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Virus Vision and Virus Realism. In reverse order.

Virus Vision and Virus Realism. In reverse order.

 

 

 

Two very different perspectives are evident as the battle with the coronavirus plays out. The first offers a vision of a better world after the virus. The second focuses on the short-, medium-, and long-term costs of the current crisis. It is tempting to focus only on the first perspective, the vision. However, the second perspective needs to come first, because whether or not visions can be realised, and how, will depend on where economies land. I look briefly at both aspects, then identify six conversation topics which might help us find a realistic vision. The six topics are:

  • Understanding the nature of the crisis: a simultaneous, global shock to both supply and demand;
  • Acknowledging the macro-economic imperative;
  • Recognising the heterogeneity of country cases;
  • Being ruthless in setting priorities for post-virus programmes - finding things to do that don’t cost any money;
  • Expecting surprises and building resilience, but cost-effectively; and
  • Hanging onto the vision.

A wide range of ambitions has been proposed for both the rescue phase and the recovery phase of the crisis response, summarised in Figure 1. As Sara Pantuliano suggests, ‘the Covid-19 recovery offers an opportunity to create a different type of ‘normal’ – one that can help restore trust in the state and reaffirm crucial economic and social rights’. She focuses on climate change, inequality and human rights, and recommends searching for a new social model, with greater involvement of non-state actors. Others have emphasised resilience, openness to migration, the strengthening of social safety nets, the inter-generational compact, and the deepening of social capital. In the UK, the National Health Service, key workers from overseas, air pollution, nature, community spirit and young people feature prominently in the public discourse. Improved global cooperation is also a common theme.

Figure 1

In essence, these visions amount to a reaffirmation of both the idealistic underpinning and practical target-setting of the Sustainable Development Goals. What is novel is the sense that the corona virus crisis offers an opportunity to make faster progress. Policy options on the table include: higher taxation of income and wealth; more liberal immigration rules; higher minimum wages; universal basic income; reduced subsidies for fossil fuels; higher vehicle emissions standards; greater investment in disaster preparedness; more support for the NHS, with more redundancy of health provision; better control over extended global supply chains; and in some cases (for example President Macron) protection of key national industries. An end to austerity is a common thread.

Whether much of this can be delivered during the immediate rescue period is extremely doubtful. It is very unlikely that policy-makers in Chancelleries or Presidential offices anywhere in the world have time to think about the fine-tuning of policy, for example to make rescue packages more or less green. That does not mean, however, that new options should not be on the table when recovery begins. And there are already some newsworthy innovations, like cheques to households in the US, and the tentative roll-out of UBI in Spain.

But what will the world look like when recovery does begin – probably in a sputtering and uneven way. In particular, will a new age of austerity inhibit policy change? And if so, what can be done to overcome the obstacles?

There is still enormous uncertainty about the progress of the battle against the virus, and about possible exit strategies. However, I suggested at the end of March that when the crisis had passed, we would be:

  • Poorer;
  • More indebted;
  • With less fiscal space;
  • Probably more unequal;
  • More regulated;
  • More inward-looking;
  • Probably less secure; and
  • Probably with new power brokers.

A few weeks on, the evidence is beginning to accumulate in support of this set of propositions. Everyone will be familiar with the news stories, and with the debate about the shape of the recovery: V, U, W or L. Here are just a few snippets.

For the UK, the Office of Budget Responsibility has produced a ‘reference scenario’, based on a three-month lock-down. It foresees a 35% fall in GDPGross Domestic Product in the second quarter of 2020, followed by a swift recovery, leading to a fall in GDPGross Domestic Product of 13% for the year as a whole. Government measures mean that borrowing increases by 14% of GDP, but then falls back somewhat, leaving the debt/GDP ratio at over 90%, and permanently ten percentage points higher than the previous forecast. Many think this scenario optimistic, because the lock down may continue for longer, or more Government funding will be required, or there is permanent ‘scarring’ to the economy. There is much coverage of the impact of the lock-down on the poor and vulnerable, and on the young, and hence on the distributional consequences of the crisis.

For the world, the IMF predicts, in a baseline scenario, that the recession caused by the Great Lockdown will be the worst since the Great Depression, with a loss to the global economy in 2020 and 2021 amounting to $US 9 trillion, equivalent to the combined economic output of Germany and Japan. Income per capita is expected to fall in 170 countries. If the spread of the virus is not contained, the impact will be significantly greater. Developing economies are especially at risk, partly because they have limited fiscal space. The ILO has estimated that the reduction in working hours worldwide is equivalent to the loss of nearly 200 million jobs.

For developing countries, in more detail, and especially for the poorest countries with weak health systems and weak economies, the risks are especially severe.  The immediate health crisis will be acute, especially for countries with large informal sectors and over-crowded housing. In economic terms, countries suffer different consequences from factors including: disruption to trade; falling commodity prices; reductions in exports; falling tourism revenues; lower remittances; capital flight; and lower foreign direct investment. Lockdowns add further disruption and lead to further increases in unemployment and poverty. The World Bank’s Pulse reports predict sharp falls in growth, with consequent increases in poverty: for sub-Saharan Africa, for example, from 2.4 percent growth in 2019 to -2.1 to -5.1 percent in 2020. Also for sub-Saharan Africa, ODI researchers have predicted a cost amounting to 5% of GDPGross Domestic Product and a $US 100bn shortfall in the Balance of Payments in 2020. A report for Oxfam suggests that 500 million people could be pushed into poverty, setting back the fight against poverty in some regions by as much as 30 years.

