The Financial Express

Strategic studies for the economy

| Updated: September 17, 2020 21:01:17

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Strategic studies are made by countries on various subjects and for different purposes. Of these the most common and important are the studies on the geo-political security of a country that has territorial integrity and sovereignty as the core focus. Many countries have done this and in all probability are continuing to do so at present, at regular intervals. Economic stability that underpins all other security has also received the attention of policy makers for strategic studies. When matters are normal in national and international realms and economic changes take place gradually or with minor hiccups and aberrations from the normal, the sense of complacence that is engendered does not brook any thought that things can be different, far less worse. But Black Swans do appear, however unexpected they may be and can wreck havoc on an unsuspecting populace.

The sudden appearance of Covid-19 and its devastating onslaught in country after country is still fresh in memory as a living experience in the present, driving home the truth that a stitch in time saves nine. The proverbial stitch here is the preparation for a sudden economic turmoil engulfing not one country but the whole world. Such a phenomenon was unthinkable until the currently raging Covid-19 appeared. But now the experience with the virus over the past four months in Bangladesh and six months in China, Europe and America have shown how vulnerable are our lives and life style to suddenly spreading pandemic. The fact that nothing like it happened before was no insurance against its appearance recently. Similarly, the likelihood of its outbreak in future, perhaps with greater virulence, can not be ruled out. This time around almost all countries in the world have been caught unawares, literally with their pants down. The damages to the economy and suffering to the people is not the least because of the state of unpreparedness of governments and the business and industrial sectors of the countries affected by the pandemic.

As the countries afflicted with the virus and in different stages of the outbreak, including incipient recovery, struggle to cope with it, policy analyst have to think about the strategy to address systematically a pandemic like the one they are tackling at present or one in future that may be even worse. What the analysts can and should do is conduct a number of cases of possible scenarios of the consequences of a pandemic. First, in order of priority will, of course, be the worst case scenario, followed by a moderate case scenario. Finally, the best case scenario will be in order, in which not much damage is done to the economy under the impact of the pandemic. In this case, with quick recovery the economy can be back on the rails within a period of six months after the outbreak. For the worst case scenario, recovery will not be quick and easy and may take from one to two years.  Hypothetically, this is what may happen during a worst case scenario. A pandemic like Covid-19 lasting for over six months or more may see manufacturing output reduced to between 30-50 per cent. The services sector, including hotels, restaurants, airlines may plunge to rock bottom, declining to 20-30 per cent of their full time capacity. Exports of a country with this time-frame may plummet 40-50 per cent. Imports may decline to 30-40 per cent during the year as demand for goods and industrial inputs may decline precipitously. Unemployment may  reach 50-70 per cent of labour force during the year.  The sum total of these will be a Great Depression of the economy (for developed countries)  equivalent to that of the Thirties' and a recession for all other economies. In fact the worst case scenario can use the Thirties' depression as a template. But the severity of the crisis will be much greater because consumers living in a credit card world will have almost no saving and cash in hand. The stocks that the rich may hold will be worthless, their value having been wiped out by crash in the share market. In the worst case scenario when the epidemic is estimated to linger and wreak ravage for about a year the financial institutions will have no chance of surviving the catastrophe and will become bankrupt. Only in agriculture some production will continue, mostly for subsistence of the producers.

The governments' goal during a worst case scenario will be, first and foremost, the protection of lives of the people from the virus and from starvation due to stoppage of work and income. In most countries, it will not be possible to address both of these sequentially and simultaneously. A robust fiscal policy will have to take care of both the demand and supply sides providing food relief, medical assistance and unemployment benefit for the poor and low income group. It will have to assist the producers of goods and services with credit at no interest. Banks and financial markets will need funds to restart their operations. It is only after the initial stage of recovery is over, that banks will be able to help business and industries with credit.

From then on, the role of fiscal policy can be winded down, gradually. Hopefully, after two years the economic may regain its pre-crisis strength. Of course, this delineation of the different aspects of the worst case scenario is highly conjectural. But the real life situation can be more or less like the one portrayed here. How will governments bear such a heavy burden, particularly when revenue collection from business, industries and the employed will be put on hold? Well, the government may either `monetise' fiscal policy (as has been the case in Bangladesh and India) or launch a massive sale of treasury bills and bonds, which the developed countries are now doing. Thus during the recovery phase even without a private sector borrowing from banks, public debt of the government will balloon upward, unleashing inflationary forces. If the government assistance during recovery is evenly balanced between productive and non-productive sectors, the inflationary pressure can be kept within reasonable limits.

The medium term scenario can be something that is going to happen in most countries during the present pandemic, provided it is contained by the end of this year. With partial lockdown, recovery can start six months after the last wave of the pandemic. The recovery plan can be implemented with a combination of fiscal and monetary policy. Banks will play significant role in providing loans to business and industries backstopped by financial assistance from the government via central banks.

The third scenario is the best case scenario where the pandemic is brought under control within three to six months. The disruptions to productions and business activities will be manageable to bring their activities at par with the status quo. Unemployment benefit to the furloughed employees and credit for purchasing raw materials to the business and industries will be enough to kickstart the economy.

The above is a rough sketch on how things may look like during and in the aftermath of a pandemic and during recovery from the same. The policy analysts will have to flesh out the details of the scenarios outlined above for which they may use mathematical models. The availability of data and past experience with recessions will be useful in completing the design of the scenarios.

The task of the policy makers in preparing the strategic studies will be made easier if sector-wise survey is carried out by subject matter specialists and practitioners, covering the damages to production, service provision and employment. For this purpose specific task forces can be formed with a time-frame, say for one month. Though much time has elapsed after the outbreak of the pandemic, these surveys can be undertaken even now to help policy makers for fine tuning and revision of the programmes. It would have been ideal if these surveys and studies preceded the stimulus packages. But it is not yet late as the economies afflicted with the pandemic will have to slog forward in the near future. 

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