Views from an expanding overton window: Tools for reimagining a more compassionate economy-in-crisis

(Part 2 of 2)

In our previous piece, we built a case for radical economic compassion for the vulnerable, arguing how it is at once both the vaccine against a looming social crisis and the very antidote to our post-pandemic economic woes.

Crisis economic policy responses have 3 key aims: damage mitigation, preservation of supply and demand, and preparations for recovery. As with the Global Financial Crisis (GFC), the world immediately responded with monetary and fiscal stimulus. The new global recession, however, is caused by a health pandemic; the stoppage originates not from the monetary sector but from the real economy itself.

This constitutes a vastly new way of thinking about crisis economics and requires more creative solutions. Instead of firing at the financial system with money printing guns, we now have to inject wide sectors of our society with trickle-up economics.

For policymakers the world over, COVID-19 has monumentally shifted the Overton Window, or the horizon of politically acceptable choices. Measures thought to be once impossible because of their supposed infeasibility or fiscal irresponsibility have suddenly gained consensus and immediate traction, even among fiscal hawks. Countries have gone bolder and further than what normal circumstances allow, presenting us with an opportunity to learn and adopt new best practices.

This piece outlines some of the most interesting policy measures being implemented or suggested. All of them, as mentioned in the previous piece, focus on tiding over the most vulnerable: MSMEs and low-income households. Below, they are organized along what are shaping up to be the six key principles of COVID-19 economics.

Principle 1: Restoring confidence through policy clarity and coherence.

In times of crisis, the onus is on the government to act as an anchor of stability, which is more important than ever in this current pandemic. To restore confidence in public institutions and the economy, governments must be clear and coherent. Managing communications and conveying expectations well, as exceptional leaders like Angela Merkel and Jacinda Ardern have done, infuses a modicum of certainty and peace, reducing panic risk that could otherwise cloud judgments and distort incentives of private actors.

Private firms and households can only act productively (i.e., avoiding lay-offs, availing of loans, spending and investing) if they are confident of the public sector’s management of the crisis. After all, an entrepreneur will not bother with taking out loans today if she has no faith in her small business recovering tomorrow.

Unproductive actions caused by policy confusion and a lack of confidence in public institutions will have knock-on effects to the economy. For example, loss of confidence by panicked market actors may precipitate widespread liquidity disruptions as people and companies cash out and hold on to their money, deepening the recession trough.

It likewise poses a grave threat to public health. Consider the viral accounts of patients around the world who run from hospital staff and authorities after being diagnosed with COVID-19 and consider the disastrous impact their distrust of institutions cause.

Finally, policy clarity and coherence also drastically reduce compliance costs and burdens by all enterprises regardless of size, and ease the collective path to recovery.

Principle 2: Building a time machine for households and firms

Cryostasis refers to the intentional (and reversible) process of freezing organs or organisms in a state of basic survival, with the aim of bringing them back to life when under better conditions. In the same way, the global lockdown requires us to freeze our economies with the hope of restarting them after the pandemic subsides.

The caveat, however, is that people and businesses need to survive long enough until after the “un-freezing” event. A V-shaped recovery curve can only happen if the vertex point does not wipe out the very populations and enterprises we want to revive post-lockdown.

The next set of policies focus on ensuring the survival of vulnerable groups to prevent a destructive feedback loop from gaining traction; a so-called time machine, to keep them in their current state until we arrive at a future, COVID-19-free world.

For individuals or households, two popular approaches have been employed:

1. Direct cash transfers

Direct deposits into people’s pockets helps the economy by helping those who need it the most. With widespread job displacements and disruptions, providing vulnerable groups a basic income during an extended lockdown period is the only way we can ensure their survival. The concept of “paying people not to work” is also a popular rationale, as minimum basic incomes at this time removes the existential pressure for wage laborers and informal workers to seek a living outside their households and incentivizes them to reduce their public health risk footprint.

