The Key to Recovery

RARELY ARE THERE pre-existing scripts to deal with a true black swan event. No government leader can truly be ready for a global health pandemic, combined with spiralling super-power tensions and a world economy that has barely recovered from the effects of the global financial crisis. One can therefore understand government anxiety and nervousness in taking bold actions. However, posterity will not forgive them for their inaction. There is too much at stake, especially for their people. The role of sovereign governments has been enhanced because global coordination, cooperation, and support have fallen to the lowest level in living memory. So it is critical for every nation to have a clear and bold agenda for reform and then act on it.

The current crisis is challenging because it seeks coordination across three different disciplines not used to cooperating with each other—health scientists, economists and foreign policy experts. Health experts have a clear focus to save maximum lives, economists weigh costs and benefits, while foreign policy experts try and assess the space available to nations in navigating the global power equations. These experts don’t really know how to talk to each other, much less how to quickly align to allow for coherent policy actions to deal with an emerging crisis with multiple unknowns. This is the challenge compromising responses and their efficacy across the world today.

The clear fact that has emerged is that, whether we are in lockdown or not, the economy will not operate at full potential until we have a vaccine available at scale. After lockdown, discipline and procedures will be very important, especially until a quick, accurate and affordable test is available, or until an antiviral that works is available everywhere.

RESTARTING AN economy from a self-induced coma of over two months is unprecedented. Whatever country we may be in, consumer demand for nonessentials has fallen—India had barely any car sales in two months, while April figures for clothing sales fell nearly 80 per cent year-on-year in the US. In the US, unemployment has reached nearly 20 per cent—the steepest fall in employment since the Great Depression. More worrying, nearly half of the global workforce, or 1.6 billion workers, are now in the informal sectors which are the most exposed and least rescued areas of any national stimulus package announced so far.

There are no engines of growth anywhere in the world to pull the rest along. Exports and imports are down and the World Trade Organization forecasts that global trade is expected to fall by between 13 and 32 per cent in 2020; and many sectors (aviation, hotels, restaurants, malls) are just shut down. How do we get the economy back?

We need to revisit our history books to think of the appropriate response. As job losses are mounting and capital expenditures are frozen, the global economy is likely to shrink by as much as $10 trillion. Over the past 30 years or so, Keynesian economics has fallen out of fashion with the monetarists ruling the economic narrative. That may not be the right response for the economic crisis today. The global financial crises of the past two decades have exhausted monetary policy tools. Liquidity is high, interest rates are low, corporates have $12 trillion of debt, and yet there is no inflation.

How does one counter job losses and a freeze on capital expenditures? There is an urgent need to stimulate aggregate demand. In the current crisis, if handled well, inflation threat is even more remote. With lockdowns and job losses, consumption has shifted to essentials without any fall in installed capacity. Depending on the country and the weights in the consumer price index, things like food, rent, oil and durable spend will reduce and so inflation is not to be expected. Depending on the balance of trade—especially for oil importers—there will be a big support that will further curb inflationary impulses.

In the Keynesian world, this time would be ripe to push for an aggregate demand push. Given major risk aversion in financial institutions, there will be a flow of capital back to the US from emerging markets. Debt markets will also be constrained, and so the time is right to prudently print money but be sharp in ensuring printed money is carefully spent. There are two time horizons for response. The first is immediately surviving the war. The second is a longer-term view of actually winning the peace that ensues after the virus is tamed.

THERE IS a need to focus on five areas immediately to ensure surviving the virus.

First of all, alleviate misery for the temporary workers and other blue-collar workers laid off or without work. This is a basic moral imperative. Governments need to provide cash transfers and food stamps.

Second, wage support to keep workers on rolls will be better because it does not cause the emotional fear of job loss in spending patterns. It is important to provide job support for three to six months, especially to employees of SMEs. For larger corporates, they could provide loans to keep on workers, repayable after one year with a moratorium. Governments must protect jobs so that the economy can bounce back faster when demand revives.

Third, consider their version of the New Deal, the Marshall Plan, or rather a Corona Deal, to build sorely needed infrastructure (roads, rail, affordable housing, primary healthcare, and education, by pushing digital). With respect to infrastructure, the spending by printing money should not be inflationary, as it will raise productivity and reduce transaction costs. One should go for the projects that can be started quickly.

Restarting an economy from a self-induced coma of over two months is unprecedented. Consumer demand for nonessentials has fallen—India had barely any car sales in two months. Half the global workforce is in informal sectors which are the most exposed and least rescued

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Fourth, protect the financial sector, which will face a spurt in non-performing assets (NPAs). Depending on the ownership of the sector, either buffer up capital or, if government-owned, evaluate the classification norms for loans to see if there are one-time exceptions possible. The capital formation capacity of an economy is a major determinant of how bad the economic downturn will be. Governments must work to keep the financial sector going.

Finally, support for badly affected sectors—aviation, travel and tourism, auto—is inevitable but needs to be thoughtfully administered and governed. Bailout funds should support liquidity, but they also need to spur demand and even to take equity in struggling companies in badly affected sectors, while demanding a turnaround plan that is sustainable.

However, not all countries have the luxury to be comprehensive in all these areas. Depending on the state of the economy and the finances, governments need to prioritise which is most critical. This process of prioritisation is further complicated by differing—even conflicting—advice from various stakeholders and experts. The government that is able to bring together a wide range of stakeholders, and in a multidisciplinary way find an answer, will have the best chance of not just getting its priorities right but also finding the right path forward.

