Economic Policies for the War on the COVID-19 Virus (International Monetary Fund)

Yesterday, Wednesday 1-4-2020, experts of the International Monetary Fund published on the IMF’s website — a forum dedicated to the opinions and ideas of IMF staff and officials on current pressing economic and political issues — an article titled: "Economic Policies for the War on the COVID-19 Virus." Given the importance of the article’s text, including its ideas and analysis, especially regarding the nature of the economic policies they propose to follow to recover economically after the health recovery phase from the pandemic, and although some of the proposed economic measures and policies may not fit the nature of many countries’ economies entirely, including the economies of some Arab countries, I hereby reproduce below what appears in its text.

The coronavirus pandemic constitutes an unprecedented crisis. The prevailing feeling is like that of war, and it is indeed a war in many respects. People are dying. Medical practitioners are on the front lines. Those working in essential services, such as food distribution, delivery, and public utilities, are working extra hours to support the effort. Then there are hidden soldiers: those fighting the pandemic while confined to their homes, unable to contribute fully to production.

In wars, massive spending on armaments stimulates economic activity and private stockpiles provide essential services. The situation looks more complicated in this crisis, but an increased role for the public sector is the common feature. And despite the danger of excessive simplification, the policies to be followed need to distinguish between two phases:

·       Phase One: The war: the pandemic is at its peak. To save lives, measures are taken to mitigate its impact that lead to a sharp contraction in economic activity. This situation may be expected to last for no less than three months or six months.

·       Phase Two: Recovery from the wartime period: here the pandemic will have been brought under control by vaccines/medicines, partial community “herd immunity,” and continuing containment measures, albeit less disruptive. With the lifting of restrictions, the economy returns — perhaps intermittently — to its normal performance. The speed of recovery will depend greatly on the policies adopted during the crisis. If policies ensure that workers do not lose their jobs, renters and property owners are not evicted, firms do not go bankrupt, and business and trade networks are preserved, recovery will happen sooner and more smoothly.

This poses a formidable challenge for advanced economies whose governments can easily finance exceptional increases in spending while revenues fall. There is an even greater challenge for emerging-market and low-income economies facing capital flight; it will be necessary for them to obtain grants and financing from the global community (a topic emphasized in a subsequent blog post)... Here I make clear the article’s reference to the subsequent blog post: in fact, it is the joint statement of the Managing Director of the International Monetary Fund and the Chair of the International Monetary and Financial Committee that was issued on 27-3-2020 after a conference via the Internet, and given the importance of this statement, its direct relevance to the state of the global economy, and to the aid campaign and expected solutions for poor low-income countries, I reproduce below what it contained:

The world is in an unprecedented situation, where the pandemic has transformed from a global health crisis into an economic and financial crisis. With the sudden stop of economic activity, global output will contract in 2020. Member countries have already taken extraordinary measures to save lives and protect economic activity. But more is needed. Priority must be given to targeted financial support for vulnerable households and firms to hasten and strengthen the recovery in 2021.

Although the largest health impact has been in advanced economies, emerging markets and developing countries, particularly low-income countries, will suffer especially severe harm from the coupling of the health crisis with a sudden reversal in capital flows and sharp declines in commodity prices for some of them. Many of these countries need assistance to bolster their crisis response and to restore jobs and growth, given shortages of foreign-currency liquidity in emerging-market economies and rising debt burdens in many low-income countries.

Strong, coordinated policy action, including at the multilateral level, is critical to effectively resolve the global crisis. To that end, members of the International Monetary and Financial Committee welcomed the Fund’s vigorous efforts to support an exceptional number of countries seeking emergency financing at the same time, as well as its close cooperation with other international financial institutions, notably the World Bank Group. The Fund stands ready to deploy its $1 trillion lending capacity to support its member countries.

In light of these exceptional challenges, the Fund has already acted to ease the debt-service burden of its poorest member countries under the "Catastrophe Containment and Relief Trust" and is called upon to strengthen its crisis response by raising access limits to its emergency facilities through the "Rapid Credit Facility" and the "Rapid Financing Instrument." Unlike traditional lending facilities, the Fund will explore additional options to assist member countries facing foreign-currency shortages. The Executive Board will discuss these issues in the coming weeks to produce a strong package of actions to be considered by the International Monetary and Financial Committee during the Spring Meetings. Our shared goal is to make the Fund’s response to the crisis more effective in helping its member countries achieve a faster and stronger recovery.

