(First of two parts)
The black swan event of the 21st century has arrived. Societies suddenly shuttered, with the world economy – once thought to be an unstoppable train – seemingly stopped dead in its tracks. A global recession has been declared with all signs pointing to an even tougher recovery path than that of the global financial crisis.
The IMF projects the world economy will contract by an estimated three percent, a cumulative loss of US$9 trillion, “bigger than the economies of Japan and Germany combined.” The United Nations estimates 2.7 billion in the global workforce has been affected by lockdown measures, with 1.25 billion of them experiencing reduction in incomes. After decades of global progress on income gains, 170 countries will now experience negative per capita income growth.
Illustrating the scale of the crisis, Goldman Sachs estimates that the United States’ gross domestic product (GDP) could fall up to 24 percent in the second quarter, the steepest drop since quarterly GDP accounting began in 1947, costing the US upwards of 16 million jobs in just the first few weeks, already dwarfing the nine million jobs cumulatively lost in the aftermath of the 2007-2008 global financial crisis.
In the Philippines, the government is projecting flat to negative growth this year. Between the best and worst-case scenarios published by the Philippine Institute of Development Studies or PIDS, we are set to lose anywhere between P276 billion to P2.5 trillion, with another P150 billion loss if the lockdown is extended for another month. Domestic consumption, long a reliable driver of our growth, has taken a nosedive with up to 1.2 million in the workforce experiencing job displacements or disruptions. Many businesses languish without revenues and wage laborers and informal workers suddenly have no income to subsist.
When the coronavirus disease (COVID-19) has finally run its course, a full accounting of its human and economic toll both at home and abroad will reveal massive devastation like no other in recent memory.
An unprecedented economic challenge
By all accounts, the crisis we are facing is unprecedented. Global fiscal and monetary policy responses to it have likewise been unprecedented, and rightly so. Experts are projecting that longer and multiple lockdowns are necessary to contain COVID-19’s onslaught. This effective strategy of suppression is saving countless lives, but is unleashing crippling economic havoc in waves.
The first wave was immediate: lockdown economics ground the system to a halt. Across the globe, manufacturing slowed, supply chains were disrupted, and consumption reduced to a minimum. We are now living in the reality of the second wave of its economic impact. Governments and central banks are exhausting their dry powder we confront widespread job losses and displacement among wage laborers, loss of income among those in the informal economy, and loss of revenue among micro-, small and medium enterprises or MSMEs. Here, health policy and economic policy objectives find themselves to be diametrically opposed: if the former seeks to prolong isolation, the latter longs for a quicker return to integration.
At this stage, we face at once both a crisis of supply and demand. No amount of negative interest rates can make up for the supply slump caused by closed factories and frozen supply chains. Neither can any amount of stimulus conjure up demand with the consuming public shuttered indoors. The limits of monetary and fiscal stimulus are thus exposed: for now, these levers exist solely for the purpose of survival: to induce entire economies into comas, to keep them alive until this is all over.
The third wave of the crisis will rear its ugly head only after COVID-19 has been declared defeated. Recovery will be hampered by less consumption and investment, not just because people are more cautious about spending, but because both firms and households have less to spend after months in lockdown.
It may also be a time when we reckon with how the threads of our societies have come partly undone, how social fissures have been deepened and entrenched by the global lockdown, and how we regressed from the dream of a more prosperous, equitable, and globalized world.
Disproportionate impact on the vulnerable
Unlike COVID-19’s immediate health risks and threat to human life, the scope of its economic impact spares no one, and affects every sector of the economy.
The closure of malls, hotels, and restaurants causes a butterfly effect to ripple through entire industries, from farms and manufacturing plants to banks and every corner of the financial system. One may happen to know a friend or a family member falling ill from COVID-19, but everyone in the world will be affected by the disease’s impact on the global economy for a long period of time.
And while COVID-19’s breadth is indiscriminate, its severity is disproportionate. Those who have the least will suffer the brunt of COVID-19’s devastation. Low income households can ill afford to have a member get infected by (or god forbid, succumb to) COVID-19. The economic impact is likewise devastating for our poor and our MSMEs, who cannot survive the loss of income and livelihood caused by prolonged and repeated lockdowns.
A moral obligation to the losers of the tradeoff
We thus have a moral and social obligation to hold the fabric of our society together by taking care of our most vulnerable.