SMART GOVERNMENTS will not just seek to survive but will prepare to get back into a world they did not leave with a clear strategy. Winning the peace in this new period after the Covid-19 war is won will require thought and care. But the autonomy that governments gain due to the crisis should not be lost. They should view the world with three different lenses. The first is the superpower rivalry that will get close to a cold war by the time the US elections take place in November. With over 40 million unemployed, a shrinking economy, and over 100,000 dead, President Donald Trump will classify China as the very clear enemy. This will create space for countries to enter global supply chains heavily dependent on China.

Global arrangements will change and countries will need to reassess their alignments. They could make claims to enter governing councils in multilateral institutions and take other steps to understand their new realities. The superpower rivalry will be difficult to navigate. Countries will need to decide whether they choose sides and, if they do, how to do that carefully and well.

Countries already know the long-term policy moves that they could not find the political space to do before; the crisis currently allows them the political space to overcome special interest groups. While sceptics have doubted if governments can indeed execute on such radical reforms, the quick response from governments in the past two months has proven that the political will to do so in times of crisis can bring about remarkable results. One such example is in virtual care, which has had its breakout moment with many providers making strides in weeks for what had previously taken years or decades. Denmark rolled out virtual consultation software for specialists in two weeks, Kaiser Permanente moved from 15 per cent of oncology care in virtual settings to 95 per cent in one week, and Queensland Health expanded their virtual care capacity from 90 to 1,600 users. Hence, governments should be bold in what they aim to do. This extends within the confines of government, with an increased appetite brought on by the crisis to adopt new ways of working that span organisational silos and force teams to adopt an iterative, customer-centric approach to developing policy and deploying services. Multidisciplinary teams made up of health professionals, economists and service delivery experts, for example, as an idea is not new within government, but the scale that it has been adopted in recent months has delivered a revelation to governments that these organisational constructs deliver demonstrable value—and must be retained when the peace is won.

Finally, governments should also understand the important long-term changes that were already present and accelerate their actions. Be it with respect to sustainability and climate change or in digital adoption and data standards. For instance, as part of a green economy agenda, post-Covid-19 recovery presents an opportunity to make a push for a fossil-free, renewable electricity system, with Canada looking into replacing coal-fired power with some mix of largescale hydro, natural gas, and wind and solar.

Digital transformation in particular has seen rapid progress, with governments focusing on building data control towers that aggregate different public and private data sources to aid decision-making and support scenario analysis, deploying technology-centric services such as Bluetooth-based contact-tracing apps, and establishing digital platforms that help facilitate market operations in sectors where value chains have been severely disrupted—for example, digital identity solutions to help authenticate remote transactions between parties. Now, governments need to ensure that they not only retain this momentum and avoid returning to the old ways of working, but that they also continue to accelerate. To do this, they need to reset their digital strategies and project portfolios to ensure investments being made today can be reused in the future, ensure that their workforces have the right tools and practices in place to return to the workplace, and adopt iterative, value-driven approaches to building platforms rather than traditional multi-year programmes—all the while keeping one eye on managing costs.

The pandemic has triggered long-lasting structural changes that will affect up to 1.5 billion jobs within the next decade. But governments also need to move aggressively to meet the crisis in the short and medium terms. Vast swathes of workers out of employment should be supported by governments to obtain new skills, to improve productivity in core sectors like construction and enhance semiskilled workers’ capabilities to perform important jobs. Governments must also use this crisis as an opportunity to enhance their digital skilling and education capabilities as a longer-term play. Digital learning across primary, secondary, and higher education has the ability to increase flexibility, engage learners, and expand access to more students. Governments should examine best practices for delivering high-quality instruction remotely, supported by trained teachers, holistic student services, and robust online platforms. Leaders should also make sizable investments in closing the digital divide, ensuring that students have widespread connectivity and online learning devices; doing so will minimise inequities that stem from lack of access to these tools. Substantial investment in digital education will make societies more resilient to future waves of Covid-19, and to any future emergencies that may require swift transition to remote learning settings. It will also help reinvent and modernise education, replacing outdated systems with cutting-edge learning models.

COVID-19 HAS presented a unique opportunity for countries to reflect on the most essential features of their systems to improve health outcomes at the same or lower costs. As systems readied themselves for the pandemic, critical trade-offs were forced, such as extending the scope of practice for nursing and allied health workforces, and what care was really essential to continue inside the hospital walls, if at all. If countries are willing to re-imagine what kind of health system they want in a post-Covid-19 world, they have an unparalleled opportunity to enact change. Health systems globally should think innovatively about how they implement new care delivery models, data and analytics, policy setting, payments, and other important topics.

Governments should be quick to learn from other governments, but customise for their own economies. The crisis provides the governments with great autonomy to undertake fundamental reform of their economy like India has done in abolishing the Agricultural Produce Marketing Committee (APMC), under the pall of the crisis. This will be different for every economy, but it will have the longest-lasting impact as Douglass North taught us. But crises like these, if well-navigated, will create political popularity and space for country leaders. Smart decisions will improve the prospects of the country for a long time to come. Deciding and acting appear difficult, but the stakes are high, and those who navigate well will improve the prospects for their country.

Country leaders should not underestimate the fierce urgency of now to take action. As Thomas Paine wrote in 1776, ‘We have it in our power to begin the world over again.’ But only if we act.

(This article is a Boston Consulting Group white paper)

About The Author

Janmejaya Sinha and Vincent Chin

Janmejaya Sinha is Chairman India and Vincent Chin is Global Leader Public Sector Practice of the Boston Consulting Group