Raghuram Rajan: Virus’s shock to production will expose the hidden poor

Raghuram Rajan: Virus’s shock to production will expose the hidden poor
A sign near the Breckenridge ski resort gondola in Breckenridge, Colorado outlines public health guidelines about social distancing to limit the spread of the coronavirus. Picture: Liz Copan/AP

The Covid-19 outbreak has reasserted our need for expertise and for leadership that protects the most vulnerable in society, says Raghuram Rajan

THE coronavirus pandemic will expose economic weaknesses. But the crisis also reminds us that we live in an interconnected world. If the pandemic has any silver lining, it is a much-needed resetting of focus on the most vulnerable in society, on the need for global cooperation, and on the importance of professional leadership and expertise.

Apart from the direct impact on public health, a crisis of this magnitude can trigger at least two economic shocks.

The first is a shock to production, owing to disrupted global supply chains. Suspending the production of basic pharmaceutical chemicals in China disrupts the production of generic drugs in India, which reduces drug shipments.

The second shock is to demand: As people and governments take steps to slow the spread of the coronavirus, spending in restaurants, shops, and tourist destinations collapses.

As these and other shocks propagate, already-stressed small- and medium-sized businesses could be forced to shut down, leading to layoffs, lost consumer confidence, and further reductions in consumption and aggregate demand.

Moreover, downgrades to, or defaults by, highly leveraged entities (shale-energy producers in the US; commodity-dependent developing countries) could lead to wider losses in the global financial system. That would curtail liquidity and credit, and trigger a dramatic tightening of the financial conditions that have hitherto been so supportive of growth.

The parade of horrible possibilities could go on. The more fundamental point is that the world economy had not fully recovered from the 2008 global financial crisis, nor were the underlying problems addressed. On the contrary, governments, businesses, and households have piled on more debt, and policymakers have undermined trust in the global trading and investment system.

And our response to the Covid-19 crisis could be far better than it has been. The immediate task is to limit the spread of the virus, through widespread testing, rigorous quarantines, and social-distancing. Most developed countries should be able to implement such measures; yet, Italy has been overwhelmed by the epidemic, and the US response has not inspired confidence.

Long queues in a shop in Cork. Picture: Dan Linehan
Long queues in a shop in Cork. Picture: Dan Linehan

Unless the coronavirus is eradicated globally, it could become a seasonal disruption. If a treatment is not discovered soon (Gilead’s antiviral drug, remdesivir, shows some promise), all countries will face a choice between walling themselves off and pushing for a global effort to eradicate the virus. Given that the former is an impossibility, the latter seems the natural choice. But it would require a degree of global leadership and co-operation that is sorely lacking.

The presidency of the G20 is currently held by Saudi Arabia, which is mired in internal and external disputes; and US president Donald Trump’s administration has repudiated multilateral action from the outset.

Still, some key countries could step up to lead a global response, including by persuading more countries of the value of co-operation. For example, countries that have been relatively successful in managing the epidemic, such as China and South Korea, could share best practices. As countries bring the coronavirus under control within their own borders, they could dispatch spare resources to countries that need more experienced medical personnel, respirators, testing kits, masks, and so on.

Moreover, China and the US might finally be cajoled into reversing recent tariff increases and dispensing with threats of new ones (such as on cars). While a temporary reduction in tariffs would do little to enhance cross-border investment, it would offer a slight boost to trade. Moreover, an accord could enhance business sentiment about the post-pandemic recovery.

Within countries, the immediate task — after implementing measures to contain the virus — is to support those in the gig economy, whose livelihoods will be disrupted by quarantines and social-distancing. Those who are most vulnerable economically also tend to lack access to medical care. Governments should offer cash transfers to these individuals — or to everyone, if vulnerable populations are hard to identify — as well as coverage for virus-related medical expenses. Similarly, a moratorium on some tax payments may be necessary to help small- and medium-sized businesses, as would partial loan guarantees and other measures to keep credit flowing.

In developed countries, the pandemic will soon reveal just how many people have joined the ranks of the precariat in recent years. This cohort skews towards the young and includes many of those living in ‘left-behind’ places. The precariat’s members lack the skills or education to secure stable jobs with benefits, and thus have little stake in ‘the system.’

Cash transfers would send a message that the system still cares. But far more will need to be done to expand the social safety net and extend new opportunities to the economically marginalised.

Populist parties and leaders have capitalised politically on the plight of the precariat, but they have failed to live up to their promises. The pandemic may have a silver lining here, too.

Governments that have undermined established disaster-preparedness agencies and early-warning protocols are now finding they need the experts after all. Covid-19 has exposed incompetence. If the professionals are allowed do their jobs, they can restore some of the public’s lost trust in the establishment. In the political arena, a more credible professional establishment will have an opportunity to advance sensible policies that address the problems facing the precariat. If the professionals fail to capitalise on them, the pandemic will offer only more division, chaos, and misery.

Raghuram Rajan, former governor of the Reserve Bank of India, is professor of finance at the University of Chicago Booth School of Business

More on this topic

Dominic Raab to lead daily Covid-19 meeting in Boris' absence as British PM ‘very likely’ to need ventilatorDominic Raab to lead daily Covid-19 meeting in Boris' absence as British PM ‘very likely’ to need ventilator

'He’s in our prayers tonight': Simon Coveney offers well wishes to Boris Johnson 'He’s in our prayers tonight': Simon Coveney offers well wishes to Boris Johnson

Covid-19: Majority of coronavirus deaths are male, figures showCovid-19: Majority of coronavirus deaths are male, figures show

British doctors without PPE report being ‘bullied and shamed’ into treating patientsBritish doctors without PPE report being ‘bullied and shamed’ into treating patients