Research paper

The Big Shocks-Crisis that changed the world

Author: Pallav Shrivastava
Research Coordinator, GCTC
Areas of interest: International affairs, macroeconomics, international finance, foreign policy, public policy, climate change and modern history





Four external global big shocks have hit the world: Pandemics, World Wars, Economic crises, and Ecological crises. One can argue that these are very different catastrophes and cannot be compared with each other but they have a lot in common. Pandemics, World Wars, and Ecological crises cause large-scale deaths. 65 million people died in the Spanish Influenza of 1920 and World war 2 each. All the big shocks create huge economic crises as billions and trillions of dollars are lost and economies contract. The world economy contracted by 4.4% due to covid-19, the biggest decline since the Second World War with a far stronger contraction than the 1.7 percent recorded in 2009 during the global financial crisis [1]. In case of a war, capital is diverted to military expenditure, putting a hold on other priorities. In case of a pandemic, capital and resources need to be diverted in the pandemic response and lockdowns have huge economic costs. In case of an economic/financial crisis, people lose their savings, assets. All the big shocks at best lead to a recession or at worst, lead to depression. All the big shocks lead to significant political and social changes. Many blame the great depression for the rise of Fascism and Nazism in Italy and Germany, World War 1 for the Bolshevik Revolution, the decline of the Byzantine Empire after the Black Plague, and many instances [2]. Surprisingly, there are many things common among the Big shocks.


No country in the world can claim that it is prepared for big shocks. The covid-19 Pandemic is the most recent example. Developed countries like the USA, UK, France etc had no pandemic preparedness and even if they had, it just remained in papers. All the big shocks till now were unexpected and caught everyone off guard. Every country wants to exploit opportunities but knowingly ignore the risks associated with those. Each country sees these opportunities in forming alliances and accumulating arms for the sake of balance of power but no country thinks  about the disastrous outcome [full-scale war] which can be based on miscalculation and distrust. During the global financial crisis of 2008, the housing market saw a boom but it all came crashing down when it was realized that the boom was actually a bubble, created by too big to fail investment banks and lack of regulatory oversight [3]. Covid-19 is not the first pandemic of the 21st century. We have had SARS in 2003, H1B Influenza [ Swine Flu] in 2009 and ebola in 2013. These pandemics had a much higher mortality rate but their impact was disproportionate. They did not affect every country equally but the countries that did get affected did much better against covid-19. Countries like South Korea, Taiwan etc followed and implemented textbook practices of 3ts [ testing, tracing and treatment] to contain covid 19 and they were quite successful [4].

Humanity has not invented the time machine yet but we do have enough knowledge, data and tools to predict and forecast. In fact, with time, predictions and forecasting ability have only gotten better [5]. Countries don’t just get involved in arms races to showcase their hard power. They know very well that if the time would arrive, they will use those arms even if it is due to a miscalculation. The post-cold war period has not witnessed any major arms control treaty, on the contrary, countries are building up their military arsenals. The Macroeconomic forecasts and financial models failed to predict the global financial crisis of 2008. The sovereign rating agencies gave AAA ratings [ best ratings] to sub-prime mortgages [low-quality mortgages] which were largely responsible for the global financial crises. Health experts have been warning the world against a global pandemic for years [6]. Countries should work meticulously on risk analysis and risk mitigation but we see what we want to see and hear what we want to hear.


The world is a chronic procrastinator when it comes to big shocks. It delays everything until we hit the crisis but during the crisis, it diverts all its resources to fight it. The actual shocks are like a nightmare for humanity. Deaths, taking place in large numbers, cities being bombed, people losing their jobs and life-savings and so many more consequences. 21 million and 65 million people died in World War 1 and world 2 respectively. Billions and trillions of dollars of income were lost in the great depression and global financial crises. 65 million people died in Spanish Influence while in covid-19, 4 million lost their lives which is much less if we compare it to the past global pandemics [7].


Big shocks affect every sphere of life. Everyone is affected directly or indirectly. During these big shocks, markets take the back seat while the state and community gets forward. The role of the state expands while solidarity within the community increases [8]. One can argue that the

states are not prepared against these big shocks but states certainly have more tools and powers to fight these shocks. The global financial crisis of 2008 could have become the second depression but with the right fiscal and monetary policy, it was avoided. Deaths per million people in covid-19 is low because of modern medical science and the ability to test, trace and isolate on such a large scale. The lightning speed in which vaccines were developed will keep the covid deaths much lesser as compared to other pandemics.

People go through a horrendous time during a shock but there have been instances in the past where the state strategically used the time of crises to implement its agenda or long-pending reforms which may not have been possible during normal times. Naomi Klein, a Pulitzer prize winner, in her book “The Shock Doctrine”, explained this in detail. In the book, she elaborates on “Disaster Capitalism” which means implementation of free-market policies during the time of crises. During the time of shock, there is widespread suffering so people will not be able to protest against the state and big bang reforms can be enforced.


