullback from Afghanistan and the Middle East. President Trump has essentially ended the U.S. presence in Syria, and is seeking to do the same in Afghanistan. Perhaps most significantly, he has shown little interest either in forming alliances or in preserving the US’ traditional leadership role in the face of international issues. His stance on the World Trade Organization and the World Health Organization are both case in point.
Simultaneously, the power of other countries has grown, giving them both the ability and the desire to effect global affairs independently of U.S. desires. China and Russia, now significant economies on the world stage, contend the US’ position at the centre of global affairs.
This is more than just a self-inflicted choice by the US. Globally, there had already been a meaningful decline in the appeal of the ‘American dream’. Critics point to repeated cases of gun violence and school shootings, racial injustices and police brutality, economic mismanagement (2008 global financial crisis), and the growth of populism within Washington. American ideology is growing increasingly unattractive for many. Indeed, Gallup’s pollsters reported that worldwide approval of U.S. leadership plunged from 48% in 2016 to a record low of 31% in 2020. This drop places the U.S below China’s 34% — leaving Germany as the most popular power with an approval of 39%.
This trend has been particularly pronounced in the current crisis. The US has not been at the centre of a collective effort to address the virus and its economic effects. In fact, the US has in many ways been a good exemplar of how not to handle the crisis. Its response has been slow, incoherent and divided. This was perhaps best captured by Trump’s call to inject disinfectant as a potential cure — a blatant demonstration of why post-truth populism cannot be used to tackle global crises. In my view, this will reinforce the increasingly widespread perception that the United States has lost its way.
Crises change the socioeconomic order
Crises often create winners and losers — rebalancing the socioeconomic order. This can have severe political, economic and cultural ramifications.
Interestingly, most recessions tend to reduce income inequality. One study found that business cycle recessions decreased inequality in more than fifty percent of counties. In the Great Depression, income inequality rose significantly in the lead up to the stock market crash, but fell sharply after that, and remained at a historically low level from the 1940s through the 1970s.
The Great Recession is a notable exception to this trend, however, with income and wealth inequality widening sharply in the subsequent years. Studies have shown that those with a lower socioeconomic status were the worst impacted by the recession. One study found that 55% of Americans “lost ground” during the Great Recession (based on various hardships including unemployment, missed rent/mortgage payments, and reduced income), whereas the remaining 45% remained largely unscathed. The fraction suffering multiple hardships were those with the lowest education, income, and wealth. Similarly, another study reported that, during 2007–09, more than 60% of families experienced a decline in wealth and one-quarter lost more half their wealth, but another quarter of Americans gained more than 25% in terms of wealth. Those with higher income and more wealth in 2007 were less likely to experience a subsequent decline in wealth.
In my view, the current economic downturn will be more akin to the Great Recession, resulting in the following effects:
1) Widening economic inequality
Global lockdowns have resulted a collapse in economic activity. In the US, 30 million Americans filed for unemployment benefits in May. It took about a year to reach that number in the wake of the Lehman Brothers’ bankruptcy. Meanwhile, nearly a third of U.S. apartment renters didn’t pay any of their April rent during the first week of the month.
The UN’s Framework for the Immediate Socio-Economic Response to the COVID 19 Crisis warns that:
“The COVID-19 pandemic is far more than a health crisis: it is affecting societies and economies at their core. While the impact of the pandemic will vary from country to country, it will most likely increase poverty and inequalities at a global scale.”
I believe that there are several reasons for this widening economic inequality.
Firstly, as was the case in the Great Recession, I expect the unprecedented levels of monetary stimulus to disproportionally benefit those with high levels of financial asset ownership. Put very crudely, monetary stimulus measures such as quantitative easing (QE) promote large increases in financial asset prices, while driving down returns to middle class savers who have cash in the bank. While these monetary instruments are essential in economic recoveries, the biggest beneficiaries of these price rises in the Great Recession were those with substantial asset ownership. As such, the wealthy got wealthier, widening inequality between the ‘elite’ haves and the ‘ordinary’ have nots.
