Dilemma for governments

THE International Monetary Fund (IMF) recently announced that a global recession was imminent as a result of the Covid-19 pandemic. Many economists have predicted the effects of this pandemic to be similar to the Great Depression of the 1930s. In fact, some are convinced that the economic fallout from Covid-19 would be far more disastrous than the Great Depression.

For one thing, if we look back at the Great Depression, the main reason for it was the defective system of Classical Economics, which did not allow for government intervention while ignoring the effect of the financial system on the economy. In other words, the system dismissed the effect of money on the economy.

As a result, the stock market crashed and stock prices collapsed in 1929. By 1933, the domino effect had forced the banking system to fail. With that as background, John Maynard Keynes developed the Keynesian Theory, which advocated for government intervention to get the economy back on track. It worked. However, today’s recession is solely due to the Covid-19 pandemic.

What is the worst economic impact we should expect from Covid-19? Firstly, the number of jobless people will be enormous. It will most probably surpass the highest unemployment rate ever recorded in the United States during the Great Depression, which was 24.9%! As a comparison, the unemployment rate in the US was only 4.4% in March 2020.

Secondly, most businesses, especially small ones, will be bankrupt. For the US, the plummeting oil prices (West Texas Intermediate) are further aggravating its economic problems.

How will governments contain the impact of the pandemic in the long run? Ultimately, they will have to choose between saving their citizens from death or shielding the economy from recession. By choosing the latter, that is by not enforcing lockdown and allowing businesses to operate, the number of Covid-19 infections and deaths would inevitably increase.

Without the people, barbers will be without customers, shopping complexes will be empty, flights will have no passengers, and no one will be buying new cars.

Because people are afraid to go out and spend, reviving the economy will be useless. That leaves world leaders with the other option – save the people first and the economy second.

Speaking of which, let’s say that the economy will recover by the end of 2020 or in early 2021, as predicted by the IMF in their World Economic Outlook report.

But caution is the word of the day. When an economy begins to improve after a recession or depression, the unemployment rate may continue to worsen for some time.

Many companies will remain hesitant to hire workers until they regain confidence in the recovery. It may take several quarters of economic improvements before full confidence returns.

Here, governments will have to rebuild their macroeconomic policy to ensure smooth recovery, keeping in mind that this is not the usual kind of recession. It is more like a game theory. There are many probabilities, good and bad, that can emerge from the game.

But whatever the outcome, we must not lose hope. In this hour of need, hope is the only thing that keeps us going. Let’s hope that there would soon be a way or a means to end the pandemic because only then would the world be able to take the first step towards economic recovery.

HERNIZA ROXANNE MARCUS

Faculty of Business and Management

UiTM Sabah