We have grown accustomed to tracking daily death counts caused by the disease. But the human toll and suffering caused by the invisible consequences of the lockdown cure remain unaccounted for. Oxfam International (a confederation of 19 independent charitable organizations focusing on the alleviation of global poverty), reports half a billion people around the world will be pushed back into poverty; this number is only set to increase as the global lockdown lingers. More costs and consequences – hunger, eviction, poverty – remain unquantified. Accountants like to say, “what does not get measured does not get done.”
It may serve us well to be reminded of the tradeoffs at play. The real tradeoff is not between lives and GDP growth, the latter of which we now all concede to be hugely unimportant at this time. It is a choice between saving lives and saving livelihoods, failure in either of which mean all just the same to our most vulnerable: one kills by attacking the lungs, the other, by starving stomachs.
Still, the general consensus is that the balance of tradeoffs weighs heavily on the side of saving lives than saving livelihoods, and rightly so. Indeed, the depth and length of our economic pain rests on the strength and breadth of our health policy response. But we have to help those on the losing side of this tradeoff: the poor and the vulnerable.
The case to be aggressively compassionate in our problem solving isn’t just a moral one; it is one that makes economic sense. Lockdowns save lives because they buy governments valuable time in strengthening health system capacities. In a world of no free lunches, we must realize that while the time afforded to our health sector by lockdowns may indeed have been purchased from all, it was done so at a more costly price from those who have the least in our society: the MSMEs that are forced to closed down and thus are strapped for cash with payments and liabilities due, and our informal workers and laborers who have lost livelihoods and do not have the means to scrape survival from the jaws of this crisis.
No time for crises of imagination
In unconventional times like this, conventional monetary and fiscal policy levers are painfully inadequate. Furthermore, solely relying on measures like quantitative easing alone usually benefit only a fraction of some sectors of the economy and may not trickle down to those who need it most, exacerbating suffering, inequality, and social unrest.
The most effective solutions exercise preferential option for the poor in economic policymaking – directly focusing financial firepower for the vulnerable – for good economic reason. This is our vaccine against social collapse. The most popular of these policy measures – direct cash transfers, wage subsidies, loans and guarantees for MSMEs – target those who have the least and those who have the most to lose when the economy takes a pause.
Left unprotected, the smallest among our enterprises will be unable to pay rent, wages, and utilities. The least among our people will be unable to ensure basic survival. This is especially critical for our MSME sector, which comprises 99 percent of enterprises and generate two-thirds of the jobs in the country. Our economy is only as strong as its base: a huge swath of the population no longer producing and consuming for the economy will reverberate devastating knock-on effects, hampering prospects for a quick, V-shaped economic recovery.
Moreover, if the lockdown continues for longer than expected, those who are jobless and hungry may seek to find work in spite of quarantine laws and may resist the authorities, causing unrest. Those who are desperate and hopeless may resent the better off, causing strife. When we do not take care of the least among us, societies disintegrate.
The economic and social consequences of the lockdown cure can appear to be vastly greater than the direct suffering caused by COVID-19. Thankfully, governments have more power to address this social crisis than they do in suppressing the virus.
While the world confronts a health crisis of unimaginable proportions, our problem solving need not suffer a crisis of creative imagination. Now is the time for the public to apply radical economic compassion to imagine bold solutions for those from whom we have traded livelihoods for lives.
In the next installment of this piece, we will explore how operationalizing radical economic compassion looks like around the world.
Social fissures have long existed before, but have been exacerbated in the years since the 2008 global financial crisis. COVID-19 has unveiled in sharp relief the pre-existing conditions of our old normal: highlighting glaring inequalities and exposing acute vulnerabilities among certain sectors of society. We leave them unaddressed at our own peril.
Practicing radical economic compassion, securing social justice, and addressing inequalities are challenges we ought to meet not just in our post-recession recovery, but here and now, as we figure out how best to deal with this crisis. Social unrest and collapse await as the alternative.
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Cesar Purisima is a former finance secretary of the Philippines. He is an Asia Fellow at the Milken Institute and is a founding partner at Ikhlas Capital, a pan-ASEAN private equity growth platform.
Laura Deal Lacey is the executive director of the Milken Institute Asia Center based in Singapore. The Milken Institute is a global nonprofit, nonpartisan think tank helping people build meaningful lives by catalyzing cross-sector partnerships and solutions to improve health, access to capital, and job creation.
Harvey Chua is a managing director at Avisez Asia, a boutique corporate advisory firm. He is also an advisor for the Philippines at Asia House, a UK-based think tank.