Long Read

COVID-19 and the International Political Economy

“It was a storm in a tea cup, but in politics we sail in paper boats.”

Harold Macmillan

Old Etonian Harold Macmillan described how sensitive politics can be even in the best of times.  But these are not the best of times.  How will our ‘paper boats’ withstand the current tempest?

The global COVID-19 pandemic has presented the world with one of the greatest political, ethical and economic challenges in modern history with the global economy expected to lose $9 trillion – “the worst in centuries”.  How can political economies both save their populations as well as their economies from the global COVID-19 pandemic?  This essay will explore this question through the comparative lens of the international political economy.

The political problem of mankind is to combine three things: Economic Efficiency, Social Justice, and Individual Liberty.”

John Maynard Keynes

The wisdom of another Old Etonian, the 20th century’s most influential political economist, John Maynard Keynes, is as important today as it was nearly 100 years ago before another of capitalism’s great crises, the Great Depression:

The ‘Political Superstructure’ and the ‘Economic Structure’

“These relations of production constitute the economic structure of society, the real foundation, on which arises a legal and political superstructure.”

Karl Marx

Political economist, Karl Marx, saw the ‘political superstructure’ in a society both creating and created by the ‘economic substructure’ or ‘base’ in a mutually reinforcing feedback as shown in the figure below.

Figure 1: Marx’s Model of Capitalist Society

In order to understand the political causes and consequences of the COVID-19 pandemic, I therefore use a framework in the comparative international political economy, called ‘Varieties of Capitalism’ which is rooted in the base of society, its economic substructure.

Varieties of Capitalism

The international political economy can be characterised by a typology of varieties of capitalism (VoC) based on their institutions (e.g. capital and labour).  These institutions in turn provide the framework within which varieties of political parties emerge representing both the Right and the Left.  At a macro-political level, right-leaning political economies are known as Liberal Market Economies (LMEs), while left-leaning political economies are known as Coordinated Market Economies (CMEs).

Capital in LMEs is ‘impatient’ and seeks to maximise returns to shareholders in the short term, while in CMEs it is relatively more ‘patient’ and seeks to maximise returns to a broader set of stakeholders in the long term. Labour in LMEs is concerned with ‘flexibility’ while in CMEs it is concerned with ‘commitment’. 

VoC’s institutions reinforce each other as ‘strategic complementarities.’ For example, the LMEs’ impatient capital reinforces the need and ability to have flexibility in the labour markets, while the CMEs’ patient capital reinforces the need and ability to have commitment to the labour markets.  Essentially LMEs are short-term and individual-focused, while CMEs are longer-term and community-focused, as summarised in the figure below.

Figure 2: Varieties of Capitalism Typology
Adapted from Hall, P. and Soskice, D. (2001) and Piepenbrock, T. (2009).

Varieties of Pandemic Performance

“People in Korea they are willing to compromise their privacy to some extent for the sake of the greater good, for the sake of public health.”

Enna Park

The figure below shows the number of COVID-19 deaths per capita for the weighted average of LME nations and CME nations measured from the day of each variety of capitalism’s first recorded death.

Figure 3: COVID-19 deaths per capita over time for LMEs and CMEs
Graph generated using data from “Our World in Data”, by Roser et al.

The most striking observation is that LMEs have experienced on average 31 times more deaths per capita than CMEs.  Furthermore, the CMEs’ relatively low deaths are even more noteworthy given that more time has elapsed since their first recorded deaths than for the LMEs.  Both the larger magnitude of deaths and the shorter time period over which they occurred makes the LME death rate much higher than the CME death rate.

“If some Western democracies squandered it [COVID-19], that shows how their system of government is inferior to China’s own.”

The Economist

Mixed Market Economies: ‘Stuck in the Middle’

While LMEs and CMEs represent the extremes of the political-economic spectrum, there are also ‘Mixed Market Economies’ (MMEs) which lie along this continuum.  Examples of MMEs include Italy, Spain and France.

