State vs the Market in a Pandemic Economy

Big government is what The Economist told us to expect at the start of the Covid-19 pandemic in 2020. It anticipated greater government intervention, of course, as there should be in the case of a health emergency that Covid-19 has turned out to be. But it also anticipated government mandates, use of contact-tracing as a surveillance system that would trample on individual rights, etc.

I remember saying at the time in one of my Owl Wisdom Podcasts that it appeared a little too alarmist and that in the context of a viral epidemic-gone-pandemic, the government had a duty to intervene and help their citizens. Who else can people turn to, if not their governments. And that while the use of surveillance technology for ulterior motives is not advisable, there are several other useful roles that governments have to play.

The Economist’s recent January 15, 2022 edition is on The Bossy State, which argues that governments are using the pandemic to shape corporations to their will. If only it were that simple. The fact is that in rich, advanced countries where governments have spent big during the pandemic, they have helped businesses keep workers in their jobs or have helped provide families with unemployment benefits.

Across the world, governments have had to pull out all the stops in protecting their people against the pandemic and at the same time, keep their economies chugging along. Would any of this have been possible by the government alone? In poorer, developing countries, where the healthcare infrastructure is woefully inadequate, governments have an even larger role to play in developing that infrastructure, even though the pandemic will not wait for the infrastructure to be built. Which is why field hospitals are being set up everywhere, there is door-to-door vaccination going on in remote areas, and in countries like India, millions of final-year medical students have been mobilized to bolster vaccination and Covid treatment efforts. And it’s still not enough to bring the pandemic under control.

This state vs market way of framing the entire pandemic-affected political economy strikes me as somewhat childish and impractical at best, and libertarian at worst. To my mind, the state and the market (business) have to work together to tackle this crisis of unprecedented magnitude. And I would imagine that there ought to be no problem with that, since the state and business have often worked together, including in undesirable ways, as I have argued in an earlier blog post. Governments’ and businesses’ interests are not opposed to each other; they have always found ways to work with each other knowing that it is in their best interests to do so. Indeed, they have often depended on each other, an aspect that has only been heightened in today’s technological age.  

Besides, it is not merely government intervention, but what kind of intervention that matters. This, of course, depends on each country’s economy and its requirements as well as the capacity of government and business to help. In the context of the Covid-19 pandemic, businesses in western, advanced nations have depended on their governments to protect jobs and offer massive unemployment benefits to their workers. They have also been the ones to innovate and produce vaccines and treatments in the shortest possible time. Governments on their part have helped the unemployed, protected jobs, provided relief to the worst affected sectors and kept the costs of borrowing at all-time lows, so that businesses can borrow easily and spend. In many countries, corporate taxes were also reduced/deferred to offer financial relief to companies.

In poorer, developing countries such as India the spending capacity of government was limited, and without causing fiscal deficits to soar to unmanageable levels (it was already 9% in 2020), the government tried to do a balancing act between providing economic relief and managing the healthcare part of it. There were no unemployment benefits for laid-off workers or furlough schemes to keep people in their jobs, but most large corporations took it upon themselves to retain their employees. It was the small and medium businesses that were worst affected, since the pandemic has lingered well beyond what most of them could have managed within their means. And even though the government had a credit guarantee scheme for such small businesses, banks were wary to lend to them.

Where government intervention ought to count even in normal times, such as education and healthcare, is what the pandemic has exposed as inadequate. It is reported that most countries in Africa have not been able to progress with their vaccination programmes, not only because of lower access to them, but because of poor or non-existent healthcare infrastructure. On the other hand, Latin American countries have fared much better in vaccinations.

And as far as education is concerned, it is the single-biggest casualty of the pandemic, adversely affecting a couple of generations at least. Schools and colleges remaining closed for the better part of 2020 and 2021, will set back young people’s education and careers by several years, even if they have been promoted to the next grade without conducting exams. And while the pandemic was a time to explore the virtues of online-education, how many have access to technology and can afford it?

I think that countries that fared better on healthcare and education, will progress faster in the years to come. The Economist carried an article recently that tried to analyse which countries among the advanced nations did better during the pandemic that I shared on LinkedIn and Twitter. I found some of the parameters irrelevant and what I thought ought to have been considered were absent, such as education and employment. It is here that it is worth looking at the Nordic countries and their approach to Covid-19. Each country pursued its own policy, from Sweden which didn’t lock down at all, to some of the others that followed Covid-related restrictions for a very short while, leading to little or no disruption at all to education and work. It also helps that their economies are not very dependent on tourism and that dominant sectors of their economies were conducive to work from home.

It is worth noting that even in GDP terms, most of the Scandinavian economies suffered less of a fall in economic output during 2020-21, and almost all of them were back to pre-pandemic levels in Q2 of 2021, same as the US, according to the chart below from the Government of Sweden website. Denmark seems to have done even better than the US and Norway less so, but higher than the Euro area. What’s more they seem to have managed this growth without stoking inflation to very high levels.

Overall, their strategy in tackling the pandemic was to take all the precautions, but to let life go on as usual, as much as possible. It appears that they were better prepared for the fact that Covid-19 is here to stay for a while and might even become endemic, but in less virulent ways. Other countries, including India went in for severe lockdowns lasting several months, in which many businesses had to shut down and millions of migrant workers lost their jobs.

It was only in the middle of 2021 – the second year of the pandemic – that countries slowly decided to give up their zero-Covid strategy. However, China still persists with its zero-Covid strategy even as new outbreaks emerge in several cities and each one is being locked down. It is having an adverse effect on their economy and their people’s lives, surely. And while the country was extremely successful in containing the spread of the virus when it first erupted in Wuhan, its strategy in dealing with successive variants and waves have not been as impressive.

Even now, as countries emerge from the Omicron variant, which is said to peak by middle or end of February 2022, the expectation from most governments around the world is that they will continue to stay accommodative in their economic policies, and will help vaccinate and protect their citizens, as also create jobs for the unemployed.

We are in the midst of the corporate earnings season, and it appears that even though Indian companies have been benefiting from a corporate tax cut in 2019, there are still headwinds in the form of inflation and high input costs. Besides, as a result of the pandemic, we are likely to see some sectors do better than others; Indian tech companies which are usually the first to report their earnings have recorded a good set of corporate earnings, no doubt helped by the stronger digital drive during the pandemic. But, with inflation raging high and consumer demand weakening, many companies are already demanding that the government boost consumer demand and undertake higher capex investment in this year’s budget which is to be announced on February 1, 2022.

The ball is back in the government’s court. In bad times, more than in good times, the government is the only resort.

The animated owl gif that forms the featured image and title of the Owleye column is by and I am thankful to them.  

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