Valdai Club

Countries may face a real trade-off. Should they go through a period of extreme and painful lockdowns, and along with it a steep decline in economic activity – or should they delay the peak and slow down the transmission and suffer a less acute but longer decline in economic activity? East Asian countries took the formal approach and Western countries are taking the latter approach. The first approach sacrificed one quarter of growth. The latter approach of social distancing, depending on success, may mean up to 6 to 12 months of economic loss.

The response to the COVID-19 pandemic has come in a variety of forms. On the one extreme, China imposed draconian measures to contain the virus, and data has shown that it has been successful – at least for now. On the other end, Western countries are taking the “mitigation” approach, a semi-formal social distancing format to slow down the spread of the disease. And in between, there are the less-than-severe but still highly effective approaches that Singapore and Korea have undertaken. Punishment for violations also range from “yelling” at offenders to beating them up on the streets, to throwing them in jail or simply using technology to monitor them so that there is not even room to transgress.

 

The differences in approaches reflect differences in political systems, in the people, culture, and infrastructure of various sorts. The differences in approaches also translate into differences in outcomes – the control of the pandemic in their respective countries and economic responses to the varied approaches. These are two important data to watch in the next few weeks to give us a clue as to how long this will endure – 2 months, 6 months, or until a vaccine or cure comes along

In a coordinated fashion, people were allowed to come out of their building once every few days and in a coordinated fashion they were directed to a community grocery stand. It meant that drones were flying around to see who is on the street – if there were anybody – who was wearing a mask and who wasn’t. It meant that nobody saw anybody for weeks. The Chinese people coped with it in part because it was strictly enforced, and in part because most of them were frightened by the disease. The harrowing memory of SARS came back all in a flash.

But, after a month of a real and serious lockdown, China resumed business – but gradually so. The economy took a big toll, with activities basically coming to a grinding halt in the entire first quarter. But things are coming back to normal, with key businesses in full operation, supply chains, production and logistic chains basically coming back to function. Two thirds of the economic activity is “business as usual.” But social behaviour has fundamentally changed. People don’t go out as much as they did before. Restaurants, although open, require people to be facing and eating in the same direction – like Parisians, except without the outdoor cafes. Half of the people go to the office at a time, and most often they keep a safe distance from each other. And this is all taking place in a city, Beijing, that has had 0 new domestic cases for some time now.

What this tells us is that countries may face a real trade-off. Should they go through a period of extreme and painful lockdowns, and along with it a steep decline in economic activity – or should they delay the peak and slow down the transmission and suffer a less acute but longer decline in economic activity? East Asian countries took the formal approach and Western countries are taking the latter approach. The first approach sacrificed one quarter of growth. The latter approach of social distancing, depending on success, may mean up to 6 to 12 months of economic loss. But – for many countries perhaps not a choice, as few countries can stomach what China did to contain the virus.

Of course, there is the other end of the radical approach, allow the virus to “get through” the community quickly – that is, infect half of the population, and develop herd immunity. The country is back on its feet in a shorter period of time than in the case with mitigation policies. But few countries are willing to go down that dangerous route, with many casualties along the way. If somehow the country is able to separate its populations – strictly isolate the elderly population and vulnerable people, and let the younger and stronger ones move the virus quickly through, then the strategy can mean fewer human losses. But the idea still seems unimaginable to most politicians – authoritarian ones and otherwise.

As the world tanks, China is back on the rise. But now, it has a responsibility as it gets through the pandemic first. For its own interest, China can use the opportunity to build trust in the international community and show that it is a reliable partner, a dependable stabilizer in the world. Now is the opportunity of the century for it to build this image. In what ways can China help?

First, it can guarantee the functioning of supply chains for the world – it is resuming all supply chain operations with a view of promoting international trade in particular. It can guarantee medical supplies and equipment to those who most need it, including the US, despite the recent bickering and finger-pointing and blame games that the two countries have caught themselves in. Second, it can also help stabilize financial conditions. The US is currently absorbed in fighting its own domestic war, and its vast quantitative easing policies and fiscal stimulus which will inevitably lead to sharp rises in the debt challenges the stabilizing functions of the dollar. Countries may turn to Chinese assets as an alternative “flight to safety.” China can do its part in making sure that monetary and fiscal policies stimulate demand for the world.

Third, and importantly so, China can lend a very crucial hand to developing countries. These more vulnerable nations are often left behind, as they have neither the fiscal, state, and infrastructure capacity to cope with extreme natural disasters or human disasters such as global financial crises. The international system does not offer sufficient assistance to these countries. For instance, during the Great Recession of 2009, the Fed arranged central bank swap lines to guarantee liquidity amongst a few industrialized countries. But it is now up to China to be effective lender and credit guarantor to emerging markets. IMF provides loans but with harsh conditionalities that many cannot accept. In the financial crises in Argentina, Egypt or Portugal, China stepped in to provide liquidity and took on credit risk that developed countries didn’t.

 

If we look ahead a bit, the next big challenge is the tsunami that will face developing countries. So far, they are still behind the curve. But once it strikes, the result will be devastating. And they have even fewer tools to deal with the situation. This means that it will take substantially longer for them to be on the other and better side of the pandemic curve. But so long as that is the case, all countries’ borders will have to shut. So long as a part of the world does not resolve the pandemic crisis, no borders can really open up lest another  imported case comes to attack the population a second, or third time. And how long – even if many rich countries fix their own problems – can they keep borders tightly sealed? If there is one lesson to be learnt from the Great Depression of the 1930s, it is that protectionism, each country for their own, freeze in trade, capital, and human flows is the ultimate accelerator of an already grave economic downturn. To prevent that from happening, countries would need to resist the temptation of deviating from the united front, and work together – out of both self-interest and a moral imperative.