There is a lot to learn from the Covid-19 pandemic for climate change, both in terms of how systemic disruption in one part of the world can transmit to other parts of the world. Secondly, the magnitude of the reaction to Covid-19 just shows up the gap in response to climate risks – money can be found if necessity dictates. Fair enough, the pandemic is rapid, while climate change is slow until, perhaps, a tipping point is reached and the crisis can unfold at lightning speed.
What are the economic lessons from Covid-19?
Every day and week, things are changing as the globe adjusts to the systemic risk that Covid-19, or the coronavirus disease pandemic, has foisted on the world – it is a black swan indeed! Some countries are better prepared than others and some have deeper pockets than others. Covid-19 is a democratic virus – it cares little about your class or status in the world.
Events have moved so fast that even the G7 and G20 were unable to gather their thoughts.
We are learning, as it were, the Covid-19 economics as we go. Every country has its own context and, since there has been no global, collective preparation for this raging event, governments will have to learn off the cuff, as it were, and mistakes will be made. All we can do is learn from the frontrunners in dealing with this pandemic, namely China, South Korea and Italy.
Viruses do not have the habit of waiting for anything.
Economies have to fall off the cliff for a short period, it seems, as both demand- and supply-side components of the economy are forced into quarantine.
Societies that are more socially fragmented are likely to be worse off, as they have high degrees of inequality and persistent conflict.
The pandemic has shown that people can unite in mysterious ways when they are confronted by a new enemy. When all is over, they may perhaps go back to their old ways of bickering.
What we know is pandemics are oblivious to social and economic fractures. They are agnostic to the consequences. The lesson for our age of uncertainty is that prolonged fracture and inability to structurally reform economies can deepen crises caused by external shocks. If we are to learn anything from previous pandemics, such as the Black Death (which raged from 1 348 to 1 349 and, in civilistional terms, was short and brutal) and the Spanish flu, is that, if there is a prolonged economic shutdown, economies can be permanently damaged. Some have better resources to recover and others may be set back many years.
Social change can also ensue from a pandemic; the Black Death, for instance, tilted power from elites to peasants, bringing about significant reforms in the Western world. In his book, The Great Leveller, Walter Scheidel identifies plagues as being one of the ‘four horsemen’ in history that brought about fundamental shifts in society, alongside war, natural disasters and revolutions, each operating as a ‘positive check’ on inequality in society. This is still to be seen with Covid-19.
Nonetheless, inequality and pandemics place a premium on strong political and economic leadership – this goes without saying.
While governments focus on flattening the curve of coronavirus infection and ensuring the economic damage on medical services is minimal, all they can do is ensure vital channels of supply remain open for these services.
A decisive State that is able to universalise the economic prescriptions in times of crisis is better able to implement lockdown measures. In the US, states are competing with one another to secure supply of essential medical goods and services, and price gouging has now ensued. The governor of New York has asked the federal government to step in – essentially, to socialise production and nationalise pricing.
Countries dependent on foreign capital flows have found that there has been a run on their stock markets and government bonds have generated higher yields, pushing interest rates up. In the short term, vulnerable countries will become poorer and, if there are imports, these will become more costly. They may have to deplete their foreign reserves or go begging to the International Monetary Fund (IMF).
Demand will initially peak for essential items as households go into lockdown. Production will ramp up in response to the increased consumer demand, but sooner or later, this demand will slump, as only essential services are permitted to operate and households look to stretch their finances for as long as the lockdown measures persist. It could be weeks or months.
Nobody knows how long this tail will be, but China’s drastic measures show that it can last at least two months, and that is the best case scenario for the world at present. Italy is showing a different trend and lockdowns are intensifying social and economic pain. The situation across Europe will magnify, as the European Union (EU) is already putting measures in place to deal with the pandemic’s fall-out. The EU has moved fast to arrange a stimulus package and an EU Solidarity Fund to direct more funds at medical services, cushion against the loss of wages and create rescue packages or tax redemptions for businesses.
The virus does not change prevailing conditions – in the case of South Africa – but merely extenuates the deepening hole. The rand is weak and economic growth for the next quarters is likely to take a further hammering. Meanwhile, ratings agency Moody’s saw fit to downgrade South Africa’s rating to junk status at a time when the country is grappling with the Covid-19 pandemic – clearly, no mercy is being shown. It is pushing South Africa the IMF’s way.