Secondly, I expect future austerity measures to widen inequality. The IMF has recently warned that global debt is at unmanageable levels — with debt levels the highest they have been since WWII. A deleveraging will be necessary at some point in the near future. Historically, such austerity measures have had a disproportionate impact on lower income households.
Thirdly, school closures have disproportionately affected low-income families. In the UK, school closures have had a heavy impact on families who rely on free school meals. Meanwhile, working parents in low income families have been straddled with (relatively) higher childcare costs. There also exists a wide disparity amongst populations with a higher income who are able to access the technology that can ensure education continues digitally during social isolation. The long-term impact of school closures is yet to be seen. However a study of a one week closure of schools in Taiwan during the 2009 H1N1 outbreak found that 18% of families lost income as a direct result — with disproportionate affects on the poorest.
Meanwhile, lockdowns and social distancing are disproportionally impacting lower income workers. Sectors already heavily affected have typical weekly pay of £320, compared to £455 for the economy as a whole. Less than one-in-ten of those in the bottom half of earners say they can work from home, making it much harder for them to protect their incomes in the face of social distancing measures. Those in the most at-risk sectors and occupations also have less to fall back on, being around 25 per cent more likely than average to live in families with no savings at all.
I believe widening economic inequality is a major problem, and would hope that governments take strong action to prevent a repeat of the Great Recession. Research on inequality points to worrying medium-term effects such as increasing economic instability, crime and deteriorating health standards.
Inequality can be especially dangerous when the world is in a fragile state — as it is today. Two contrasting historical examples highlight this truth. In Athens, in 594 BC, due to considerable levels of inequality, the lower classes began to plot a revolt. Solon, an Athenian noble statesman was elected to reform the system. He devalued the currency, reduced debt and improved the economic conditions for the most economically disadvantaged. This ultimately averted the revolution. Contrastingly, when the Roman Senate refused to redistribute wealth at a similarly critical juncture, Rome was ravaged by a class civil war that went on from 133–30BC. This stratification of society was a key contributor to the ultimate collapse of the Roman SPQR.
This was not unique to Rome. Inequality has played a key role in the collapse of other civilisations — most notably the Han and Gupta empires. I hopes that we can avoid a similar fate.
2) Growing support for populist parties across the world
Populist ideology has seen a surge of support across the world since the Great Recession. High profile manifestations of this in recent years include the election of Trump, the Brexit vote, the electoral successes of Italy’s Five Star Movement and Alternative for Germany and the election of right wing President Jair Bolsonaro in Brazil. In 2018, 20 populist leaders held executive offices around the world — a five fold increase since 1990.
I believe that Covid-19 will only increase the support for populist ideologies across the world. I see this as the result of three interrelated consequences of the current crisis:
- Economic uncertainty — We are in the midst of the deepest recession in modern history. Fears over the economic implications of a second wave of infections has dampened business confidence, subduing investment, potentially leading to a prolonged period of unemployment. Studies have shown the positive correlation between economic uncertainty and populism.
- Socioeconomic inequality — the causes of which have been discussed above. The relationship between the two factors is discussed here.
- Nationalism — I see the growth of nationalism as a combination of (i) protectionism and anti-immigrationism in the face of high unemployment; (ii) re-nationalisation as states and firms seek to reduce future supply chain vulnerabilities.
I worry about the consequences of a further growth in populist movements across the world. Specifically, I fear that a continued distrust in institutions (especially the media and the judiciary) — will push us further into a post-truth world. I worry that rising political polarisation will lead to civil unrest and potential human rights abuses. Above all, I worry about the impacts that populism will have on de-democratising the world.
Concluding thoughts
Covid-19 has accentuated a number of trends that have been materialising for decades — isolationism, populism, widening inequality, and an increasingly unstable international stage.
However, it is not too late. This crisis presents a fork in the road. We still have a choice as to which path we decide to tread. By opting for global cooperation, and by ensuring we provide support to the most economically disadvantaged in society, we can avoid a lonely, hostile and destitute outcome.
I will be publishing part two of this essay next week. In this, I will explore the behavioural and technological implications of the Covid crisis.
