Coronavirus: The Path to Economic Recovery

           It would ultimately be the decision from the country’s medical and health experts who will decide on how the coronavirus crisis is said to have subsided. For example, the continuous absence of new cases within two weeks could be a relevant condition. Nonetheless, the fact that the uneven spread of the coronavirus across different regions and groups of population have prompted many residents and governments to reconsider the need of economic re-opening as the lockdown has hit the economy severely. One is not talking about a “switch on and off” decision of economic re-opening but a gradual step-by-step process that will open some economic activities in areas where the coronavirus is least affected.

          Bearing in mind that the economic lockdown has not been due to the poor economic performance, but the sudden rise in the health hazard has prompted shops and businesses to close to avoid contagion. Hence, once the market opens, the first waves of business shall be the retail shops, restaurants, personal services, transportation, and tourism businesses. The immediate effect is to put workers back to work and consumer spending begins to rise again, thereby benefiting both small businesses and large corporations. The next wave of economic changes shall relate to investment and industrial production. The low interest rates will provide incentives to home buyers and the real estate market will soon be revived. Industrialist and manufacturers shall start working on new investments, as one lesson from the coronavirus is that light manufacturing in the pursuit of self-reliance in basic manufactures is important, especially in the supply chain. Investments are expected to first increase in the production of health-related manufactures and services, leading to an overall rise in the health and medical sector. These economic revivals could lead to other new investments in construction, land-rezoning, and R&D activities.

           Economic optimism shall soon be met with inflation, either due to the rapid rise in demand, consumer spending, or the need to replenish the loss businesses suffered during the lockdown, though many governments have increased their welfare subsidy to rescue workers and businesses. The extent in the rise of inflation will also depend on the performance of the coronavirus as to whether it would revive and lead to new spreads and the speed in which the governments withdraw their subsidy and allow the private economy to run its own course. The use of monetary instruments through changes in the interest rate can impose an effective control on inflation. The theory is that the government should step in amid the crisis but withdraws once the economy is back on its own feet.

           While there is no question on the path of economic recovery, there can still be variation in the extent of the recovery and how quick the economy will return to normal or even enter a period of overheating. What is more important is to see whether the economy can just recover, or the investors would use the occasion of recovery to conduct capacity-enriching restructuring at the same time so as to improve and expand the economy’s production capability and competitiveness. Typical examples would include the focus on new construction of infrastructure, improvement in human capital, expansion and commercialization of science and technology, quality control in production and innovation. Investment activities would venture beyond banking facilities and stock market activities, but formation of investment consortium to establish large investment projects. With the coronavirus and the low economic activities, it is a golden opportunity to engage investment in infrastructure and other long term projects, as the cost could be lowered while long term infrastructure investment could enhance the future production capability of the economy.

           Other than the investors, another key economic player is the government, and this depends a lot on the political or ideological orientation of the government leaders. For a pro-welfare political leader, the coronavirus is an excellent political opportunity to enlarge its government policy by dishing out billions after billions of dollars to those affected by the coronavirus. Effectively, everyone is affected by the coronavirus. Hence a pro-welfare political leader would commit spending to different groups of people. The question is not so much about the need, as asset qualification is not required and the need in the same group of people may differ, but the politics of sympathy would urge a pro-welfare political leader to commit a blanket-type of assistance. Indeed, some governments would provide aid to the different affected group of people: unemployed, single-parent families, retired, elderly and sick, students and youths, homeless, entrepreneurs and small businesses, minorities, people in remote regions, immigrants and so on. By classifying these different groups of people, such an embracive approach to welfare policy is effectively dichotomizing the economy into various fragmentations. One thing these government leaders never ask nor concern is the resulting fiscal deficit and national debt, and no word as to how these deficits and debts could be covered or financed. Debts are just accumulated, and it would be the future taxpayer, not the political leaders, would have to shoulder the debts. A massive over-spending on this generation would always mean the extra economic burden on the future generation, as well as a fall in competitiveness and a weak currency.

           A pro-business political leader, on the contrary, will provide adequate rescue to the shock resulting from the health hazard, but the period of subsidy provision is minimized so that businesses can re-open as soon as the pandemic situation improves, thereby allowing the economy to revive on its own pace. In addition, the recovery policy should also give way to encourage new investment with the intention to reestablish industries and restructure the economy wherever possible. A wider manufacturing base and a stronger infrastructure are always the prerequisite for a competitive economy. Furthermore, it would even be preferable if a pro-business government announces new policies that provide incentives to businesses and investors, such as a lower tax rate either across the board or for a certain period in the infant stage of the business, as this ensures not only employment but a bigger industrial base.

           There is thus a difference between recovery and restructuring. The immediate effect of economic re-opening will result in recovery as businesses return to normal and employment is restored. And as the recovery proceeds, the economy can soon overheat as inflation seeps in, and the rise in inflation could become unpleasant and restricts further growth. As such, recovery must come with restructuring where new investment areas are being explored, and government policies are aligned with the pace of recovery so that economic expansion occurs simultaneously with an expansion in economic capability and capacity. In short, while it is the businesses and consumers that contribute to economic recovery, it is ultimately the institution of appropriate policies that would allow economic restructuring to occur. If so, the impact of the coronavirus becomes a blessing in the long-term perspective. Of course, the short-term loss of resources and lives in the period of the pandemic is lamentable.

           For a post-pandemic economy to recover, there are different roles played by different economic participants. Workers will be re-employed, and their lives will return to normal. The re-opening of various businesses allows various financial activities to function, and the economic multiplier will lead to further cumulation of growth. The work of financial institutions would function to aid the activities of investors. The role of the government is crucial as to the policies each government would institute. Should the political leaders be short-term driven and concentrate on provision of subsidies and disregard the growing deficit and debt? Or the instituted policies should provide incentives for investors and producers to engage in capacity expansion, thereby able to generate tax revenues to lower the deficit and debt. Eventually, the role of the government is not to create a bigger government and a bigger public sector, but economic opportunities where businesses and employees would have a greater chance to progress.            

Dr. Kui-Wai Li

April 23, 2020