COVID19 lethally combines being infectious and deadly. Science, along with the now-daily updates on the dramatic increase in global cases, has made that much clear. Here, though, I want to concern myself not with the scientific facts (these are -should be – relatively uncontested) but on how Governments must respond to those facts. What I do want to argue here is that, even once governments start taking the virus seriously, there will necessarily be stark differences between what developed countries and poorer countries are able to do. Crucially, this difference will undermine the effectiveness of policy in developed countries. If this issue is not solved, the efficacy of the response in developed countries will be undermined. I propose that the only appropriate response to this crisis is a global coordination of policy which combines state coordination of social distancing measures with emergency social policy to facilitate this. Large developed countries must exploit their powerful balance sheets to underwrite loans to those countries that cannot borrow on the scale required to meet this challenge.
What has to happen, and what has happened?
At this point, I am going to take as given what appears to be the overwhelming advice of epidemiologists that social distancing is the appropriate way of dealing with a pandemic. If anybody seriously needs to rehearse these arguments, I found this a very straightforward demonstration. Technically, social distancing, that is, drastically reducing the amount of social contact, lowers the socially determined “R0” value of the virus, that is, the average number of people a sick person infects. This in principle has two effects: firstly, it “flattens the curve”. If the R0 value of the virus decreases as a result of social distancing, the speed of transmission decreases and the total number of sick people at the peak of the epidemic decreases. Secondly, and perhaps most enticingly, if the R0 value of the virus can be reduced below one via social distancing, there is no upward-sloping curve anymore. The virus dies out. This appears roughly to be what has now happened in China, where new cases are primarily from new people coming into the country.
That’s a rendition of the hard science. Now, what has to happen socially? In short, people have to be cajoled to socially distance. For those who can work from home or take a month off, the only major problem is working out how to persuasively make the case that they ought to endure major inconvenience in order to save lives. The significant economic problem comes when social distancing comes at the expense of income. Since flattening the curve is an externality- social distancing benefits other people, most of whom you won’t know- incentives cut against doing it. Add in a strong incentive not to do it (i.e. you lose a month’s income and cannot pay rent) and compliance seems unlikely. Exploiting the state’s coercive power to force compliance is not the silver bullet it might appear for three reasons. Firstly, with democratic governments there is only so far politicians will dare push against public opinion. Secondly, and relatedly, governments have less power than they think against their own populations if there is genuine resistance to a policy. This is particularly the case in liberal democracies when most laws are implemented with the broad consent of the population, and state capacity for large-scale repression does not exist. Thirdly, doing things with the consent of citizens is infinitely preferable from an ethical perspective than forcing behaviour. It is both more effective and philosophically preferable to create conditions in which people choose to socially distance than to impose it on a hostile population. None of this means that state coercion should not be used at all; just that it will be more effective if it is going with the grain of private incentives. Practically, this means that there needs to be state intervention to partially replace the incomes of people who need to stop working, to ensure that they can pay rent and provide food for themselves and their families. Note that here I’m setting aside arguments about how to protect the economy. For what it’s worth, protecting the economy seems beside the point when social distancing will inevitably lead to a recession. Instead, this is primarily about ensuring compliance with social distancing.
Now, what has occurred? As a very rough guide, we can sketch out a non-exhaustive typology of government responses as follows:
Nationwide social distancing (China, South Korea, Italy, Germany, France, Spain, Jordan, India)
The state provides for the complete shut-down of non-essential social contact through a combination of “advice”, economic incentives, and state repression
Limited social distancing (US, UK, Kenya, Nigeria, Senegal, Ivory Coast, South Africa, Canada, Iran, Australia, Japan)
Closing down of bars, restaurants, and schools, but with patchy implementation of working from home, implemented mainly through government advice with some economic incentives
Travel restrictions and economic impact mitigation (Brazil, Mexico, Ghana, Congo)
Intervention designed primarily to mitigate the economic impact, perhaps combined with some travel restrictions
Naturally, the government response has been driven to some extent by the severity of the outbreak. Hence the notable difference in policy in Africa, where countries such as Ghana have implemented such a rigorous testing regime in airports that further intervention has not been deemed necessary. Government competence also appears to matter, hence the disparity in response between the US and Europe. What should be notable however is the huge financial cost of the response between countries which intervene heavily and those that do not. I could pick from a huge number of examples of the direct cost and make a much longer article, but instead I’ll just cite my favourite: the Danish government is paying 75% of the wage cost of workers who would overwise be laid off for three months in order to prevent lay-offs and give workers the peace of mind they need to stay at home. In economies with weaker links between trade unions, employers and the government, direct government payments to laid-off workers are the obvious alternative. Then there is the indirect economic cost. Remember, we’re forcing economies into recession here, which nearly always precipitates a ballooning of public debt as tax payments drop. This cost is likely prohibitive for economies in the global South. Leaving aside the varying seriousness with which leaders appear to be dealing with the threat, there is a risk that some countries simply will not be able to afford an appropriate policy response.
