RASHID A MUGHAL
ON first of January 2020, when everyone was celebrating “Happy New Year”, from Australia to America, no one thought that within a couple of weeks later, the world would face the biggest human tragedy — never seen before — in the shape of Corona virus epidemic, which would, on one hand kill hundreds of thousands of people and bring the entire world on tenter hooks and wash away whatever gains the global economy achieved after the great depression of 2007-2011. Some economists say the damage Corona Virus is causing to the global growth is much more in magnitude than the meltdown of 2007-2011. According to World Bank, in the coming weeks, all countries— even those without a single Corona Virus patient—will need to take concrete policy steps to protect their people and limit harm to their economies. No one can reliably predict the full economic impact of the outbreak. Too much depends on what is unknowable—how long the outbreak lasts, how many countries it afflicts, and the extent to which a coordinated, concerted, fasttrack policy response is mobilized and sustained. But what we do know is that the outbreak arrived at a weak point for the world economy, when global growth was beginning to pick up from its lowest rate since the 2009 financial crisis. Tackling these challenges will require global cooperation. Governments should avoid protectionist policies, which would exacerbate disruption to global value chains and amplify already elevated levels of uncertainty. Even more important, governments should avoid restricting exports of necessary food and medical products and instead work together to support increased production and ensure that resources flow to where they are most needed. In the medium term, as economic conditions improve, the lesson for policymakers is not to look inward, but to encourage businesses to hold a higher level of inventories and diversify suppliers to best manage risk. That has troubling implications for developing economies: Tighter credit conditions, weaker growth and the diversion of government resources to fight the outbreak would reduce funds available for key development priorities. An economic slump would also set back the fight against extreme poverty. It is imperative, therefore, that policymakers everywhere recognize how economic harm can be transmitted from one country to another — and to act quickly to prevent its spread. The only known approach to effectively address the disease is social distancing. In Hubei province it was missed, but the rest of China made sure not to miss it. In Italy the window was missed, and then the rest of Europe missed it too. In the US, still constrained by insufficient testing, the early window was also missed. As the disease proliferates, social-distancing measures will have to be enacted more broadly and for longer periods to achieve the desired results. This will choke economic activity in the process but there is no other remedy. Another wave of infections remains a real possibility, meaning that even countries that acted relatively quickly are still at risk every time they nudge their economies back to work. Indeed, we have seen some resurgence of the virus in Singapore and Hong Kong. In that sense, only history will tell if their early and aggressive responses paid off. At present, the economic outlook for late actors looks bleak, having caught politicians, policy makers, and financial markets off guard. What happened in the last eight weeks was not part of the risk calculation. Forecasts won’t help much here. For example, consensus estimates for initial unemployment claims in the US were around 1.6 million this week, but the figure came in at 3.28 million — an historically unprecedented figure, about five times greater than the largest weekly increase in the global financial crisis. Notoriously unreliable at the best of times, forecasts look especially dubious now as there are simply too many unknowable aspects as the virus’ properties are not fully understood and could change, the role of asymptomatic patients is still imperfectly understood, the true rates of infection and immunity are therefore uncertain, especially where testing is limited. Policy responses will, therefore, be uneven, often delayed and there will be mis-steps. The reactions of firms and households are uncertain too. Perhaps the only certainty is that any attempt at a definitive forecast will fail. However, it will be worthwhile to examine various scenarios as it still adds value in this environment of limited visibility. The concept of a recession is binary and blunt. All it says is that expectations have flipped from positive to negative growth, at least for two consecutive quarters. According to some Harvard Economists, “ the bigger scenario question revolves around the shape of the shock — what we call “shock geometry” — and its structural legacy. What drives the economic impact path of a shock, and where does Covid-19 fit in?” In the US politicians have passed a $2 trillion stimulus package to soften the blow of the Corona Virus crisis. But policy innovation also will have to occur. For example, central banks operate so-called “discount windows” that provide unlimited short-term finance to ensure liquidity problems don’t break the banking system. What is needed now, today, is a “real economy discount window” that can also deliver unlimited liquidity to sound households and firms. The emerging policy landscape includes many worthwhile ideas. Among those are “bridge loans” that offer zero-interest loans to households and firms for the duration ofthe crisis and a generous repayment period; a moratorium on mortgage payments for residential and commercial borrowers; or using bank regulators to lean on banks to provide finance and to rework terms on existing loans. Such policy innovation could have meaningful impact in softening the virus’ impact on economies’ supply side.Yetit also needs agile and efficient execution. If downside risks materialise, including a much wider spread of the Corona Virus outbreak and global growth looks set to bemuchlowerthan projected, governments could be faced withthe challenge of havingto respondto significant weakness at a time when domestic policy space is limited. In additiontotemporarymeasuresto support viable businesses and vulnerable workers, co-ordinated policy actions across all the major economies would be needed to ensure effective health-care provision around the world and provide the most effective stimulus to the global economy. Additional fiscal and monetary policy support and enhanced structural reforms in all countries would help restore growth, improve the confidence of consumers and investors and reduce uncertainty. — The writer is former DG (Emigration) and consultant ILO, IOM.