In the US, this comes in the form of $1,200 in one-time stimulus checks for households earning up to $75,000. Ireland’s plan features weekly payments, while Spain is launching universal basic income scheme. The idea is to model the transfer scheme to a country’s specific needs and characteristics.

In the Philippines, the Pantawid Pamilyang Pilipino Program (4Ps; the government’s conditional cash transfer program) household list eliminates the need to reinvent the wheel. Many economists are urging an expansion of of existing beneficiary lists like 4Ps to include those who did not previously qualify, but are considered dangerously close of falling back into poverty. Improving data quality and coverage, expanding the magnitude of the transfer, and fine-tuning the disbursement mechanism to minimize contact and patronage politics are further considerations.

Policymakers in developing economies may wish to explore attaching conditions like retraining and upskilling to subsequent cash transfer support, turning basic social safety nets into productivity-enhancing measures.

2. Wage subsidies

Paying businesses directly to freeze employee-employer relations has quickly emerged as a favorite among economists. Preserving this relationship, especially in a country where about two-thirds of employment is generated by MSMEs, is paramount because it puts the economy in a state where it is in the best position to pick back up where it left off. Other reasons posed by experts include:

Superiority to Loans-Based Approach. In a crisis environment, businesses are unlikely to draw more debt. MSMEs may also find the loan application process challenging and may not find banks that are open and processing loans fast enough. Finally, businesses that do not have relationships with banks prior to this pandemic may also be hampered by KYC processes.

Scarring in the Labor Market. To prevent lasting damage to the labor market, economists warn that workers should not stay jobless for a long time. Otherwise, both their relevant skills and connections to the job market may erode, making them less employable in the recovery period.

Shifting the Balance of Incentives to Avoid Lay-offs. With wage subsidies in the picture, entrepreneurs may be more inclined to fund the balance to avoid lay-offs. An employment-first approach will put a backstop to consumer spending and head off a vicious cycle commonly seen in recessions.

Ease of Administration. Wage subsidies are easier to implement because payroll tax information is easily available and verifiable. MSMEs are also more likely than their employees to own bank accounts, paving the way for a cascaded distribution model.

Denmark has set 13% of GDP to pay up to 75% of workers’ salaries through firms. The UK allocated 10% of GDP to cover up to 80%, allowing firms to rehire workers who were just laid off because of the lockdown. Germany’s $40 billion Kurzarbeit program covers payments for shortened work hours. Hong Kong’s plan includes a $100 million fund for reskilling initiatives. In ASEAN, Malaysia has set aside 0.8% of GDP to cover 4.8 million people specifically employed by MSMEs. Particularly in the Philippines, there are suggestions of up to 75% wage subsidies, amounting to an average of P10,000 per employee, with the ceiling set at P15,000. Estimates put the cost at about $35 billion for 42 million employees.

In both the direct transfer and wage subsidy approaches, the principles of simplicity and directness are valued. Preserving consumption power by preserving the continuity of employment relations is also prioritized.

For firms, especially MSMEs, priorities include injecting liquidity, maintaining solvency, and easing burdens. While revenues have cratered, payments for wages, rent, utilities, and interest remain. “If someone does not pay for something, then someone else is owed something.” This adage warns of a chain of bankruptcies that will ripple throughout the financial system and cripple our economy.

For any crisis, pumping the system with liquidity is always a good cure. Central banks lowering interest rates and reserve ratio requirements are a good start. However, policymakers must be careful to direct excess liquidity to those who need it most and not only the few at the top of the food chain. Unlike the GFC we confronted before, industries that appear to be in dire need of bailouts this time are mere indicators of broader malaise, the tip of a larger iceberg underneath encompassing swaths of the real economy.