Commitments by the international community have gone some way towards offsetting the cost of managing the short-term consequences of the epidemic. Sherillyn Raga at ODIOverseas Development Institute (London) has a useful tracker, listing responses by the IMF, the World Bank, the Regional Development Banks, the EU, and many bilateral donors. There are some impressive totals. However, the overall impact will depend on the type of funding, whether grants, loans, or loan guarantees: some rescue packages are more useful than others.

There are many more nuggets where these came from, many speculative, and most quickly overtaken as the crisis continues. The key point, though, is not to underestimate the medium- and long-term consequences of the corona crisis. These will shape the room for manoeuvre when the crisis ends. Will there be fiscal space to implement elements of the SDG vision? Or will the crisis present not so much an opportunity as a dead end?

In thinking about this in a development context, there are six factors to take into account, six conversation topics.

First, this is not the first time that budget plans have been overturned, public sector deficits have increased, and debt levels have been high. The Global Financial Crisis of 2008-9 is often cited, but we might also look to Europe after WW2 (and indeed WW1), and, in development, to the structural adjustment crisis in the 1980s, the debt crisis leading to HIPCHeavily-indebted poor countries in the 1990s, and other shocks like successive world food crises in the 1970s, 1980s, and 2000s. Crises are like unhappy marriages, in that no two are the alike: for example, the late 1940s was a time of fixed exchange rates, with many problems caused by the evaporation of dollar reserves and the inability to import materials needed for reconstruction. Nevertheless, a recurrent feature of past crises has been the availability of large transfers to needy countries, whether via the Marshall Plan in the 1940, conditional aid transfers in the 1970s, debt relief linked to poverty programmes in the 1990s, and monetary action during and after the GFC. A key question this time is whether the global character of the crisis, acting on both supply and demand, leaves anyone standing with the resources to support others.  Will the IFIs have the long-term resources, and on the right terms? Will China play a role? 

Second, it will be essential to understand the macro-economic constraints, in both developed and developing countries. Levels of public and private debt will be much higher after the crisis than before.  The IMFInternational Monetary Fund has said that higher debt may be sustainable if interest rates remain low and if central banks continue to pursue unconventional approaches. However, Kristalina Georgieva, the Managing Director of the IMF, has also warned that ‘the crisis is adding to high debt burdens and many could find themselves on an unsustainable path.’

How serious is that problem? There were already concerns before the crisis about the debt sustainability and fiscal space. These two are linked:  ‘fiscal space’, according to the IMF, ‘is defined as the room to raise spending or lower taxes relative to a pre-existing baseline, without endangering market access and debt sustainability’. Africa is of particular concern. The World Bank reports that ‘due to deteriorating fiscal positions and heightened public debt vulnerabilities, Sub-Saharan African governments do not have much wiggle room in deploying fiscal policy to address the COVID-19 crisis’. Indeed, ‘the COVID-19 pandemic is putting unsustainable pressure on governments with large fiscal deficits, heightened debt vulnerabilities and weak health systems. The massive fiscal costs could lead several governments to default on their debt. Approximately 17 governments have bond spreads that exceed 1,000 basis points (bps), a threshold value that typically preceded defaults’. Measures agreed by donors will help to offset the short-term costs of dealing with the crisis, but recovery measures are yet to be agreed.

Third, on heterogeneity of country experience. Some countries have stronger debt and fiscal positions than others, and some are exposed to greater shocks than others. The ODI country case studies, now numbering 30, reveal a great variety of country situations. Pity the debt-distressed and fiscally-constrained country that depends on natural resource exports or tourism, or the country whose export markets have dried up because e.g. no-one is buying new clothes or bunches of flowers.

Fourth, fiscal constraints mean that policy-makers need to be ruthless in setting priorities. Increasing taxation may be an option for some. But they will also need to find things to do which both serve the long-term vision and do not cost any money. Lives and livelihoods during the pandemic, of course, but what about after? If the UK is any guide, there will be enormous pressure on treasuries around the world to provide medium-term support to particular sectors: retail, the airline industry, restaurants, universities, many others. There is also pressure to weaken regulation as well as providing monetary support, which may have adverse consequences. So, what can Governments do to rebuild and deliver the SDGs without costing any money? Public expenditure reviews are likely to be extremely fraught. Taxation issues also. Managing interests will be very tough.

Fifth, on building resilience. There will be many calls for redundancy in health provision, for example, and the wider debate also focuses on the fragility of global value chains. Health pandemics are not the only issue on the agenda. In the UK, for example, flood protection has been a big topic in the past year. In East Africa, the pandemic coincides with a locust outbreak. In Zimbabwe, there is malaria crisis. In Vanuatu, there has been a cyclone. The national risk register will need careful review. A key issue will be to look at the costs and trade-offs of different actions: see ODI’s work on Risk-Informed Development.

