Expert Speak Health Express
Published on Apr 19, 2020
The COVID19 pandemic has impacted the rich and developed countries. It has reiterated the importance of effective and adequate primary healthcare facilities, especially among the nuclear-weapon states.
Can the global economy survive COVID19 shocks? Amidst the spread of the COVID19 pandemic and the imposition of lockdowns, the world has come to an abrupt halt, with the global economy taking a downward swing. This slowdown is being compared to the Great Depression of the 1930s and the Global Financial Crisis of 2008. Even as the increasing number of transmission and casualties continue to perplex international organisations and local politicians and administrators, a plan is required to map the aftereffects of this pandemic and how to recover from it. The sudden economic slowdown, possessing the intensity of multiple shocks, will in the future lead to a new equilibrium of output and price across markets and product categories. The global lockdown has forced business people and employees to tap into their savings to meet their daily needs. Due to the lack of an alternate source of income, investments are expected to decline further. This volatility in macro-economic variables highlights the uncertainty of the global macro-economic scenario.

Path to recovery

Several paths can be traced for the recovery of domestic economies — U-shaped, V-shaped, and L-shaped. The V curve represents the dipping of the growth rate and a return to the pre-crisis level with GDP returning to earlier trends. The U curve depicts that although the actual growth rate trickles and then recovers to the pre-crisis level, the GDP remains below the previous trend. The L-shaped path is the worst. Unlike the V or U track, the growth rate dips and remains below the earlier level, usually for a prolonged period. GDP falls substantially below the pre-crisis trend and stays there. For instance, during the 2008 financial crisis, Canada experienced a V-shaped recovery, while the US exhibited a U-shape graph, and Greece saw with L-shaped economic growth.

Figure 1

Source: Harvard Business Review

A demand shock can be managed without permanent loss of GDP, but supply shocks, also known as structural problems, lead to permanent loss of GDP. The former shows recovery with V- and U-shaped paths, while the latter leads to an L-shaped path unless the government introduces significant reforms.

The demand-supply recovery can be explained using three conditions. Firstly, if there is a pure demand shock, then as the demand recovers, the economy will recover and have a V-shaped recovery path. Secondly, if there are supply and demand shocks, then growth rates will recover alongside demand, but growth potential will remain low. This marks a U-shaped recovery path. And lastly, if the shock is predominantly structural, then the growth potential will fall substantially and won’t be able to recover, which in turn will result in an L- shaped recovery.

Figure 2

Data source: World Economic Outlook, April 2020 — Chapter 1: The Great Lockdown, International Monetary Fund.  Note: 2020 and 2021 figures are projected.

A comparison of seven emerging markets and developing economies (Brazil, China, India, Indonesia, Mexico, Russia and South Africa) and seven advanced economies (Canada, France, Germany, Italy, Japan, UK and the US) shows that Italy will be the most affected in 2020, with its real GDP growth shrinking by 9.1 percent (Figure 2). The shape of the US’s recovery path will depend on the type of reforms its government introduces since there will be a 5.9 percent drop in its real GDP growth rate. According to the World Economic Outlook (WEO) report published by IMF on 14 April, the world economy is expected to contract by 3 percent in 2020, and advanced economies and emerging markets and developing economies will be affected. These projections are the most optimistic scenario, with the pandemic under control by May-June. That still implies a U-shaped recovery for the world (and for India). In the less optimistic scenarios, we are probably looking at an L-shaped recovery. The WEO hasn’t projected after 2021, but if GDP contracts for two years in a row, that is the likelihood.

What lies ahead for India

India’s real GDP change is positive at 1.9 percent, surpassing both China and Indonesia. Although it seems that China is recovering from the shocks of the pandemic, it might take a U-shaped economic recovery path. However, meeting its original pace of growth poses a challenge due to the limitations in its international export outlets. In India, the virus became active much later, but is spreading rapidly. The government is still focused on suppressing the disease with physical distancing and strict lockdown measures. But India faces another challenge in the form of its dismal doctor-patient ratio, one per 1,445 patients. This grim situation has diverted the focus and priority on saving lives, posing difficulty in estimating what the recovery path of the country might be. With no foreseeable development of a vaccine, containing the spread of the virus has become imperative.

Meeting its original pace of growth poses a challenge due to the limitations in its international export outlets. In India, the virus became active much later, but is spreading rapidly.

In the Indian context, one of the following outcomes is likely. If the COVID19 crisis is shortlived, and people resume operations quickly, it will result in short term demand shock. India can recover from this by lifting the lockdown and providing some economic stimulus, resulting in a V-shaped recovery. On the other hand, if the lockdown leads to changes in the labour force or the workings of business (for instance, if a migrant worker is pushed out of the labour force or SMEs are forced to shut-down), this could lead to a loss of potential GDP. Depending on the magnitude of disruption caused to the supply-side, the recovery could be either U- or L-shaped.

In order to avoid such a situation, the government intervention framework must take precedence over the free-market model. The governments should use the concept of ‘helicopter money’ where direct cash transfers are made to those in need, including daily wage labourers. Peculiar situations like these allow the government to move away from the set-standards of the poverty line and ration card. The domino effect is expected to spread within the hospitality and tourism industry, with the lockdown leading to zero demand. The government should ensure that people working in these affected industries are provided with the basics, including salaries, insurances and job security. Such a ‘bottom-up’ measure would not only help employees keep up with these tough times, but will lighten the pressure on the businesses. This step will put pressure on the fiscal deficit, but desperate times call for desperate measures. Disruptions to business and the labour force must be avoided to ensure that the lockdown does not lead to structural problems, and to create the conditions necessary for V-shaped recovery in India.

Unlike the Ebola virus, which primarily affected the developing African nations, the COVID19 pandemic has impacted the rich and developed countries. It has reiterated the importance of effective and adequate primary healthcare facilities, especially among the nuclear-weapon states. To tackle any such pandemics in the future, the government should have provisions and a constant supply of masks, beds, ventilators and other items that medical staff require. The preparedness should not be contingent on the occurrence of a global epidemic. In such emergent situations, there is a natural tendency for people to hoard essential commodities. To meet with the sudden upsurge in demand, the government should intervene and ensure fully functional supply chains, to avoid any shortages. In such testing moments, more emphasis is placed on actions rather than on deliberations, and so the government must make quick decisions and implement them on a war footing.

The state of the global economy in a post-pandemic world will depend on the pace of revival, quality of decision making and implementation in various countries.

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Prachi Mittal

Prachi Mittal

Prachi Mittal was an Research Assistant with ORFs Centre for New Economic Diplomacy(CNED). Her research focuses on development economics Indian economy and the Sustainable Development ...

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