Much has been written about the economic damage that the COVID-19 pandemic has inflicted onto the world. The most effective way to deal with the spread of the virus thus far, apart from having a fully vaccinated society, is to go into lockdown. As we all know, the purpose of a lockdown is to minimize human interaction, and to achieve that, most economic activity would have to be suspended.
Around the world we have seen the impact that lockdowns have had on people’s livelihoods. Even with the shift towards working from home, human interaction is still essential for the functioning of many businesses. Many businesses, therefore, have had to close down permanently, meaning that workers lose their jobs, and unemployment begins to rise. Governments have had to step in to help those in need because if they didn’t, they risk plunging their economy into a full-blown recession.
An event like the pandemic will not only have short-term impacts on the economy, but will also cause long-term issues. A recent study published in the Center for Economic Policy Research’s VOX EU journal in London sought to study what the long term impacts of pandemics have been historically. The study is euro centric, meaning that it focuses primarily on Europe, and in this particular case, primarily Western Europe.
The authors collected data about pandemics that resulted in more than 100,000 deaths dating back to the 13th century which have affected countries like the UK, France, Germany, Italy, and the Netherlands. They then collected data about the subsequent price levels i.e the inflation rate in the affected countries. What they found was that inflation dropped steadily for a period of 13 years at which point it reached its lowest level before prices started to pick up again.
In order to discount other factors that might have been responsible for prolonged deflation, the authors also studied various wars from the same period to see what impact they had on the price levels. What they found was that wars had the opposite effect on a country’s inflation rate. This was because after a region has been affected by violence and destruction, it must focus its energy on rebuilding, which is an activity that stimulates the economy. The pandemic, on the other hand, forces people to become a lot more cautious. This is something we can observe even today, as people are bracing themselves for potential future expenses (healthcare etc.) and as a result prefer to save their money rather than spend or invest it.
This is what leads to a prolonged period of deflation, which is bad for the economy as a whole. An extended deflationary period is basically what characterizes a recession. A recent example would be that of the austerity policies that the UK government used as a reaction to the 2008 financial crisis.
So what does this mean for the contemporary world? Will the next 10 years be a recessionary period on a global level? The authors subscribe to a more optimistic view. The reason being that governments have actually responded in an effective way that is directly attempting to avoid an economic crisis. Massive stimulus packages have been announced the world over, and a vaccine has been developed in record time. Technology has also allowed a significant portion of the labour force to continue their work from home. We live in a time where we are able to do things that our ancestors were not. Yet, it must be remembered that the authors are talking specifically about Western Europe. These are advanced economies with the capability to take care of their people.
What then, of the poorer countries of the world? This is where the answer gets tricky. To avoid a recession, we know that the governments must stimulate the economy and the only way to do that is to spend. They also need to procure vaccines and ensure that the entire population is vaccinated swiftly. This is not possible for countries with limited resources, which means that wealthier countries must step in to help.
Economically, it is too big an ask to convince the likes of the US, UK, or Germany to sign cheques to help stimulate economies that are not their own. When it comes to the vaccine, however, fair distribution ought to be a realistic goal.
The poorer countries are still struggling to procure doses as the wealthier ones were first in line. It is possible to distribute surplus doses amongst those most in need. Doing so is mutually beneficial because the virus needs to be defeated everywhere. It is not a case of ‘every man for himself’.
The combined effects of a recession and a health crisis will be too much to handle for many underdeveloped economies. Seeing as how interconnected the world is today, most recently evidenced by the spread of COVID-19, it is in the interest of the international community to lend a helping hand to those countries who cannot fight the current crisis on their own.