With credit quality deteriorating, banks may be afraid to lend at such an uncertain time, especially to MSMEs with thin balance sheets, unproven track records, and unfamiliar KYC records. Using the Philippine example, with a further expansion in the deficit ceiling, the government may well consider putting up a loan guarantee fund of perhaps P50 to P100 billion to back the payment of these loans to banking institutions, which ought to have a multiplier effect of around 20 times to guarantee the lending of banks to the borrowing public. A sparkplug, if you will, for restarting the country’s credit mechanism. The Bangko Sentral ng Pilipinas (BSP; Philippines Central Bank) may then perhaps consider pursuing a targeted round of quantitative easing to buy these loans from banks, injecting additional liquidity into the system. Governments can also think to attach conditions to add potency to this fiscal policy, including keeping employees on the payroll to avail of such guaranteed loans.

For a period in the nascent stages of our post-COVID-19 recovery, non-performing loans may rise. It may be worthwhile for governments to consider putting up an asset resolution trust to maximize value from the sale of assets from failed loans.

Waiving payments on interest and penalties may not be enough to maintain solvency for MSMEs. To generate more liquidity in the system, some have raised the bold idea of negative yielding loans to MSMEs, with the balance to be shouldered by the government. Negative yielding loans can be seen as the government paying a premium to keep the system running.

To ease burdens, many are suggesting moratoriums and discounts on utility bills and rent. Denmark will directly compensate fixed costs like rent for companies that prove substantial losses. Developing economies may have to be more creative. Some have called for a temporary shift to alternative rent payment schemes like rent calculated as a percentage-of-sales.

Principle 3: Preserving productive capacity

Crisis economics experts recommend maintaining supply chains and managing excess productive capacity. We don’t have to look far for imaginative solutions to our challenging supply problems. The private sectors in some countries have been proactive in brainstorming with the government on what else can be done. These involve recommendations on the easing of checkpoints to allow for freer flow of goods in the supply chain, the immediate release of goods in the ports, job displacement relocation schemes to transfer excess labor capacity to needed areas, such as building temporary COVID-19 hospitals and quarantine centers, and transferring idle production capacity to active, COVID-19 response-related sectors of the economy.

A bid to be more self-sufficient would be useful in these challenging times. In the Philippines where food supply remains an issue, Ateneo de Manila University economists pitched ramping up domestic agriculture production and food processing, with the government investing P50 billion, or what they estimate to be about a quarter of annual agricultural output.

Principle 4: Reimagining aid distribution

In an extraordinary crisis where contagion is an additional risk factor, governments are forced to reimagine how assistance is traditionally distributed to households in need. Experts from the University of the Philippines advocate further modifying direct cash aid, which puts unintended pressure on already choked supply and increases crowd density in wet markets, groceries, and even ATMs, towards what they call “in-kind transfers,” or rationing direct food subsidies. This is an alternative to direct cash transfers worth considering. They also argue for the principle of subsidiarity, with the smallest local government units spearheading targeting and distribution considering their understanding of their constituents and the local quarantine situation.

To achieve their objective, it may serve supply-challenged countries well to manage supply chains at the top and undertake bulk procurement of food and other essential items, tapping corporates in the food and logistics industries to aggregate wholesale purchasing and delivery of food items.

Principle 5: Turning crisis into opportunity

To turn this crisis into opportunities, we must contemplate how to radically restructure our societies to adapt to the new normal.

Leveraging new technologies to adapt governance and social infrastructure should be the cornerstone of this restructuring. Siloed government bureaucracies have proven to be ineffective. A radical rethinking of new methods of governance should include digitalization of government services, data-driven decision making, and enhanced inter-agency coordination.

We can start by rapidly creating digital national IDs to move towards digital distribution of government subsidies through e-money or QR codes. We don’t have to reinvent the wheel: telecommunications companies can be tapped to provide target households with internet credits as part of their assistance package, with cash aid disbursed directly into e-wallets. These telcos are sitting on a large database of users and can provide the initial backbone of this new digital infrastructure. This will hasten and institutionalize the transformation towards a cashless society.