The big shocks expose the fault lines and vulnerabilities of the economy and society. The issues of wealth inequality and social problems come to the forefront of national discourse. The aftermath of the global financial crises, with the slow recovery and rising disparity, left tens of millions of people behind the fading hope of climbing up the social ladder. Though triggered by different events, ranging from rising transport costs to higher fuel prices, and specific demands vary by country, a common theme underlying the social discontent is reported to be stagnating living standards and inequality .

The Covid-19 pandemic is worsening existing Socio-economic inequality. The lockdown measures have taken a huge toll on the labour markets with surging unemployment and plunging labour force participation. Job losses are concentrated in industries with lower wages, and among women and youth. The recent riots in South Africa, protests in the US against police brutality and systematic racism and farmers protests in India are few examples of social unrest. The big shocks contribute to social unrest by lowering economic growth and increasing inequality [9].

Since the economy contracts or struggles due to the big shocks, a large number of people get eliminated from the labour market. But the fear is that technological change may disrupt labour markets in transition, as they take over certain tasks and make traditional jobs obsolete. The coming age is the age of Artificial Intelligence and robots. A recent survey of business leaders and human resource strategists of large companies around the world shows that over 80% are accelerating the digitization of their work processes and expanding their use of remote work.Whereas 50% indicate that they will accelerate the automation of jobs in their companies [10]. Automation certainly raises productivity but it also increases Inequality by displacing low skilled workers. We may be looking forward to jobless recovery and growth. This is a tricky issue that needs to be addressed by policymakers. If left unchecked, growing disparities will lead to long-lasting grievances and ultimately to social unrest, forming a vicious cycle.


Black death, which is the most fatal pandemic recorded in human history, causing the deaths of 75 million- 200 million people in Eurasia and North Africa, peaked in Europe from 1347 to 1351. It had pretty interesting economic consequences. Due to the deaths of so many labourers, the demand for labourers increased which in turn increased their wages. This proved to be unprofitable for many landowners as their costs increased in the time of the pandemic. This sort of made society and economy more equitable.

The period following World War 1 saw impressive economic growth until the October crash of 1929. Many scholars attribute the period following World War 2, from 1945 to 1971, as the “Golden age of Capitalism” [11]. The period marked the achievement of a high and sustained level of economic growth and a high level of productivity growth along with low unemployment.

The globalization of trade and finance accelerated economic growth. International solidarity and Bretton wood system guided the war-torn world. Though, it can be argued that this is not true for the third world countries as half of them had just attained independence while the other half was fighting for their independence. The “Golden Age of Capitalism” ended in 1971 when president Nixon abandoned the Gold standard and ended the Bretton woods system [12]. When a financial crisis happens, markets correct themselves and depict the real value instead of a bubble.

There are many reasons for these post-crisis booms. During a big shock, GDP plunges but after the recovery, it does bounce back. It is because of  multiple reasons. First, during crises people save [ due to panic] and do not spend, once the normalcy gets back, people spend and invest. Second, crises encourage people and businesses to try new ways of doing things. Apollo’s arrow, a new book by Nicholas Christakis of Yale University, shows that the Spanish Flu pandemic gave way to “increased expression of risk-taking”. Today new business formation is once again surging across the world, as entrepreneurs seek to fill gaps in the market. Third, every time after a big shock, the state, market and society get more organized. Big shocks challenge the state, market and society and inform them about their fault lines and leakages. Fourth, political upheaval often follows, with unpredictable economic consequences. Finally, big shocks increase the level of government spending as fiscal and monetary policy is expanded to rescue the economy. It is important to implement these policy measures as no spending will lead to depression, exacerbating the shock [13]. Due to the covid pandemic, global debt has reached an all-time high of $281 trillion or more than 355% of global GDP, according to the institute of international finance. Government deficits and debt to GDP ratio are at an all-time high in every major country. There is no easy answer to solve the debt problem but a discussion should start to reduce this unsustainable debt and deficits.


The World has not faced recently any Global Ecological Diasater. The biotic crises in the past, have led to mass extinction. The earth faced five mass extinctions in the past and the ongoing mass extinction caused by human activities is called the sixth extinction [14]. The biggest shock and existential threat to humanity in the future is: climate disaster. Ecological crises should be categorized as natural disasters but increase in their frequency and scale is clearly due to climate change. Superstorms, cyclones, melting of glaciers, extreme rainfall, flooding, desertification, wildfires, droughts etc give ample evidence about climate change. There is no doubt among scientists that human activities caused and are still causing climate change. The Paris agreement of 2015 was a historic achievement in the fight against climate change but its proper implementation and achievement of targets are way more important. Due to the current big shock, governments around the world have realized the significance of resilience and

sustainability. This is the reason why more governments are taking climate change seriously and investing in green energy and technology to decarbonize their economy by 2050. Our actions will tell whether we learnt from our mistakes in the past or we failed to treat history as an important source for precautionary measure for predicted upcoming disaster..


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