Individuals, companies and governments were largely unprepared for the sheer magnitude of COVID-19, a virus that has both mirrored other crises and been completely different all at once.
While crises of the past like the Great Depression or the 2008 financial crash had universally catastrophic days, COVID-19 slowly swept its way across the globe impacting different countries and their economies at different times. Neighboring countries with similar economic structures have seen vastly different infection and survival rates. Because of this disparity, the natural feelings of uncertainty and fear can last longer, according to Michael Spence.
“In some ways it is more like the shock of 9/11, at least in the US,” says the Nobel Laureate. “A pandemic hits much more than the economy though, and the uncertainty, fear, and risk aversion last longer.”
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The global pandemic and the supply side shock
With COVID-19, one of the biggest differences, in economic terms, is the supply shock. And while there is not much a government can do to counter an indisputably lower economic output—particularly when citizens and businesses must adhere to isolation regulations—economist Oliver Hart sees three key areas where governments can, and should be, focusing on during these times.
“From an economic point of view, the role of the government should be to redistribute resources so that people and businesses who are liquidity constrained, with low cash reserves or savings, can survive the shock,” says Hart. “The government also has a role in ensuring that the fall in output from the supply shock—which can be regarded as a recession—does not multiply into a full-scale depression. Finally, of course, the government has a huge role in coordinating a public health response to the crisis.”
While the global economy is currently undergoing a negative shock, the long-term impacts on the economy are unknown. The economists do, however, agree that once the virus is under control, the global economy will be too, even if it takes some time to reach that stage.
“The recovery will be slow because the only way to make it faster is to do it unsafely with great risk in terms of deaths from the virus,” says Spence. “The recovery pace will also depend on the amount of semi-permanent damage that is done, such as the number of businesses that fail, but policies designed to limit this kind of damage are being implemented now.”
While Sir Christopher Pissarides expects a 'coronavirus recession', he agrees that the efforts that have already been put into place have reduced the severity of what may come next.
“Government action, especially the fiscal stimulus, has been good so far, so the recession will not be as severe as it could have been had markets been left alone,” says Pissarides. “I do not expect to see many long-term consequences. Once the pandemic is over, the world economy will quickly bounce back.”
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How to reduce the global impact of the next pandemic
One of the clear lessons of this pandemic is that when it comes to communicable diseases, we are all vulnerable.
“We're unfortunately really in the dark about what's happening with this epidemic even in rich countries, but certainly in low income countries,” says Michael Kremer. “COVID-19 is an example of how we're all linked together. This disease is really a case where the system is only as strong as its weakest link.”
Kremer is one of the pioneers of advanced market commitments, a possible way forward to help reduce the impact of future pandemics. An advanced market commitment is essentially a system in which donors commit in advance to finance the purchase of a vaccine before it is developed to help incentivize the development of vaccines.
“We need to think about a wide range of mechanisms, including advanced market commitments as a way to help address the huge range of health challenges around COVID-19,” says Kremer.
Reducing the lag time between emerging diseases and the development of treatments, while viewing health from a global perspective can ensure that if and when another pandemic hits, countries, economies and their citizens will be better prepared and less impacted.
Building a new normal
Many people believe that beyond the pandemic lies a new normal and the chance to create a more equal, sustainable and resilient economy.
“It’s a new situation,” says Pissarides. “We need a new institutional structure. A new normal in government policy towards the economy.”
“The main lesson we’ve learned is that we have to do a much better job of getting ready,” adds Spence. He sees the pandemic as a chance to experiment with new ways of doing things. “People, businesses and other institutions don’t change the way they behave. And in a crisis like this, they’re forced to do new things. They conduct experiments they wouldn’t have conducted before.”
Bengt Holmström says that COVID-19 is accelerating trends that have been shaping the global economy for a while, fundamentally changing for example how we work. According to Holmström, a crisis as severe as COVID-19 means that people have to make important choices amid uncertainty. But, adds the Nobel Laureate, “the smart ones look forward and see where we are headed rather than looking backwards.”