The impact of partial global compliance
The point of observing this disparity is that a truly effective response to coronavirus has to be global. Suppose one economy successfully locks down. Maybe the R0 number decreases so that the total number of cases is lower; maybe it even falls below one and the number of cases drops. Now suppose that its neighbour does not, and the number of cases explodes until most of the population is infected. Once the outbreak is contained within the first country, the government would like to end the lock-down and let things return to normal. But if it does that, the virus will simply come in from the other country and the epidemic begins again. This means that either travel between the two countries has to be completely shut down, with everyone coming from the highly infected country being quarantined and tested, for as long as the virus is rampant, or the first country has to stay in lock-down even after the epidemic has died down because new cases are coming into the country. Either case means a much longer period of economic lock-down for the first country, and probably a less effective containment of the virus, considering that social distancing and travel bans will not elicit 100% compliance. If the virus mutates, which is still uncertain, then the problem is compounded by the fact that it will be present in the second country for years to come.
None of this is to say that the policy of the first country is in vain. It will experience a “flatter curve”, lower usage of its health service’s capacity, and ultimately fewer deaths. This is not in any way an argument that social distancing is futile. However, if there is only partial global compliance, it will be harder to actually kill the virus, and the economic shocks will last longer.
It should be clear from the above that the most efficient way of responding to the crisis is for comprehensive social distancing measures to be undertaken in all affected countries (that is, where border control and testing has not been effective enough to prevent an outbreak). In some economies, the state’s power may be effective enough to enforce a quarantine. For many economies, in particular in Latin America and sub-Saharan Africa, the police force is simply not large enough to prevent widespread flouting if economic incentives cut so strongly against compliance. The only solution is a large, rapid (possibly temporary) expansion of the welfare state in order to allow everybody to socially distance without immediate destitution. The immediacy of the threat suggests there will be no time to develop the infrastructure to means-test, identify who is self-employed and who can work from home, or condition these payments on any other form of behaviour. The low union density and large informal sectors in most of these economies also cut against many of the corporatist solutions implemented in Europe. The most efficient solution will be direct, universal payments to citizens from central government. These should be enough to maintain subsistence. Any more and there would be legitimate concern about an inflationary bubble (remember, the supply side of the economy contracts significantly during social distancing). The use of electronic money transfers such as M-pesa make this feasible, and programmes such as Bolsa Família mean that some states will have existing infrastructure to call on in implementing this. In other words, the technology and institutions exist for this to be done. The major stumbling block will be the cost.
The differential borrowing capacity of global governments
Naturally, the first step is for scientifically literate global leaders to persuade the less gifted of the necessity of the response outlined above. If the virus mutates quickly and a vaccine proves elusive or otherwise less effective than we would hope, they may have many months in which to do this. However, there is then a significant financial problem: for some economies (the US, UK, and Japan) the government has an almost unlimited capacity to borrow and spend, especially in an economic crisis. Empirically, this has been demonstrated over the last decade, as public debt has grown to 107%, 80.8% and 238% of GDP respectively, while real interest rates have actually remained negative i.e. investors will still pay those governments to hold and spend their money for them. There are three reasons why this is the case. Firstly, these countries have powerful central banks which have the power to print money in order to bail out their governments. This assures investors that there is little to no chance of these governments being unable to pay investors back. This is the major difference between these economies and the Eurozone. Secondly, the governments and central banks of these economies have credibility when it comes to inflation, meaning that investors are not concerned about deliberate and stark devaluation of debt (obviously a negative real interest rate means a relatively predictable erosion of value over time). Thirdly, there is a large pool of domestic savings seeking safe assets, which creates significant, inelastic demand for government debt. These factors are more important in an economic crisis because, firstly, the threat of inflation decreases rather than increases and secondly, investors seek safe haven assets, further flooding the pool of demand which government bonds soak up.
