Last weekend, I wrote about the leadership seen between the Eastern and Western countries, and their varied actions to control the Covid-19 crisis. The overall picture shows that many Eastern leaders reacted quick and with high-end technology solutions for social tracing and massive testing; following strong regulations that civilians abided. While in the big West, with time advantage, leaders were a bit more reluctant. Of course with exceptions of some, such as Germany, New Zealand and Norway to name a few. Nevertheless, now the dust starts to settle on the first wave of the Covid-19 infections, and we need to ask: What now?
Before the pandemic, the world was growing at strong economic parameters, for both the macro and micro contexts in developed and developing nations. However, due to the drastic constraints in order to “flatten the curve”, the great lockdown imposed worldwide is showing its consequences and its proving to be one of the worst recessions we will face. With millions unemployed, healthcare systems heavily shaken, and a supply and demand sector completely unbalanced, this unprecedented crisis demands for innovative and strong solutions.
Why is this happening?
Mainly three effects are driving this economic recession of the Great Lockdown that need to be understood.
First, on the micro-side, there is a direct effect as a consequence of the quarantine measures. This represents both a cut on the supply and the demand side. On the supply, as many civilians cannot go to work, they are causing factories, restaurants and bars to close down. And even from a global supply chain perspective, production in one side of the world is heavily disturbed by lockdown in another, making producers face a shortage of inputs. Then, on the demand side, we can observe a decrease in consumption of certain sectors, such as retail and tourism, as people are not consuming this type of goods. Once the quarantine period is lifted, many countries will start to see reductions of this direct effect. However, it would require extra attention from the government but also collaboration from consumers in the next few weeks, as the subject of social distancing needs to be implemented to prevent more infections.
Second, on the macro-side, an indirect effect as a consequence of the first one, as civilians cannot go to work, there is a reduction on household and companies income. This has two sides as it is causing workers to become unemployed. On one hand, it is forcing workers to apply for unemployment insurance to which the government will need to increase their debt or go into their savings (if they have) to support their civilians. While, on the other hand, people stop consuming anything but essential goods, and try to increase their precautionary savings. Overall causing an extra reduction on the aggregated demand side, where small businesses and medium sized companies will be risking bankruptcy or asking for loans, which puts the financial sector also at risk. The solution we see nowadays from governments is helicopter money for those businesses and direct money transfers (or vouchers) to the people in need. The debate rises on which companies need help quicker, and which vulnerable part of the population get the money transfers first. These issues peak when we talk about low income with high inequality countries.
Finally, if we combine both effects, we get a long run damage to economic growth that can be particularly alarming in the months to come. Because workers remain at home, skills wear down. Then, when they look to rematch with an employer, it takes time to find the correct one as many companies will need to shut down or would not be able to hire immediately. This brings a hit to economic productivity. And this is why we can see at the moment, forecasts showing a poor 2020 for everyone with scars than can last until 2021.
Some consequences of the Great Lockdown
It is probably obvious by now that the biggest hits of this crisis, economically speaking, are on the Gross Domestic Product (GDP) and the employment rates. The World Economic Outlook shows that up to April 2020, the situation worldwide was precarious in terms of GDP, which would be accentuated every month that a country is on lockdown. While for the unemployment rates, forecasters predict a global increase to up to 21 percent, where emerging and low-income continents, like Latin America, Africa and parts of Asia, will be most impacted.
It is not easy for the European continent either, according to the European Commission’s 2020 Economic Forecast, the collective GDP of the EU nations is set to face a contraction of 7.4 percent due to the pandemic. In comparison, during the financial crisis of 2009, the EU economy “only” contracted 4.5 percent, thus why this forecasted number is troubling. Furthermore, southern countries like Greece, who is still struggling with the effects of the last recession; and Spain and Italy, where the death tolls and infectious rates are higher, are set to be the worst impacted with individual contractions of more than 9 percent. In terms of unemployment, and as a result of the lockdowns imposed, Eurostat released that in March 2020 the EU zone was facing a 6.6 percent unemployment rate. This number has been updated since, with predictions putting it around 9 percent by the end of 2020. Now, with the Summer around the corner and restrictions bans being lifted in the area, EU leaders need to remain cautious due to the possibility of a second wave emerging further on, putting more pressure on the already palpable recession.
The consequences are palpable, and numbers do not lie. Governments worldwide have made a combination of fiscal and monetary policies along with liquidity support to exactly tackle these issues. However, the way these measures are adopted depend a lot on the context of the country and their balance accounts, but also in the culture and obedience of their people. As the latter ones need to find a way to adapt to the new normal.
The New Normal?
