‘The clock is ticking for economic transformation’

Baku, July 14, AZERTAC

30 years ago, when the Soviet Union collapsed, the world’s leading economies designed the current global economic system conforming to the new situation to harmonize the economic and political processes. Undoubtedly, within this period, new rules stimulated the emergence of new players. In this context, according to free-market economy principals, countries and companies have formulated their industrial and trade strategies globally, to gain a competitive advantage. Subsequently, as time went on the orientation of the flow of production facilities shifted towards the East, especially China. One crucial factor that has conditioned the change in the orientation was the situation at the labor market in the mentioned regions, which was allowing the firms a tremendous advantage by cost reduction for the labor activities.

All parties enjoyed a longstanding win-win situation until the COVID-19 pandemic. Namely, due to the preventive behavior of individuals and the transmission control policies of governments, such as the closure of the borders, a sharp slowdown in the global economic activities was predictable. Nevertheless, the consequences of the pandemic are delivering a significant universal shock due to a very high degree of interdependence between economies. As mentioned beforehand, the creation of transnational value chains and the design of production strategies globally has led to a catastrophic situation during the pandemic. Undoubtedly, the segmentation of the business processes on a geographical basis, relevantly to factors like infrastructure, legislation, and market size was generating an immense advancement in the post-pandemic period. For instance, Apple is supplied by 200 major subcontractors in 24 countries, most based in China (39%), Taiwan, and Southeast Asia (23%) or Japan (16%). Its subcontractors also provide raw materials and components on the global market. Given that fact, the majority of the worldwide firms which operate in electronics, household appliances, automotive, and apparel sectors are utilizing the same strategy as Apple does, then it means in the current environment erstwhile chance became a curse. Moreover, cataclysms are triggering a global economic crisis in the short run. According to the World Bank, there will be a worrying decline of %5.2 in the world’s GDP and 70 million people will face impoverishment at the end of 2020. Although it is known that various economic models can be employed to model the consequences of pandemics, the imponderable economic dimension of the pandemic and nonsystematic risks that accompany the processes make things extremely sophisticated and requires a comprehensive approach.

Times of upheaval are always periods of radical change. It appears that in the light of the colossal harm caused by the pandemic, a total recondition of the global value chain systems is inevitable. However, within this process, it shall be considered that crises do not automatically produce the right recipes against them. Therefore, governments and firms will try to build resilient regional systems to reduce the extent of exposure by exogenous factors. This might underline the topical issue of “self-sufficiency” with respect to food and health security. The used term of “self-sufficiency” in the stated sectors not only implies the supply of sufficient products, further it refers to the prevention of the penetration by the external elements in technologically sensitive sectors, as the mentioned ones are. In the regional digitalization context, contrary to popular belief, the tendency of localization would not be restricted with the boundaries of the countries. It will stimulate the accumulation at the regional alliances and unions for the sake of mutual economic interests, as the global interdependence would best be diminished in this way. At the current uncertainty, we can only speculate as the economic transformation will significantly affect the globalist economic mechanisms and institutions due to the inadequacy of them on risk and crisis management.

Albeit the prevalent uncertainty, the intellectual inhabitants of the planet will intend to generate sustainable solutions for the crises, specifically for the economic ones. This notion will play a pivotal role in the process of transformation as the condition in the post-pandemic era will require new players and new ideas, as it did before. From my point of view, in the subsequent phases, we will observe rapid developments in the formulation of robust economic mechanisms particularly, in industry and supply chain. Nonetheless, the entities will succeed to orient the processes in the direction that would serve to common interests.

Nijat Muradzade

Bachelor student of Istanbul University

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