Furthermore, this may be a time to finally recognize internet access as a universal right because it empowers people to continue their education and access to economic activities – both basic rights – even under extraordinary circumstances, such as protracted lockdowns.

The digital economy must be encouraged to operate in even greater magnitude, considering that e-commerce and logistics will remain a pillar of consumption-based economies for the foreseeable future. The BPO industry will have to adapt to remote work as an integral part of its DNA. Overseas workers, whose remittances support consumption in many emerging economies, can be protected by carrying mutually recognized and updated digital health and immunization certificates in the future, akin to a mutually recognized digital health ID that can be updated by home and host country governments in real-time.

The gig economy in the transport sector can also be leveraged. In the Philippines, where a number of people find work as transport drivers, Ateneo economists estimate that the government can pay riders P10 billion, estimated to be the cumulative monthly income of public transport riders, to deliver food and supplies and ferry front liners to their places of work.

Digital solutions for the pandemic era are not limited to economic ones, but can be used to address the health crisis head-on. Private sector-developed apps can trace and track infections in communities and hotspot public places. Other countries are using data to track community movements and healthcare site capacities. Nationalizing them into coherent strategies with health authorities is the next step.

With everyone already paying an inconceivable price for this pandemic, we should try to reap the silver linings by pushing the fast-forward button on the digital transformation of our societies.

Principle 6: Data-driven policy agility

The global best practice is to have government policy responses be sensitive to events as they unfold, including automatic triggers (i.e., kickers contingent on key macroeconomic indicators or COVID-19-related data points). An example would be additional cash transfers that would kick in based on unemployment or poverty statistics and the gradual re-opening of certain industries and geographic areas based on current infection rates.

Policy agility also calls for an exit strategy, a staged recovery plan, and a constant re-evaluation of trade-offs based on facts. Policymakers need to be both agile and courageous enough to continuously weigh the opportunity costs of lockdowns. In the same way that extreme cures always run the risk of harming patients more than the illness itself, extreme and protracted lockdowns in developing economies may in the long run prove to inflict deeper, longer lasting, and more widespread damage to people’s lives than the virus itself. “Lives or livelihoods” may in the end prove to be a false choice; one cannot exist without the other.

This calls for a reasonable compromise. Determining which sectors are eligible for gradual reopening can be assessed against a number of data points like infection rates and risk potential. It would also be assessed by economic contribution, like employment potential and the economic needs the sector can meet if the extended lockdowns persist. Geographic and demographic data points ought to drive decision-making on lockdowns, not fear.

Imagining a Better post-COVID-19 world

These are just some of the best examples of bold and imaginative solutions we can consider in this time of crisis. In positioning ourselves away from social collapse and towards a quick V-shaped recovery, we must strive to marry the potential of innovative policymaking with the promise of radical compassion to the vulnerable.

COVID-19 is the 9/11 moment of the younger generations and perhaps the World War II moment of this century. The characteristics of our challenges have fundamentally changed: wars against countries nor against stateless terrorists have ceded the stage to shared global challenges like pandemics and climate change, where those with the least are ravaged the most. An unprecedented crisis like this is only likely to recur and test us with more frequency in the future. 

A revolution in policy thinking is upon us. Because of COVID-19, ideas like universal basic income, digital cash transfers, telemedicine, and remote working suddenly appear more attractive and viable, presenting opportunities to reshape how we live and work in a post-pandemic world. As the pandemic continues to expand the Overton Windows of policymaking, we must not take this opening for granted.

The scope and ingenuity of our social and economic policy responses to these challenges and opportunities will define how succeeding generations will live in a profoundly altered world. Our kids and our grandkids’ quality of life rests on how decisively we reimagine a more compassionate economy-in-crisis and stave off the coming contagion of social disruption and unrest.

Making sure patients survive COVID-19 rests on our heroic healthcare front liners. Making sure society survives the pandemic’s aftermath rests on the creative imaginations of everyone. We owe it to each other to emerge on the other side of the lockdown into a world worth living in.

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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.