Finally, this all may sound like a jeremiad, heavy with foreboding about the economic barriers to change. It is indeed the main conclusion, that future planning should be realistic. However, that does not mean abandoning the search for a ‘new normal’. It just means thinking hard about what can be achieved, where, and when – and about working out where to find additional resources. That will be especially necessary if we are to come out on the right hand side of the scenarios I proposed in March (Figure 2). The next step, I think, will be to think this through, sector by sector, and country by country. Contributions welcome.

Figure 2

Source: https://www.simonmaxwell.eu/blog/loaded-after-covid-priming-policy-for-after-the-pandemic.html

Image: adapted from www.i23rf.com, image 20745786.

Comments  

# RE: Virus Vision and Virus Realism. In reverse order.Steve Wiggins 2020-04-27 08:36
To cheer you up, try Richard Baldwin.

voxeu.org/.../...

Virus hits no fundamentals. Key thing is to maintain capitals of all kinds until crisis is over. Then the economy should pop back up.

Check out every previous crisis over the last 50 years, as we’ve just done. At depth of crisis, all kinds of predictions are made about the world being changed for ever, and for the worse. Then jump to the last reel and check the ending. Food price spike? East Asian currency crisis of 1997?

And don’t get me started on Asia’s chance of feeding itself as seen in 1968.



Critical to all this, is just how long will this go on? Contrast two models. Take Taiwan. Getting just about everything right. Never locked down. Hardly any infection, fewer deaths. See: medium.com/.../...

Compare and contrast to the UK.
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# RE: Virus Vision and Virus Realism. In reverse order.Sheila Page 2020-04-27 09:35
Another less pessimistic view, and by a proper macroeconomist, not just an international economist:

bylinetimes.com/.../...

But most of this doesn’t apply to developing countries with debt denominated in external currencies. For them, the advice has to be, as it was in the 1980s, copy Mexico and Argentina: borrow as much as possible, then waste everyone’s time with endless negotiations, then borrow again. Repeat for 200 years. And don’t get distracted by debt jubilee campaigns or similar: they just put creditors’ backs up.
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# RE: Virus Vision and Virus Realism. In reverse order.Steve Wiggins 2020-04-27 09:37
Portes argues very convincingly.
Love the analogy of the month of August as an annual economic (non) disaster. Anyone see any flaws with Portes’ arguments?

For agriculture in Africa, we begin from the same position. Farmers are, reluctantly, rather accustomed to having to bounce back from a failed harvest on account of drought, hail, floods, pests and so on.
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# RE: Virus Vision and Virus Realism. In reverse order.Max Mendez-Parra 2020-04-27 09:39
This (the Jonathan Portes piece) is the problem with all macroeconomist: they believe that they have a control panel and they can flip switches to move the economy in any direction.

Using a seasonal and limited phenomenon (e.g. holidays) to compare to this crisis is remarkable. Two things I found really interesting:

‘If governments do the right things, they should be able to minimise the permanent damage’. Really?

‘As for unemployment, we’ve learned from the past decade that the UK labour market is remarkably good at creating new jobs even in hard times.’ In how many instances of hard times has the UK been remarkably good in creating jobs to be able to make such an extrapolation? Was it remarkably good in the late 1970’s and early 1980’s? Early 1990s?
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# RE: Virus Vision and Virus Realism. In reverse order.Andrew Shepherd 2020-05-06 17:37
I agree on the permanent damage issue, Max.

For example, researching recovery from the 1991 drought in Zimbabwe in 2000/1 showed many people having failed to recover 10 years on – though that was almost certainly a case where government probably didn’t do nearly enough. And it’s fairly well established that the malnutrition which occurs in crises can lead to long term consequences eg on life cycle productivity , see here for a recent analysis: Hyland, Marie & Russ, Jason, 2019. "Water as destiny – The long-term impacts of drought in sub-Saharan Africa," World Development, Elsevier, vol. 115(C), pages 30-45: ‘In addition to lower levels of wealth, women who experience droughts in infancy also receive fewer years of formal education and, in the case of extreme drought conditions, have reduced adult heights. Our results also suggest that drought exposure in infancy can have long-term, negative impacts on women’s empowerment. Finally, we also show that these impacts may be transmitted to the women’s offspring, with children of affected women more likely to be born at a low birth weight (weighing less than 2.5 kg).’ (a 19-country study)

And again Zimbabwe as an example of impacts on schooling. Alderman, Harold and Hoddinott, John and Kinsey, Bill H., Long Term Consequences of Early Childhood Malnutrition (July 2006). Oxford Economic Papers, Vol. 58, Issue 3, pp. 450-474, 2006. Available at SSRN: ssrn.com/abstract=916871 or dx.doi.org/10.1093/oep/gpl008

We also know that long term, consistent social protection programming can mitigate some of these consequences, especially on schooling, see here for a recent (cautious) review. And no doubt other good development policies, preferably combined in sensible ways.

Andrew
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