Coronanomics: 8 things we've learnt about the economics of COVID-19
While the COVID-19 pandemic is a public health crisis first and foremost, there are a number of significant impacts and lessons for both local and global economies, according to UNSW Business School’s Tim Harcourt
COVID-19 is the biggest global public health pandemic in just over 100 years – since the Spanish flu outbreak of 1918 just after the First World War. Most of the media interest had been in the public health aspects of the crisis but increasingly, interest is on the economic consequences of the pandemic and often the issues involved in fighting wars on both fronts, become entwined. This virus that started from the wet markets (markets selling wild animals) started in the Chinese industrial city of Wuhan (the Chicago of Asia) and has made its way to South Korea, Iran, Italy and now the rest of the world. If trade bought prosperity to all corners of the world then COVID-19 is taking it all ways showing the dark side of an interdependent world. And a public health challenge than none of us would have experienced before.
It’s a public health crisis first and foremost, but in looking at the economic aspects, what have we learned so far?
It’s the end of globalisation as we know it
Globalisation will never be the same. But it’s not an outright rejection but rather a reset of globalisation. The difference between this crisis and SARS or even the Global Financial Crisis (GFC) or North Atlantic Financial crisis is that all major economies have been hit almost at once by the impact of COVID-19 and it’s done damage to global supply chains in manufacturing and even more to people- based industries like education and tourism and other services-based exports.
There’s been disruption and nations will want to rebuild with a revitalised interest in economic self-sufficiency – especially in medical equipment and technology – and never be reliant on imports in an emergency again. The fact the nation that dominates global supply chains in medical equipment is also the origin of the pandemic is not helping matters.
The nation-state is back
Despite the talk of supranational governance citizens are looking to their national governments to deal with the crisis. Italians looked to Rome (not Brussels) and the European Union (EU) has been very low profile, and in China, Beijing took control from Wuhan’s city and provincial leaders once the virus started spreading. Borders have been shut – within the EU as well as to the EU and nations as diverse as New Zealand, Singapore, Japan, Norway and Australia were quick to shut their borders. In Australia, states have even done it starting with the island state of Tasmania followed by the Northern Territory, South Australia, Western Australia and finally, Queensland.
And public ownership of key industries is back on the agenda too. Starting with the airlines we will see partial nationalisation. It’s mooted for the UK, Europe and Asia. And the main carriers in the Middle East are already state owned thanks to the deep pockets of their government owners. And the same for ports and airports. But it may stop at bank nationalisation. But all in all, in Australian terms we are going to be seeing a bit more of the economic flavour of Ben Chifley and a little less Paul Keating.
Whither foreign investment?
The days of fully mobile capital are gone. And state-owned enterprises buying up distressed assets offshore. We have already seen Australian Treasurer Josh Frydenberg announce sweeping new changes to Australia’s Foreign Investment Review Board (FIRB) guidelines that will mean all foreign direct investment bids will be scrutinised with the threshold abolished.
At first, it was said this would apply to free trade agreement (FTA) partners but this was clarified to apply to all. Why FTA partners? Clearly the Treasurer was not worried about a flurry of investment from Chile or Thailand, it was clearly directed at Chinese state-owned enterprises looking to pick up distressed assets. The media photos of medical equipment being sent from Australia back to China on charter flights by Chinese owned companies didn’t help perceptions.
So, what’s the wash-up? Australia has relied in foreign investment since Governor Phillip brought convicts to these shores – but we have been a trading nation well before when the indigenous people of Arnhem land traded sea cucumber with the fishermen of Makassar – and that will continue.
But Australia is going to be careful to spread foreign ownership so it’s not dominated by one country, it is going to be careful about strategic assets and geopolitical risk (no more Port of Darwin sales) and generally more watchful in this space.
Fiscal stimulus: go early, go households, go again and again?
During the GFC, Australian Treasury Dr Ken Henry was the mastermind of the “go early, go hard, go households” approach that enabled Australia to avoid recession – one of the few western economies to do so. Now the Federal Government is looking at several stimulus packages targeting households and small business and selected industries adversely affected by COVID-19 like the arts, sports, tourism and aviation (the airlines received a $715 million package).
But this is different to the GFC in that there was no social distancing or lockdown in 2008; it was purely an economic crisis, and not a public health plus economic crisis. While it is important to bolster the safety net and keep money in the economy a big stimulus during lockdown when global supply chains are logjammed may not work. The Federal Government may choose to wait until a vaccine is found for the virus and then bring in a stimulus to help kick start the recovery. The Reserve Bank of Australia, for its part, like most of the world’s central banks, have let interest rates fall to almost zero and have bought back bonds to help put cash on in the economy.
Labour pains: will a wage subsidy do the trick?
In a welcome move, the Federal Government has brought in a wage subsidy which allows workers to remain on the books (even if sent home) and eases the burden on employers by picking up part of the tab in terms of payroll. Countries like Denmark have implemented this with some success and it’s on the cards in the UK as well. This helps ease anxiety in the labour market and keeps workers attached to their employer without bankrupting the company. It also helps in recovery as the employer just puts the worker back on and we avoid transactions costs of firing and rehiring.
Will it do everything? Well, it can’t but it is a necessary but not sufficient policy in dealing with COVID-19. The constructive role played by the trade unions and the Minister for Industrial Relations has been positive moves to come out of the crisis.
The tyranny of social distance
Australia’s great economic historian Geoffrey Blainey wrote ‘The Tyranny of Distance’ to describe Australia’s place in the world as well as the vast distances within our shores as well as beyond our shores. Now, half a century on, we have ‘The Tyranny of Social Distance’ which prevents people from being in crowds and increasingly in smaller and smaller groups. This may be temporary but it has vast economic implications and may even change how we work in the post-COVID-19 economy.
Will we find we can work at home, without staff meetings (thank goodness) will the reductions in traffic congestion and carbon emissions give us some guide to what may work in a future environment? This may provide a controlled experiment to how human beings adapt to change when we have to (and we may even surprise ourselves on the upside).
No more bread and circuses: "footynomics" and the arts end of the world
The tyranny of distance has adversely affected anything involving crowds from our favourite sports to the arts and culture and even religion. It has revealed the economic value of sport too as the AFL and NRL, Australia’s two major football codes in terms of commercial value were very reluctant to postpone their respective seasons and it took a while for Japan to give in to the inevitable and move the Tokyo Olympics to 2021. All sports and arts institutions will be very different post Corona, and the rediscovery of outdoor pursuits (even simple ones like playing with your kids in a city park) could transform sports and recreation after the crisis.
The post-corona economy: the post-war reconstruction of the 21stcentury
During World War Two, in Australia, the Curtin Chifley Labor Government was fighting a war in the Pacific and possible invasion whilst setting up the nation for a post war world of industrial development, full employment and mass immigration. This was known as Post War Reconstruction, one of the biggest social and economic programmes the nation has undergone in its history. The changes in the war economy, with women working in munitions factories and the like, made the planners think this could work in the peace, along with the need for a larger population and a banking and financial system and a higher education system (the expansion of the universities) and research programme (via the CSIRO).
It could well be that while the nation and the world brings in temporary measures to deal with Corona Virus, this could also be an opportunity to remake ourselves, develop new industries and new ways of working and dealing with work, education and family life.
The global economy will never be the same again after Corona Virus and we might also find that neither will that nation and the way we deal with work, with enterprise, with play, with family and how we deal with the natural environment.
Tim Harcourt is the J.W. Nevile Fellow in Economics at UNSW Business School and hosts The Airport Economist and The Airport Economist Podcast.