After all the restrictions are lifted, when people go to the New Normal, governments have a choice to make. Either they take their old ways of globalised economic growth, that actually put many in a more precarious situation, or they adopt a new style. One that was particularly interesting this last week, was mentioned in a report from the World Economic Forum: the concept of Doughnut Economics. This model implies a doughnut shape concept of showing what people need in order to thrive without causing more damages to our environment. The ring of the doughnut per se represents the ideal state of societies, in terms of a social foundation for safety and sufficient space for civilians, accompanied with an ecological ceiling that implies a regenerative and distributive way of economic growth. Meanwhile, the hole of the doughnut represents those populations who do not have the basic necessities, such as clean water, access to healthcare and receiving a fair income and education. And beyond the ring of the doughnut, lies the destruction of the planet, due to climate change, pollution and loss biodiversity; because in this area, we would be overshooting the resources mother nature gives.
Amsterdam plans to become the first doughnut city through four social foundations: health, connectivity, empowerment and enablement. The mix of the pillars in each foundation would make this city a more socially and ecologically one. This sounds like a very good plan that many other leaders, especially in the developed world, should be able to copy, and even improve.
Though, this seems like a good new innovative way of shaping the world towards a more equal and sustainable one, it is not exactly mapped out for the developing and low-income world, as they are still far away from adopting this type of models. Unfortunately, for these countries to focus on been sustainable, they need to tackle some bigger underlying issues, such as inequality and poverty.
Inequal countries face a dilemma everyday between keeping a strict lockdown to avoid more infected people or let the economy move and jeopardize the lives of thousands of people, with an overwhelmed healthcare system that is already collapsing. For example, let me talk about Peru. A 31 million habitants country, with high inequality, informal labour and poverty rates, but strong economic growth until the times before the Covid-19 pandemic. With still a lot to learn, Peru was one of the few countries worldwide that was not as heavily impacted by the financial recession in 2009, and since then this country has been top in macroeconomic policies and is a great hub for foreign investment. However, Peru has a flaw, they have a poor institutions management and low quality in public services. The Peruvian healthcare system has been neglected for so long, with structural problems that have been carried on for decades, and that have shown to be even more vulnerable in times like this.
Peru was the first country in the South American continent to impose the full lockdown, and it was right on time as by mid-March it had less than 5 infected people in their territory. Yet, it is facing its worst crisis in modern times. With national GDP contractions of around 16 percent in March and 20 percent in April, this economic recession is hitting through all fronts. This country has around 70 percent of informal labour, which means 70 percent of people able to work, do it without any type of contract, health insurance, pension security and so on. And Peruvian president, Martin Vizcarra, knows of the constraints of locking its people inside, as it means that many people are not getting paid simply because they are not working. Even though, the main driver of economic growth in Peru is the mining sector, letting this one continue working has not been enough to support the weight of the whole economy. According to Bruno Seminario, head professor at the Universidad del Pacifico, sectors like construction, restaurants, cinemas have fallen almost 90 percent, while others such as manufacture have completely shut down causing Peruvian non-traditional exports to be reduced almost by half. This means that the economic recession this country is facing will last between two to three years.
Nevertheless, not everything is lost. Maria Antonieta Alva, the current – and youngest – Minister of Economics, shows her plan in action. Financed through government spending, tax reforms and private savings, the rebuilding time will consist of four pillars. First, on pandemic front support, transferring funds to improve the public health system and national security. Second, family support, through 4 types of money transfers, starting with the poor and rural households to independent workers. Third, business support, in order to secure jobs when the lockdown is lifted. And fourth, support to the chain of payments through the injection of liquidity via national programs. This plan has started to work, especially the first 3 pillars, but the truth is that the decisions are harder that what they seem to, because they need to be considered at the same time every day, from lower to greater risk for the population, but also bearing in mind that it needs to follow protocol supervision from an external entity who would want to investigate in the future. And if there is one thing that we know about politics, is that bureaucracy and investigations, are not always the cleanest or the fairest.
Finally, there is one extra pillar that needs to be observed, and is not only in Peru, but globally. We know the lockdown has put enormous pressure on incomes, workers, companies, education, mental health and so on. But this virus is not going to disappear when the lockdown is over. As the WHO said a few weeks ago, this virus is here to stay and we need to learn to live with it. Individual’s behaviour will play a huge role in the New Normal post-pandemic juncture, as this will focus on social distancing. Going to a restaurant, bar, cinema, market, anywhere will be changed after this quarantine. Even now, with bans lifted in some nations, but with places establishing restrictions to keep people at a distance, these just do not do it. And this is not a matter of “I have to go out because I have to work to earn money”, it is a matter of keeping each other safe by simply not overcrowding spaces. I believe here lies certain arrogant confidence of thinking “I am not going to get sick”, or even worst, not being empathetic enough to care about the person that is around you. But under these circumstances, we need to follow the basic protocols to end the pandemic and be able to have a normal life. People, you and me, need to be leaders by obeying the restrictions, and not because they are imposed or there is a punishment for not following them, but because we know it is the right thing to do.