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Save lives or livelihoods?

At this point, it has become clear that the situation under COVID-19 is escalating quickly and the world will face profound health and socio-economic challenges in the upcoming quarter. No one yet knows what the ultimate economic cost of COVID-19 will be, but the consensus seems to be that it won’t be pretty. UNCTAD has warned of a slowdown in the global growth of around 2% which wipes almost $1 trillion off the value of the world economy. In the past, a big contraction in economic activity is followed by a bustling aftermath but not without the long-term negative effects.

The adverse effect of a pandemic is not restricted to human effects but an overall devastating effect on the economy. The necessary measures being undertaken to contain the virus such as isolation, social distancing, closure of academic institutes, working remotely, shutdown of non-essential businesses, eventually halt the economic activity. Therefore, flattening the medical curve through containment steepens the recession curve as shown in the diagram below by Centre for Economic Policy Research.

Containment measures flatten the infection curve, but steepen the recession curve.
Image: Centre for Economic Policy Research (CEPR)

Though, there are various levels of economic effects of COVID-19 pandemic on both supply and demand side similar to those seen in previous pandemics.

Currently, the global economy is suffering from an unprecedented supply shock. The least important impact in economic terms comes from sickness-related absenteeism that is the fall in production due to workers taking time off. Some workers will take time off because they are sick, while others as a precaution leading to disrupted work schedules and loss in productivity. Moreover, school closures will further restrict labour supply as some workers especially females will take time off to take care of children and avoid the risk of contamination. Repeated shut downs that will save lives but at a staggering cost of jobs and livelihoods.The consequent fall in production will potentially raise costs and lead to temporary inflation, however, central bank can ignore this as companies usually have the ability to compensate for this by either offering overtime work or hiring temporary workers post pandemic.

Another reason for lost revenue and disrupted supply chains is due to the temporary shutdown of the world factory, China. China is the world’s second largest economy and one of the leading trading nations, therefore, their economic fallout and downturn hazard risks global growth prospects. Factory production in China has plunged at the sharpest pace in three decades, therefore, leading to a fall in supply of end goods and inputs used in production of other goods.

Pandemics need not necessarily just be a supply shock. It is also a demand side shock dictated by consumer behaviour as consumers have always been a cornerstone of economic activity. As majority of today’s consumption can be categorized as social given major economic activity is driven by events that bring people together such asrestaurants, sports events, concerts or travel. It is safe to assume that consumers who do not yet have the disease have also altered their behaviour given the contagious nature of the virus. People have started to cut back sufficiently on the social consumption. It might not be a permanent loss but the economic impact will be severe as there is more likely a net fall in consumption over the year. On the other hand, the service sector that caters to consumption services rely heavily on personal contacts such as salons and gyms will face lack of business.

 

In Pakistan, almost 52.7% of GDP share comes from service sector and almost 35% of people are employed in service sector. Moreover, in Pakistan, around 70% of the labour works in the informal sector. For these workers there will be no work from home or sick pay and out of these especially those without a financial cushion will be put under due stress. Daily wage workers and those who work in essential sectors might not be able to afford to self-isolate. Therefore, the longer the pandemic continues, more likely the reduction in total household income that will further supress consumer spending post pandemic, subsequently delaying the economic recovery.

A World Bank paper published in 2006 on a severe influenza outbreak forecasts a fall in global GDP of nearly 5%. It predicts negative effects similar to those happening today, though, the good news is that the growth is anticipated to pick up pretty quickly post pandemic, right now our job is to get there. Governments around the globe have some difficult choices to make as the conventional monetary or fiscal policy measures might not be enough to offset this fall in social consumption and one-off supply shock.

The world is facing a joint health and economic crisis of unprecedented proportions and there is no easy way out from this global crisis.The macroeconomic costs of pandemics are generally measured through a significant decline in economic activity translated into a fall in real GDP, real income and employment. Thus, in addition to increased healthcare spending; policymakers, economists, researchers and private sector needs to come together to formulate policies that will be crucial to prevent or at least limit catastrophic economic breakdowns. Immediate measures that government can take include deploying more resources for healthcare, reducing tax burden and providing emergency liquidity for sectors suffering maximum losses. In past week, central banks globally are easing monetary policies in an attempt to supress economic fallout and strengthen stock markets. However, governments that offer liquidity support with nominal interest rates might help stock markets but risk a potential run on cash.

Simultaneously, fiscal measures have a significant role to play to minimize the number of personal and corporate bankruptcies. Policymakers should be considering tax reliefs and public guarantees to facilitate credit assistance. Government also needs to plan to keep public services and utilities running. Another measure to compensate for the underemployment of the workforce is a short-time work allowance to ensure people keep spending even if they are not working. Governments need to prepare for the pandemic by thinking ahead and acting fast.

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