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Economic scars, once again: Reading the fine prints of pandemic mitigation

economic scars once again reading the fine prints of pandemic mitigation 816x832 - Economic scars, once again: Reading the fine prints of pandemic mitigation


We all aspire for a strong economic recovery. But it is prudent to ensure we tie the loose ends in our fight against the virus. There are many challenges to growth after the lockdowns are eased; a near-normal path will not be an easy walk in the park when labor gets back to work. As Dr. Edsel Salvana warned, the virus doesn’t play by the rules. It continues to rewrite the rulebook.

Even in chess, anything can happen during an adjournment.

One good insight comes from the IMF’s World Economic Outlook issued just last month. The Fund should know whereof it speaks because it has formidable access to data on all of its 190 member countries.

Reopening of the economy is not linear. The Fund shows that different countries that tried to do some gradual reopening from the Great Lockdown and ascent from the depths of the recession in the second quarter were frustrated by successive waves of re-infection and deaths. Even more serious is that while lockdowns lead to economic contraction, the Fund also found that “voluntary social distancing” out of fear of the virus contributed a great deal to the shrinkage of business and employment. If at all, economic recovery could only be partial, subdued for the most part.

This is the economic scar, the traumatic aftermath, of the global pandemic. Output losses are real, and healing will take time.

Of course, one does not quickly see that in the Fund’s latest growth projections. World output is projected to recover from a decline of 4.4% in 2020 to 5.2% in 2021. So much is expected of the biggest economy of the US, a resumption of growth of 3.9% from a deep dive in 2020 of 4.3%.

Advanced economies consisting of the US itself, the Euro area, Japan, the United Kingdom, Canada and others are expected to decline by 5.8% this year and recover by a positive 3.9% next year. No one is spared from the Great Descent of 2020. For emerging markets, the forecast is a decline of 3.3% but a recovery of nearly twice at 6%. Only China is expected to sustain growth this year but India’s performance is exceptional, if it comes to pass: from a 10.3%recession to a recovery of 8.8%, the highest for next year. ASEAN-5 will join the strong performers as it is expected to bounce back from a recession of 3.4% to a 6.2% economic expansion in 2021.

But first, how did we handle the pandemic relative to the other neighbors in the Asia Pacific?

From the Fund’s Regional Economic Outlook: Navigating the Pandemic for Asia, also issued in October 2020, an interesting boxed article shows us the narrative of Asia’s lockdown and reopening experiences captured by four charts. Data for these charts should be recognized to be true as of September 2020.

The first chart groups the Philippines with Malaysia and New Zealand which imposed near-complete lockdowns for over one month. Others were very stringent but the duration was shorter. Still others were more selective on what to lock down.

But the effectiveness of the lockdown was challenged by the initial public health conditions and the density of the population. For these reasons, the lockdown did not seem to be effective in the Philippines as well as in India and Indonesia. While some countries went big on testing and tracing, the Philippines and Indonesia were considered to be laggards.

The experience of this region with reopening was diverse. Some countries reopened only when evidence of viral suppression was strong. There were re-infections, some nationwide but others were small outbreaks. In the case of the Philippines and Indonesia, reopening was done even before a decisive fall in infection cases because of the perceived economic cost. New cases stabilized but the virus was yet to be suppressed. The Fund observed: “These early openers have continued to experience a high number of new infections, reflecting a pickup in mobility after reopening, less scope for voluntary social distancing, and other factors…”

The next chart shows that with bad experience with early opening, the subsequent reopenings were rather slow for the Philippines, together with India and Indonesia. Here, schools remain closed and other sectors remain partially closed. Some countries that waited for the infection to subside succeeded in opening up more sectors and activities.

The Fund further commented that economic recovery was rather sluggish in the early birds. The next chart clearly shows the consequences of recklessness in terms of economic slack. Business activities proxied by purchasing managers’ indices across countries were lower than pre-COVID-19 levels in both the Philippines and India, suggesting that mobility remains low because of fear of getting the virus. This is also exacerbated in the Philippines by what the Fund calls “limited or insufficiently implemented fiscal stimulus.”

We notice that it was only fairly recently that some local governments have started to strengthen their testing and tracing capabilities. We have started to learn that “an effective testing, tracing, and quarantining system has helped some countries detect and contain infection clusters before they led to widespread community transmission.” In our previous columns, we wrote that Vietnam has used an impressive tracing system to quarantine all close contacts of positive cases as early as during the second quarter. China and Korea leveraged on technology and big data to improve the efficiency of contact tracing.

The composite equivalence of these charts for the Philippines is the so-called “voluntary social distancing.” Business and entertainment activities remain weak because people continue to be afraid of the virus and what it can inflict on them. Aside from possible prolonged quarantine, death and prohibitive cost that could wipe out the family’s finances, it seems wise to avoid shopping malls and eating places. For businessmen, it seems wise to cut losses by stopping operations and laying off workers. As a result, output is lost and the loss could be large and protracted.

Today, modern business cycle theories caution careful and conservative forecasting of economic growth after a recession as deep as this one. There is very little basis for believing that the output blip below trend will turn around to resume normal growth after a few quarters. Public policy intervention will have to weigh in big and be sustained. To leave a rare legacy, the President and the economic managers will have to continue strengthening their partnership with Congress to maximize the use of the national budget in managing what Oscar Jorda, Sanjay R. Singh and Alan M. Taylor, all from the University of California Davis, called “long economic hangover” of the pandemic (IMF, Finance and Development, June 2020).

“If the historical trends we have highlighted play out similarly in the wake of COVID-19, then secular stagnation (Lawrence Summers, 2014) would be a concern for monetary and fiscal stabilization policy for the next two decades or more.”

The good news is that monetary policy’s prolonged low interest rate regime can now be useful in helping provide fiscal space for mitigating the root cause of all these troubles.


Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.

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