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12 January, 2022

Dalia Marin: “I don't think we can see the recovery so soon in 2022, as the international organizations expect it”

The Ukrainian Week met with Dalia Marin, Professor of International Economics at TUM School of Management, Technical University of Munich to discuss the pandemic impact on the economy, opportunities for Ukraine and challenges of influence of fourth technical revolution

Some people tell that crisis is always combined with opportunities, or opens opportunities. Do you see any of such opportunities due to COVID-19 pandemic for Ukraine?


- Yes, I think so. One opportunity for Ukraine to recover from this crisis is definitely to invest more in technology, in particular, in robots so that can be used in the manufacturing, industries. And you can gain productivity if you do it wisely. Actually, this is what high-income countries have been doing. Now, when the pandemic came, those firms, are able to reshore production back to home, because the labor cost does not matter that much anymore. And therefore, they could produce in a high-wage country like Germany, so Germany was reshoring production back from China. This is what some of the other emerging European countries have done. They have more robots per thousand workers than the United States of America. 


How long will last current Coronacrisis for economy? 


- COVID-19 has transformed the world economy because rich countries reshored back to Europe. This is also true for the United States. This is going to lead to more disruption that is known so far. There is a discussion among international organizations, like OCD, like IMF and so on that, after the pandemic, we will see a V-shaped recovery. So it goes down 2020, it goes up in 2021. I'm skeptical about this because we know other natural disasters that happened, like for instance in Japan, in 2011, when it was this big earthquake. Researchers have found that this earthquake has lowered GDP growth in Japan in the next year by half a percentage point. In Germany now, with the pandemic, the IFO institute which is forecasting institute based in Munich they have revised their forecast for this year by a whole percentage point. So I think it's very disruptive because this pandemic has an economy-wide effect. If magnifies from one firm-to-firm relationship, from one business-to-business relationship to other businesses, it transplants itself forward. And because of this disruption, I don't think we can see the recovery so soon in 2022, as the international organizations expect it. Because, first of all, the disruption in supply chains is stronger and so, therefore, the impact has to be bigger.

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Which economies were better prepared for the impact of the pandemic? And who can recovery faster?


- I think those economies, who have been successful in vaccinating their populations, those economies are doing much better. And the other thing, it's very striking when you look at IMF world economic outlook, which does the forecasting of which economies are going to do recover fastest. There are two things that drive it: vaccination and public support and expenditures by the government. And they are related because if the government has big expenditures, it helps to vaccinate the economy. And in Germany, for instance, what the government did is helping to keep workers in their workplaces. Because of that, there was no such high unemployment rate as you saw in the United States. So the government with public support played a big role in the pandemic. And so the reason why I'm not so optimistic for emerging economies in even Ukraine is that public support is already withdrawn. Maybe it's too early to withdraw it right now.


Earlier, many economists promote globalization. Pandemic shows the vulnerability of such approach, especially because of the disruption of supply chains. Is the times of globalization over? Do you think more closed and nationally oriented economy is a better answer?


- I believe that globalization is the major driver of how low-income countries have become richer. We know that international trade was a driving force for the reduction of poverty. Globalization has been good for the poor. If you look at China, the poverty reduction has been dramatic. So globalization is actually good for economies to become from low-income to at least middle-income. 

Now, it has become more questionable because of the firms that did it. Why do firms do these global value chains? The reason why they did is that the wages in China, for instance, they are much lower than the wages in Germany. And this wage differential meant that firms could save on labor costs. But, at the same time, they had to take into account what the transport costs are. Because they had to ship from China back to Germany. Now what happened now is that you have this uncertainty shock and you don't know whether you can get the input from China. But at the same time, the shipping cost from China to Germany, has increased tenfold this year. Because there were lots of disruptions in the container costs. So that makes the business model of producing in supply chains unprofitable, basically. Because the wage differential between China and Germany is eaten up by the high transport costs. So it's the reason why firms reshore. 

But I have to say that globalization is in retreat, already since the financial crisis. There was the period after the fall of communism, after the fall of the Berlin wall, and up to 2008, the start of the financial crisis. That was a period called hyperglobalization. In this period the supply chains exploded. That happened due to opening up the Eastern European countries and entry of China to the world economy. That opened up these locations with low labor cost, so firms in the rich countries started to produce there, they moved production to these regions: to China and Eastern Europe. Then came the financial crisis. With the end of it, the expansion of the global value chains stopped. And I find in our research why have these supply chains stopped. We use a World uncertainty index, that measures how firms and households perceive certainty. It's an index that was developed by researchers at Stanford University and it goes into texts of economic journals, newspapers, and it looks up, how often is the word uncertainty comes in the text. I have found that after the financial crisis, between 2008 and 2012, this index increased by 200%. That was the European debt crisis in 2012. 

With the global financial crisis, everything changed, maybe countries are going to become more protectionist. They don't get inputs as cheaply anymore because of tariff costs on the borders. So they started already to rethink their strategy of producing in supply chains. We already saw after the financial crisis, that these supply chains did not expand anymore. We are estimating the model, what will come now with the COVID-19 crisis, and predicting, that supply chains are going to decline by 35%. Because the uncertainty index is rising by 300%. But this did not include the recent increase in transport costs, so probably it's going to be even more than this 35%.