The above-mentioned article then continued, outlining the proposed economic policy measures for the wartime period, adding: unlike other downturns, the fall in output in this crisis was not driven by demand; it is an inevitable result of measures to limit the spread of disease. Therefore the role of economic policy is not to stimulate aggregate demand, at least not now. Rather, economic policy should focus on three objectives:

·       First objective: Ensure the functioning of essential sectors: resources needed for COVID-19 testing and treatment should be bolstered. Regular health care, food production and distribution, and essential infrastructure and utilities must be maintained. This may even involve government interventionist measures to provide essential supplies based on wartime authorities that prioritize government contracting for indispensable inputs and final goods, or to convert industries to specific needs, or to undertake selective nationalizations. Illustrative examples include France’s early requisitioning of medical masks, and the United States’ activation of the "Defense Production Act" to ensure production of needed medical equipment. In cases of severe supply shortages, rationing, price controls, and anti-trust enforcement may also be required.

·       Second objective: Provide adequate resources to those affected by the crisis: Households that lose income directly or indirectly as a result of containment measures will need government support. Such support is expected to help people remain at home while retaining their jobs (government-funded sick leave limits mobility and thus reduces infection risks). Unemployment benefits should be expanded and their duration extended. Cash transfers are required for self-employed and non-employed workers.

·       Third objective: Prevent excessive economic disruption: Policies should protect the links between workers and employers, producers and consumers, and lenders and borrowers so that businesses can resume in earnest when the medical emergency subsides. Under these circumstances, firm closures would result in the loss of firm-specific know-how and the permanent cessation of long-term productive projects. Disruptions in the financial sector would also broaden the scope of economic distress. Governments should provide exceptional support to private firms, including wage subsidies, with appropriate conditionality. Large loan and guarantee programs have already been established (with final risk borne by taxpayers), and the European Union has facilitated direct capital injections into firms by relaxing state aid rules. If the crisis deepens, one could imagine establishing large state-owned holding companies or expanding existing ones to take over distressed private firms, as occurred in the United States and Europe during the "Great Depression."

- The current emergency justifies increased public-sector intervention, so long as the exceptional circumstances persist, but it must be done transparently and with clear conditions for its automatic nullification.

- The policies supporting households, businesses, and the financial sector will include a mix of liquidity measures such as credit provision, deferral of financial obligations by suspending mortgage loan payments, and deferral of taxes and social security contributions for households. As for businesses, loan maturities can be extended, taxes and social security contributions deferred, and commercial paper and bonds of this sector purchased, in addition to direct credit from central banks and provision of guarantees for these loans and credit. As for the financial sector, liquidity is provided to financial intermediaries, measures are taken to preserve market liquidity, and funds are injected by governments and guarantees provided by them), while measures related to solvency and other measures are effected through transfers of real resources, provision of unemployment insurance services, and in some cases debt relief ..etc.

- There are several options that will need to be addressed. If transfers or support loans are given to a large company, they should be conditional on preserving jobs, and placing limits on CEO compensation, dividend distributions, and share buybacks. Bankruptcy will ensure that shareholders bear some of the cost, but it will also cause major economic disruption. A middle option for the government is to take ownership stakes in the company. Past crises have shown the effectiveness of credit provided by the central bank (through asset purchase programs) or other government-controlled financial intermediaries (through loans and guarantees), if liquidity is the problem. Many practical questions also arise regarding the identification and support of those severely affected, whether small and medium enterprises or self-employed individuals. For these, consideration should be given to providing direct transfers based on their previous tax payments.
These domestic policies should be supported by maintaining trade and international cooperation, which are essential to defeating the pandemic and maximizing the chances of a rapid recovery. It is necessary to limit the movement of people to contain this epidemic. But countries should resist the instinctive tendency to close trade, especially with respect to health-care tools and the free exchange of scientific information.

- The article continues presenting these ideas and analyses under the title "From Shelter-in-Place to Recovery," and continues explaining: that encouraging recovery will have its own challenges, including higher levels of public debt and perhaps placing new parts of the economy under government control. But relative success in the first phase will ensure that economic policy can return to its normal performance. The effectiveness of fiscal measures aimed at boosting demand will increase as the number of people permitted to leave their homes and return to work rises.

- Before the pandemic it was expected that interest rates and inflation would remain low for a long time in most advanced economies. Preventing major disruptions in supply chains is expected to avoid inflation during both the emergency and recovery phases. If the measures taken to contain the spread of the virus succeed, the necessary increase in the ratio of public debt will be large, but interest rates and aggregate demand are likely to remain at low levels during the recovery phase. Under these conditions, fiscal stimulus will be appropriate and highly effective in most advanced economies. This will facilitate exiting the exceptional measures that were instituted during the crisis.

-        2-4-2020

-----------------------------