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Economic lessons from Covid-19

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Economic lessons from Covid-19

8th May 2020

By: Saliem Fakir

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The current pandemic is not a black swan. Those who have been warning about it call it a white swan. Human history is replete with episodes of terrifying pandemics or plagues. London, for instance, suffered multiple episodes of plagues within the space of one century – in 1563, 1603, 1625 and 1665 – each of which killed about one-fifth of the city’s population. The authorities kept weekly bills of mortality to record the number of those who died.

There are many lessons to learn from Covid-19, and we should heed them. Extreme events are external shocks that spread pain across society, but the intensity of the pain varies. Service sectors – including aviation, transport and many others – are the hardest hit, and many jobs in these sectors will be lost. Sadly, not all the jobs that will be lost will be regained; the number of jobs to be saved will depend on the duration of the current Covid-19-induced lockdown and whether companies can recover after the turmoil.

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The impact of the pandemic is likely to turn out to be more severe than that of the Great Depression.

Covid-19 has lifted the lid, particularly in South Africa, on the depth of the economic desperation in our country. This has been revealed by countless Statistics South Africa and National Income Dynamics Study surveys, but statistics often do not jolt us – we only get jolted when we experience periods of crisis, and this is because we do not see people in numbers. Covid-19 has, however, humanised the range and depth of poverty in our country.

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Non-systemic and seemingly isolated events in recent times should have prepared us to deal with a crisis like Covid-19. We should have learnt a lot from the Fukushima Daiichi nuclear power station disaster and extreme weather events around the world, which have become more intense.

These events disrupted the normal flow of life and the circularity of economic exchange. Japanese economists have been studying the post-Fukushima impacts closely. The rest of the world pretty much ignored what was going on there because it was seen as isolated.

The same can be said with respect to past epidemics such as SARS, MERs and H1N1. The countries that were affected by these epidemics seem to have learnt a lot and this can be seen in their ability to respond to the new pandemic in a coordinated and organised manner. These countries have also learnt the value of spare capacity on different fronts – they appreciate the value of investing in critical institutions and infrastructure. They have also learned the art of coordination – nothing is worse than clueless leaders and disorientation in times of crisis. As Covid-19 has shown, every day counts.

What we know for sure is that governments are always bailers of last resort – but few governments are in a position to play this role when they experience ‘fat-tail’ events – the so-called black swans.

Rapid coordination and the building of public confidence through coherent policy is paramount. Governments cannot save all, but at least they should be able to reduce pain as widely as possible. Mistakes will be made, but they cannot be such that they compound the effects of a crisis. There will be casualties – one knows no society, rich or poor, where there are no casualties.

A country’s depth of action is dependent on not only its fiscal resources but also its ability to foster a climate in which central modes of acting work in concert with decentralised modes of acting. Government should work with business, labour and civil society. Voices from below are also the temperature gauge of how the stress of the pandemic is being absorbed within social systems.

In a country like South Africa, having a strong network infrastructure does help, even though not everybody is fully integrated into such network infrastructure; here, I am referring to the digital highway.

This area of connectivity has to be scaled up post-Covid-19, especially in mobile telephony and the use of apps for digital transactions, health monitoring and many other applications. Government will have to push telecommunication companies to reduce data costs; it has the power to do so. We are still to assess how many lives have been saved as a result of these network technologies. We can see the value of them today because a crisis shows up not only the digital divide but also the power of what they can do for a country.

The immediate effects of a pandemic like Covid-19 is a jobs bloodbath. Since income circulation is channelled from the firm to the wage earner to government and back from government to the firm and the wage earner, the sudden impact on this circulation system chokes the life of an economy. If, for instance, half the labour force works at 50% of capacity, output will be reduced by 25%, if not more.

Firms with squeezed margins and limited credit lines will most likely not make it. Households that experience income shocks will not be able to service their debt (mortgages or credit cards) and government will begin to face reduced tax receipts. To restart the economy depends on the depth of resources in the State as a way to get aggregate demand back. But the restarting will take time and those who have lost their jobs will not reconnect with the economy immediately, as jobs will have to be matched with vacancies as the economy restarts.

Every State on the planet has different capacities to deal with the fall-out, and when the economy is down, as it is currently, everything that can be done to restart it should be done – there is simply no time for ideological wrangling.

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