Is there a chance for Ukraine to be a country where some firms from Europe can reshore their production?


- Ukraine was a very attractive location for global value chains before the pandemic. The reason why it was very attractive it's because of the talent pool that your country has. Ukraine was a skill-rich country. After the fall of communism, it had more academic people in percent of the population than Germany. So you would expect that Ukraine gets all the supply chains? But it didn't. And the reason why it didn't is just that people had a hard time doing business in the country. It's also true for Russia actually, because corruption is high and these things matter. So if the business wants to come here to produce, it's not only important how cheap the labor is or how many talented people you have, but it's also how high the corruption is. And the winning country was not Ukraine. 

The countries that were winning were Poland, Slovenia, Slovakia, Chech Republic, Hungary. These were the countries someway similar to Ukraine, but who could effectively fight corruption and make the reforms. These reforms helped these countries to become attractive locations for foreign direct investment. And that didn't happen in Ukraine. But now Ukraine has a chance, to use now this situation that firms are reshoring from Asia. It's not only China, it's also Asia: India, Vietnam, Taiwan, and so on. And Ukraine is a high-tech place. It has highly technically skilled people. That's comparable with India. So, when the rich countries try to think about what other places could diversify to, Ukraine would be a place, because it's attractive from the pool of workers it has and it has a close border to the European Union. So the transportation cost is low and less likely to be disrupted. What is also important - the tariffs on the border are low. So, if the country can make progress in reducing corruption - it will be a first candidate for that. 


Are there any effective means to develop national champions? 


- When you are looking at a Korean success story (that actually China is imitating). The Korean economy has done an industrial policy. It subsidized the winners, specifically. Now, we have these tech sectors and they are based on learning. You have to learn and by learning you reduce your costs, this effect is very important. And learning only happens by producing a lot. The economy of skills means the more you produce - the lower your costs. And learning is the same. The more you produce, the more you learn - the lower your costs. Learning is not only benefitting an individual firm but the whole economy. Because it spills over to other firms. So subsidizing a firm with learning effects is a way for these firms to reduce their cost and become competitive. In Korea, they have been successful in doing that, so now China is copying it. The Chinese are supporting and subsidizing all this digital economy, which is very much based on the learning effects.


Do you see any signs of the next global economic crisis coming? 

- People are worried that this might happen in China. China is today so big that, if that happens there, it will affect everybody. My guess is that if it's really getting there dangerous, the Chinese government will step in and will prevent it from happening. Because the Chinese government steps in all the time. They have experience in doing this, at the moment they don't do it because they try to constrain the power of big tech firms. 


What could be the challenges and opportunities of the upcoming fourth technical revolution?


- We have research by American economists on this. They have looked at the United States. USA is the frontrunner in this technology. And what they found is that in the last 30 years this technology has been replacing workers, taking away the jobs from workers. But it hasn't created new jobs. While in past revolutions from the 70s to the 80s, or the 60s to the 80s, mid-80s, while you looking at that period, new technologies had an equal impact on how much they automated the workforce, how much they took away jobs from the workers and how much it created new jobs. It was on balance. Now, for the last 30 years, this is not anymore true. And that is the potential for big polarization in an economy and even for some social crisis. Another big challenge is the lack of privacy. These new technologies are so intelligent, they can even read your emotions. This is a big challenge, that we might get the overcontrolled society. Maybe not now, but in the next 10 to 20 years. 

Same time there is a problem with productivity. We are living in a time of revolutionary technologies, but productivity isn't increasing!

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- What's wrong with that?


- This is a productivity puzzle! Part of the reason is that technologies are just replacing workers with a machine, but they're not using the potential of the technology to create new things. For instance, in education, which is my field. Artificial intelligence allows you to have an individual style of teaching. You could be much more successful in education by using this technology. But this is not happening. We have created the internet, we create platforms like Zoom, but still, the teachers teach in the same way as they used 50 years ago. 



Dalia Marin is Professor of International Economics at TUM School of Management, Technical University of Munich. She was Professor of International Economics at Ludwig-Maximilians University of Munich (1998 – 2017), Associate Professor at Humboldt University Berlin (1994-1998), and until 1994 Assistant Professor at the Institute for Advanced Studies, Vienna. She has been Visiting Professor at Harvard University (2002-2003), (2011-2012), Stern School of Business, New York University (2007-2008) International Monetary Fund (2002), National Bureau of Economic Research, Cambridge, Mass (2002), Wissenschaftszentrum WZB Berlin (1995), European University Institute, Florence (1994). She is a Senior Research Fellow at BRUEGEL, Brussels, a European Think Thank on Economic Policy in Europe, Fellow at the European Economic Association, Research Fellow at the Centre for Economic Policy Research (CEPR), London, Member of the Panel of Economic Policy (2010-2012). She has been Team Leader at the Russian European Centre for Economic Policy in Moscow and has acted as a consultant for the European Commission, the European Bank for Reconstruction and Development (EBRD), London and the International Monetary Fund, Washington.

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