At the time of writing, 2.5 million people were infected with COVID-19 and over 175,000 people had sadly lost their lives. If the lockdowns help stop the spread of the virus, the economic and social costs will be devastating. Among the many lessons, one is the need for a new policy consensus to deal with the crisis in the fallout from the pandemic.
Economic and social impacts of the crisis
The International Monetary Fund says the global economy will contract by -3% this year. According to the International Labour Organization, 1.25 billion workers, representing 38% of the global workforce, are at risk of losing their jobs. With trade and commerce disrupted, tax revenues are plummeting. A combination of increased supply and weak global demand led to a 58% decline in the price of oil from last year. Angola, Nigeria and Equatorial Guinea will take big hits. The flow of foreign direct investment has ceased. Income from tourism, retail, hospitality and transportation sectors have collapsed, and so will remittances.
Remittances are effective social insurance and help households to smooth out income and consumption levels. The decline in their flow will force families to sell productive assets such as land and livestock, pushing them even more into poverty.
The economic impacts could quickly turn into a human development crisis. Less skilled workers will be the last to get back on the job market when economies bounce back, or will enter the informal sector. The return of immigrants back to their homeland or region, often under coerced repatriations, could add to the unemployment numbers, lowering wages further down.
Low-income families are likely to cut back on food consumption and education spending. Hunger and malnutrition among children could become pervasive, impairing child growth, learning and cognitive abilities. School fees and cost-sharing expenses could force parents to keep children (often girls) out of school for longer periods.
Just when inequality takes centre stage in the global debate, the crisis could worsen the situation. If high-income groups can weather the storm, drawing down from their savings, the poor often lack such coping mechanisms and have no easy access to financial services, the collateral requirement being one barrier among many.
So far, across the globe, $7.8 trillion is injected in stimulus packages. Public funds are paying for business grants, low-interest loans, private sector salaries and direct cash transfers. Members of the G20 have also agreed to halt bilateral loan repayments for low-income countries for the rest of 2020. This will create much needed fiscal space.
Developing countries, in turn, took significant measures. To mention but a few: Kenya reduced the corporate income tax rate from 30 to 25%. The South Africa Reserve Bank cut its policy rate by 200 basis points. Madagascar postponed social security contributions and reduced advance tax payments. Ethiopia made half a billion dollars available in liquidity support to financial services providers. Senegal allocated 0.5% of its GDP to top-up health spending. Seychelles expanded subsidies to employers that maintain their workforce. Others are in the process of beefing up their social assistance and cash transfers programs.
Bridging the gap in development thinking
Who would have thought such eclectic measures could become normal without a macroeconomic stability evangelist raising the alarm?
In the aftermath of World War II, economists camped in many groups: neoclassical, Keynesian, Schumpeterian, Marxist, and so on. It is a crude way, admittedly, but lumping them under supply-side and demand-side economists is helpful to show their distinctions and policy differences.
The supply-siders assume that the economy is either in a unique full employment equilibrium or prevented from achieving it by price “distortions”. Any intervention in the market will result in an outcome below full employment. They recommend low fiscal deficits, lower taxes, inflation targeting, liberalisation of trade, interest rates, exchange rates and capital controls—a set of policies commonly known as the Washington Consensus.
The antithesis, demand-side economics, questions the concept of distortions. Its advocates argue that an economy is held back by aggregate demand: consumption, private investment, government expenditure and net exports. They note that cuts in public spending, in the name of fiscal discipline, often fall on investment rather than consumption. Macroeconomic tightening can have devastating long-term consequences, including a reduction in expenditures to meet global development goals. Interventions and regulations in the economy, therefore, should be judged on a pragmatic basis in terms of social costs and benefits.
This debate might seem inconsequential seeing it from where we are today, amidst a pandemic. However, the advice from supply-side economists pervaded politics and international institutions for so long. The Great Recession a decade ago sparked the debate, and there were some signs of a consensus emerging. However, it was short-lived, and we were back in business, save the near-zero interest rates we have today in many countries.
The current situation is yet another opportunity to forge some sort of consensus. More so because we are in both a supply and demand crises.
A good place to start is to agree on how the growing fiscal deficits can be financed without accumulating huge debts and interest rate hikes. How far can accommodating monetary policies stretch without causing inflationary spirals? How can capital control mechanisms prevent sudden and illicit financial outflows? How can the contradiction between the increasing demand for natural resource extraction to fuel growth, and at the same time the need to build green economies, be resolved?
These are not easy questions, and there are many. But, when the lockdown is over, and the virus is defeated, there is a real chance for a renewed consensus on development policy and practice—an opportunity we shouldn’t miss.