Contrast this now with many emerging economies. A prime example is Brazil. It has a persistent current account deficit, a highly volatile currency, and a central bank with questionable credibility. Suppose the Brazilian government issues lots more in Brazilian real-denominated bonds. This increases the government’s incentive to inflate away their value, and the monetary policy committee, simply does not have the credibility to ward off this concern. This, plus the current account deficit, makes investors wary of a potential currency crash. Thus, it will be hard to find buyers for a large issuance of Brazilian debt and yields will go up. Now suppose the government issues lots more in dollar-denominated debt. In this case, the concern about currency depreciation’s direct impact on the value of debt is not as strong, but the concern about the government’s ability to pay is. If the real depreciates, the service costs of the debt increase, and the government is not able to pay. Again, the current account deficit and the central bank’s incredibility makes this a real fear for investors. Yields rise. These factors are exacerbated in an economic downturn because emerging market bonds are not a safe haven asset, and the Brazilian real is a risk-on currency, so depreciation and therefore inflation risk increases during an economic downturn.
I did not pick Brazil at random. It is the sixth most populous country in the world; it has a suspected 2,000 confirmed cases of coronavirus; and it simply cannot afford to do what is necessary to protect itself and the world.
The solution: a global response to COVID19
The obvious solution to this financial problem is that developed economies which have the balance sheet capacity should use it to support poorer economies. The US, UK, Japan, and (to the extent that the ECB has the credibility to stand behind its governments’ debt) the Eurozone should expand borrowing in order to lend directly to the global South in order to allow them to take the necessary measures to facilitate social distancing.
How does this solve the problem? It could allow for the necessary expansion of government intervention for achieving social distancing without causing concern in international markets. Crucially, if designed correctly, it will circumvent the problems emerging economics have in borrowing in private international financial markets. Firstly, repayments should be contingent on economic growth. The most obvious design would be repayment of a certain percentage of real economic growth per year until the debt is paid down. This avoids the problem that international investors will not believe that the economy can pay it back. Secondly, the interest rate on this debt should be held at the same rate as the lending government’s 10-year bond yield, in real terms. Roughly, this would mean that the interest rate on the loan for the borrowing economy would be its own inflation rate minus 2%. This would ensure firstly that the debt was affordable, and secondly that there was no incentive for the government to inflate away the value of the debt. Again, this would avoid international investors’ concerns about borrowing. It would also assure repayment for the lending economy. Thirdly, the amount lent would need to be strictly limited in order to ensure a return to normal market discipline after the COVID crisis. The amount lent should be exactly enough to make direct payments in order to facilitate social distancing. Governments would be required to keep a tight leash on spending in other areas. In other words, if the design of the loans makes them targeted at the problem at hand, and fair to both the borrower and the lender, financial markets will be much more likely to take them in their stride.
Conclusion
This is an urgent matter. Unless some mechanism of allowing developing countries to pursue a responsible policy response is developed, it is inevitable that the measures taken elsewhere will be undercut, meaning a much greater eventual economic contraction. A vast amount of economic resources needs to be mobilised and only some developed countries’ balance sheets have the ability to shoulder this burden. Doing so would not necessarily be a gesture of international solidarity. It is the only solution which faces up to the scale of the economic and public health challenge.
Sadly, the prospects for this are sorely limited. It is of course possible that a highly effective COVID19 vaccine is found quickly, or that the virus turns out to be less deadly than expected and a sufficient proportion of the world recovers that herd immunity protects the vulnerable. If science does not offer the world a bailout, however, populist governments throughout the world will inflict massive damage on their citizens’ health, and this will also have knock-on effects on the economy. At the same time, it has also left the world totally rudderless at a time when global cooperation is the only way of optimally responding to the crisis. The results could be dire.