top of page

Only Governments Can Prevent Covid-19 Recessions Becoming Depressions

By Jomo Kwame Sundaram KUALA LUMPUR, Jul 30 2020 (IPS) - Covid-19 threatens economic life the world over. The most urgent and important need is for governments, businesses and families to survive. Governments must revive economies and livelihoods to prevent Covid-19 recessions from becoming protracted depressions.

The Covid-19 crisis is clearly a ‘black swan event’, threatening both public health and livelihoods. Both the pandemic and containment efforts are not due to business operations and decisions, but nonetheless have compelling consequences for them.

Covid-19 contagion contractionary, costly

In East Asia and a few other societies, successful early precautionary and preventive measures, as well as testing, tracking and treatment of the infected, plus sufficient physical distancing, isolation and quarantine measures have been enough to contain the contagion so far. 

When such measures were not taken, inadequate or failed, ‘stay in shelter’ lockdowns became necessary as contagion spread. Nationwide lockdowns have been imposed in many countries. Such preventive and other precautionary measures have reduced economic activity and demand in many sectors. 

But trying to maintain aggregate demand as if there is no pandemic does not make sense. No matter what governments do, some output losses are unavoidable. So, the main challenge in addressing Covid-19 recessions is to avoid protracted recessions or depressions. 

Due to the continued need for physical distancing and other precautionary measures, likely to remain for some time to come, vaccine or no vaccine, some business disruptions may be more lasting than others, i.e., more likely to be medium, if not long-term. 

No ‘one size fits all’

Economies are neither monolithic nor homogenous, and no single inflexible policy can possibly be suitable for all. As recessions are uneven in impact, different sectors, industries, services and businesses are affected differently. Covid-19 recessions are also unlike other past recessions. 

Many businesses may not be able to survive major stoppages and demand shortfalls, however temporary. Such businesses could go bankrupt, severely affecting workers’ families, related businesses and those directly and indirectly employed. 

Much has to be learnt quickly from other experiences, and from learning by doing. Some businesses and sectors may not be able to survive, and options should include business redeployment, infrastructure and facility repurposing as well as staff retraining. 

Strict verification and correction can take place later, even after the lockdown is over. Conditions should be strict enough to deter abuse, but not participation. For example, government grants or subsidies, later found to be ‘excessive’, can be converted into low interest loans that governments recover later, rather than treated as criminal fraud.

Business disruptions threaten livelihoods

Business disruption has broader implications, threatening the entire economy with long-term costs. If relations — including trust among entrepreneurs, workers and customers — are disrupted, they will need to be rebuilt, requiring time and expense. 

Conventional economics ignores ‘transactions costs’ incurred in recruiting workers, seeking and keeping clients and customers, obtaining credit and investing capital, building trust, and other relations, and thus is a poor guide to policy.  The adverse effects of livelihood disruption should be minimised. Income maintenance policies need to help fired workers and others whose livelihoods have been greatly diminished. Hence, extraordinary and novel social protection measures are needed.

Helping businesses survive enforced idleness or hibernation due to such measures, and protecting livelihoods are both needed. Businesses, especially smaller ones with fewer reserves, will need help to keep their workers and to avoid liquidating their businesses. 

Simple payment systems help. Idle workers should immediately receive special social protection, while staying formally employed. Such measures will minimise rehiring costs when they return to work, but should not excessively burden their employers with debt.

Only governments can help

Governments may not be able to stop, let alone reverse or fully compensate for the effects of public health measures. But they can certainly help alleviate economic hardship due to the epidemic, and minimise lasting damage to the economy. 

Crucially, timely government interventions can prevent unavoidable, potentially brief recessions from becoming longer lasting stagnations or depressions. Without appropriate government measures, output losses due to work disruption will cause large business losses leading to mass layoffs. 

Even when no longer operating, rent, lease, infrastructure, utility and other such payments vital for business maintenance and employees’ welfare, such as health protection for employees, need to be made or absorbed. Some, mainly developed countries have acted promptly and appropriately to minimise layoffs, business destruction and worker welfare.

Governments can also act more boldly to subordinate unproductive rentier claims, based on asset ownerhip or property rights, to much more essential operating costs — not unlike how US bankruptcy law enables businesses to continue operating to work themselves out of their predicaments.

Current support often inappropriate

Many governments have provided liquidity — e.g., usually by offering low-interest or interest-free loans — to help businesses and workers survive the crisis. But such measures only ‘smoothen’ debt burdens over longer periods, ‘postponing the pain’, without reimbursing or compensating victims for their income losses.

Temporary and partial compensation for income losses enables businesses to quickly resume operations after lockdowns end, rather than having to also contend with additional debt burdens. Many businesses need help to survive, and aid can be provided conditionally, e.g., on avoiding or minimising employee retrenchments.

Postponing tax payments also helps, but tend to benefit the better-off, liable for more tax, rather than those most adversely affected or needy. 

Direct payments undoubtedly help. But without some ‘easy’ targeting, especially for businesses, often, too little is available for those in greatest need, while benefiting some who are not. 

Although policymakers typically insist on means-testing for anti-poverty programmes, they rarely demand targeting for businesses, reducing the efficacy of government relief. 

An already existing, developed social protection system makes it easier to ‘compensate’ idle workers, but is rarely available in developing and transition economies. 

Lowly-paid and casual workers and many self-employed typically have debt, more than savings. Not able to survive temporary losses, they are more likely to be displaced by lockdowns, and less likely to work from home. Government ‘unemployment benefits’ can easily be made progressive, with a higher fraction of previous earnings for the poorest. 

Government ‘payer of last resort’

In March, French economists Emmanuel Saez and Gabriel Zucman, both at Berkeley, proposed that governments help ease pain and disruption with payer-of-last-resort programmes, with adversely affected businesses reporting unavoidable monthly overhead and maintenance costs to qualify for government aid. 

A government ‘payer-of-last-resort’ during lockdowns can thus help ‘suspended’ or ‘hibernating’ businesses to continue paying unavoidable maintenance bills to avoid insolvency on condition of keeping their involuntarily idle workers, instead of firing them. 

Such a payer-of-last-resort programme would reduce hardship for workers and businesses. It could enable businesses to temporarily suspend or scale down operations, to limit haemorrhage and avoid insolvency, and to pick up quickly as conditions improve. 

It would maintain ‘cash flow’ for families and businesses, minimising Covid-19 shocks’ adverse secondary impacts on demand (e.g., due to fired workers spending less on consumption), while enabling more rapid recovery as demand resumes. 

Payer-of-last-resort programmes can be affordable if well complemented by effective contagion containment measures, enabling early resumption of business operations. While unavoidably high for lockdowns, government spending, typically financed by sovereign debt, can remain manageable. 

This article is also available online here:

639 views0 comments

Recent Posts

See All

End vaccine apartheid before millions more die

Anis Chowdhury and Jomo Kwame Sundaram SYDNEY & KUALA LUMPUR: At least 85 poor countries will not have significant access to coronavirus vaccines before 2023. Unfortunately, a year’s delay will cause


bottom of page