THE latest economic data from Sweden — one of the few countries to remain open during the coronavirus pandemic as a matter of policy choice — is grim. Its economy is heading into its worst recession since World War II, and is expected to contract seven per cent this year. Forty per cent of businesses in the country’s services sector are on the verge of bankruptcy.
Why does economic data from Sweden matter? Because it clearly reveals what some of us have been writing about and pointing to in the past few months — opening the economy in the middle of a virus pandemic is not going to lead to the outcome the prime minister, his government team, or the business community have ignorantly been hoping for. (Unfortunately, even the Supreme Court has waded into this.) Evidence, not wishful thinking, should be the basis for policy. The evidence indicates that a strong public health response ensures a strong economic recovery. This is as true for Sweden today as it was true for the US a hundred years ago during the Spanish flu epidemic. (I have covered this aspect previously; according to published research, economic activity in US cities that imposed tighter lockdowns bounced back quicker and stronger than those cities that had looser restrictions in place.)
While the government has framed the question of the economic impact purely in terms of lockdown versus no lockdown (completely ignoring the public health aspect), the fact of the matter is that economies around the world are being buffeted in three related ways:
The economic impact is via multiple channels.
— The ‘exogenous’ economic disruption caused by the pandemic (upended supply chains, halted global transportation and logistics links, interrupted flow of goods, people, investment and capital);
— The ‘endogenous’ economic disruption caused in response to the pandemic via lockdowns and other suppression measures (closed factories, businesses and markets);
— The public health effect (productivity loss, absenteeism, fearful consumers, fiscal and other costs associated with Covid-19).
While the three channels of impact are overlapping, and reinforce each other, it is important to recognise they are also separate strands. Hence, while an economy may choose to avoid lockdowns, it will not be able to escape the effects of the public health crisis or the effects of the global economic recession.
This is where Sweden finds itself. The saving grace of sorts in their case is that the primary motivation for Sweden to avoid closing down the economy was not economic — it was epidemiological. By keeping society open, the Swedes have wanted to develop herd immunity within the population, as the only viable option in their calculus to deal with the novel coronavirus in the long run (in the absence of a vaccine).
Here, the government appears to be treating the virus outbreak as over — or as fait accompli. Either of these responses would be a grave mistake. The outbreak is far from over; in fact, with the premature easing of the partial lockdown imposed in the country, we should be prepared for a resurgence in the Covid-19 caseload. And with that will come a direct fallout on the economy.
Tailpiece: While the federal government’s public health response has been rightly criticised for being slow, tentative and episodic (as well as misplaced), the economic response has been criticised by some commentators for supposedly pandering to elite interests. The evidence advanced to support this argument is the fact that the government has provided a support package to the export sector and announced a ‘construction package’ to stimulate the economy.
This criticism appears to be both misdirected as well as unfair for a number of reasons. Firstly, the export sector has been ground zero since March in terms of the impact of the coronavirus (along with the aviation, tourism and hospitality sectors). This is reflected in the 54pc drop in the country’s export earnings in April. The export sector is critical to the country’s economy not just as a generator of foreign exchange, but as a direct and indirect employer of millions of workers. Its linkages to the rest of the economy, and its importance for stability of the external account, cannot be overstated.
Secondly, the construction sector is another ‘natural’ target for fiscal incentives and government support. It is highly labour-intensive – possibly the only sector with an employment elasticity greater than one — with strong backward and forward linkages with over 40 allied sectors of the economy. (However, the accompanying ‘amnesty’ to undeclared money is open to question and a matter of controversy.)
Thirdly, the government’s support has not been limited to these two sectors. The central bank has rolled out a slew of measures to support small as well as mid-sized businesses across the country impacted by the shutdown. So far, under its Rozgar refinance facility, financing of over Rs103 billion for providing wages and salaries to around one million employees is under process.
Collectively, these are precisely the areas governments are supporting globally. Around the world, governments have scrambled to cobble together large emergency support and fiscal stimulus packages to save both large as well as small businesses. So far, well over $8 trillion has been announced, with Germany and Italy unveiling fiscal support equal to nearly 35pc of respective GDP, followed by Japan’s support package of around 21pc. India’s recently announced support measures amount to almost 10pc of its GDP. If anything, Pakistan’s fiscal package is conservative and not large enough.
The diverse nature of the US response to the 2008 financial crisis underscores the mission-critical nature of avoiding shutting down large parts of the economy, or the systemically important bits. Some of the largest financial institutions, as well as the Big Three automakers, were given generous handouts to avoid what economists refer to as ‘hysteresis’, and is now being referred to as ‘economic scarring’.
While bigger businesses have been large beneficiaries of bailouts in all countries, they are an integral part of value chains that include SMEs — and employ millions of workers. Providing government support in times of distress makes eminent sense.
The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.
Published in Dawn, May 22nd, 2020