MMEs can be said to have strategies which focus on neither the full ‘flexibility’ of the LME, nor the full ‘commitment’ of the CME.  Strategy theorist, Professor Michael Porter of Harvard believes that such mixed strategies are ‘stuck in the middle’ and their performance can be worse than either of the extremes.  Hall and Soskice suggest that such MMEs should be less efficient and yield poorer economic performance than the more coherent polar types.

As shown in the figure below, the weighted average of the MMEs’ deaths per capita underperform the weighted average of both the LMEs and CMEs.  Not only are the total deaths per capita higher in MMEs than in LMEs or CMEs, but the MMEs’ deaths per capita have increased more rapidly (based on the steeper slope of the curves).

Figure 4: COVID-19 deaths per capita over time for MMEs, LMEs and CMEs
Graph generated using data from “Our World in Data”, by Roser et al.

Varieties of Politics

Having briefly explored variance in COVID-19 performance between VoCs, I will now turn to variance within a VoC, using LMEs as an example.  The UK, the lowest-performing LME, has a per capita death rate that is almost 150 times worse than the best-performing LMEs (New Zealand and Australia) as shown in the figure below.  As all three LMEs are islands, we must look for another explanation for their performance variance, other than geographic isolation.

Figure 5: Comparing LMEs’ deaths per capita
Graph generated using data from “Our World in Data”, by Roser et al.

While the institutional structure and culture of political economies in the VoC framework appear to offer a primary explanation for variance, each nation within a VoC also has its own Varieties of Politics (VoP).  While LMEs tend to be relatively more right-leaning than CMEs, within each LME, there are fluctuating dominant political parties representing the Left and the Right.

For example, it is interesting to note that the three lowest-performing LMEs have rightleaning governments (led by Trump in the US, Johnson in the UK, and Varadkar in Ireland).  Two of the three best-performing LMEs have left-leaning governments (led by Trudeau in Canada and Ardern in New Zealand).  The exception to this pattern appears to be the right-leaning Morrison of Australia, although this might be at least be partially explained by Morrison’s purported Christian-fundamentalist beliefs which places a high value on human life, as well as his embracing of the Trade Union movement in forming policy.

Varieties of Economic Performance

Having briefly described the different varieties of capitalism in the political economy and their performance in saving lives in the COVID-19 pandemic, we can now explore how their expected economic performance has been impacted by the pandemic.

“The costs of inaction in the face of covid-19 are currently greater than the costs of action.”

The Economist

Economists have begun to analyse the impact of COVID-19 on various national economies, with many finding that those who were late or resistant to act decisively, would face greater short term costs as well as long term debt obligations for future generations.  The International Monetary Fund has recently presented its projections for Gross Domestic Product growth rates in 2020 for a variety of national economies as shown in the figure below.

Figure 6: VoCs’ Projected 2020 Economic Growth Rates
Graph generated using data from the International Monetary Fund’s, World Economic Outlook, April 2020.

As can be seen, most CMEs (like China and Japan) are expected to perform better in terms of economic growth rates than are most LMEs (like the USA and UK).  Researchers have shown that LMEs, which are typically known to be the growth engines of the global economy, tend to fare less well than CMEs, the worse the economic environment – as in the case of a pandemic.

Varieties of Trade-offs

When trade-offs exist, for example between saving the lives of citizens and saving the economy, a useful way to think about it is via ‘possibilities frontiers’ which demonstrate the ‘opportunity costs’ in choosing between these options.  ‘Possibilities frontiers’ show what combination of saving lives and saving the economy is possible (i.e. the shading in the figure below).  The objective is to move as far away from the origin as a VoC’s ‘possibilities frontiers’ will allow.

Researchers have shown that VoCs have different shaped ‘possibility frontiers’. LMEs focus on specialization and efficiency and have shorter time horizons.  This tends to create severe ‘either/or’ choices, resulting in a convex ‘possibility frontier’.  CMEs focus on generalisation and equity and have longer time horizons.  This tends to create milder trade-offs, resulting in a concave ‘possibility frontier’ as shown in the figure below. 

Figure 7: VoCs’ Theoretical ‘Possibilities Frontiers’

Theoretically, one would expect LMEs to choose economy-maximisation (i.e. moving up) over death-minimisation (i.e. moving to the right), based on their focus on economic growth, efficiency and favouring capital over labour.  Conversely, one would expect CMEs to choose death-minimisation (i.e. moving to the right) over economy-maximisation (i.e. moving up), based on their focus on social stability, equity and favouring labour over capital. 

When each nation’s death-minimisation and economy-maximisation performances are plotted in this way, clear patterns emerge as shown in the figure.

Figure 8: VoCs’ Empirical ‘Possibilities Frontiers’
Graph generated using data from “Our World in Data”, by Roser et al. and IMF, World Economic Outlook, April 2020.

First, it is noteworthy that as predicted, VoCs appear to have different shaped ‘possibilities frontiers’, with CMEs achieving higher performance on both dimensions simultaneously.  CMEs need not sacrifice as much economic growth in order to save lives – the trade-off is milder than for LMEs.

Second, while most countries are operating at or near their respective ‘possibilities frontiers’, some countries (like the UK within the LME frontier and Germany within the CME frontier) are underperforming relative to the theoretical performance that their variety of capitalism would allow them to achieve.  It is bad enough that the UK’s death rate per capita is among the worst of all LMEs and CMEs, but given this poor social performance, it could theoretically have much stronger economic performance.

Third, as predicted, CMEs appear to be focused primarily on reducing deaths.  The way that they have gone about this (e.g. via early testing, tracing and targeted lock-downs) has resulted in less disruption to their economies.

LMEs (and notably those with right-leaning politicians) initially attempted to keep the economy open, as was exhibited by Donald Trump’s “The cure can’t be worse than the disease.” Boris Johnson’s government in the UK initially considered focusing on the economy and building up ‘herd-immunity’.  However, the initial resolve to prioritise the economy over the health and safety of their populations has been met with political resistance, particularly as people saw successful CMEs like South Korea and Taiwan doing the contrary.  Therefore, belated lock-downs followed without adequate testing and tracing in LMEs.  The data therefore shows that with few exceptions, LMEs’ performance is significantly below CMEs’ on both dimensions as the VoC framework would predict.

Conclusion

Political economist David Ricardo spoke about ‘comparative advantage’ of nations arising from focusing on what they do relatively more efficiently.  Recent political economists have shown that just as LMEs have advantages when economies are growing quickly, CMEs have advantages when economies are growing slowly – as in the case of a global pandemic.

Political economies can save their populations and their economies by finding the appropriate balance of economic efficiency, social justice, and Individual liberty.  The COVID-19 pandemic is an example of economic ‘collective action’ and ‘free-rider’ problems, which are best solved with collectivist political solutions exhibited by CMEs.  It appears therefore that at least for CMEs, the news is not all bad and there are some reasons to be cheerful.

Figure 9: Summary of LME and CME Performance in the COVID-19 Pandemic

Figure 9: Summary of LME and CME Performance in the COVID-19 Pandemic
Graph generated using data from “Our World in Data”, by Roser et al. and IMF, World Economic Outlook, April 2020.

Political scientist Robert Dahl famously said that politics (or power) is “the ability to get things done when goals conflict.” Politics is therefore the art and the science of managing these difficult social trade-offs, both in the short and the long term.  Research into the comparative political economy can shed interesting insights into how this can best be achieved.  I give the last word to Harold Macmillan, a previous captain of a noble LME ‘paper boat’ navigating the political trade-offs of the current tempest:

“To be alive at all involves some risk.”

Harold Macmillan

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