Resilience of Economies in Times of Health Crises: How Well We Adapt
By Prerana Bhadra and Shagun Tyagi
Over the course of time, humanity has undergone several crises of various kinds, from economic to health and from social to natural. It is how we adapt and alter to face the challenge that sets the tone for our resilience to a forthcoming crisis.
“A crisis is the sum of intuition and blind spots, a blend of facts noted, and facts ignored.” - Micheal Crichton
Through the course of this article, we aim to bring to light the adaptability and resilience of economies to health crises in particular. In other words, we will elaborate on the fighting capabilities of economies. This is a topic that is relevant today, more than ever before.
By ‘resilience’, we mean coping with significant economic stresses, withstanding and recovering from unforeseen circumstances and attempting to preserve the growth of nations and the well-being of their citizens by adopting appropriate policy stances so as to remain on the ongoing growth trajectories. Economic resilience indices gauge policies affecting macroeconomic stability, microeconomic market efficiency, good governance, and social development, and prepare economies for systematic crashes and exogenous shocks.
There is a vast difference between our topic, which is the 'Resilience of Economies in times of Health Crises' when compared to the topic 'Resilience of Health Systems in Times of Economic Crises'. The latter investigates the performance of health systems under austerity, and not how it affects the economy. The crux of any Health Policy is to maintain or improve the access to essential services by the population, specifically the vulnerable members. With financial resources being scarce, sustaining the system is understandably of paramount concern. It is tough to have provisions large enough to cater to the populations ailing health if need be. The economic health of a nation, when married to the physical health of its citizens, provides an ideal ground for prosperity. As economies become bigger over time, they should ideally also become resilient to shocks in their system.
Cases where mitigation policies have seeped into the functioning of economies:
AIDS/ HIV Pandemic
● Since its identification in 1976, over 75 million people have been affected globally by this pandemic. The African economy was severely affected by this pandemic.
● The number of cases in Sub-Saharan Africa increased by a million between 2002 and 2004. A key reason for declining African growth circa 2004 was the dramatic increase in health care spending to meet their treatment goals.
● Labour productivity declined, there were shortages in trained medical personnel and government spending increased. Competitiveness and profits fell, leading to a fiscal crisis.
● Funding has increased by approximately 4 billion USD over the past decade in low and middle-income nations including Africa.
● Through partnership programs and investments, staffing models to optimize the impact of healthcare workers and planning based on the projected future needs derived from national data, the Sub- Saharan African economy has developed its resilience towards the disease.
● Though there has been a substantial reduction in the death rate, the world has not been relieved of the disease. While economies continue to be affected, they are better prepared to anticipate the costs and provisions needed.
Spanish Flu/ The 1918 Flu Pandemic
● Spanish Flu is said to be the largest influenza pandemic in US history. It is estimated that about one-third of the world’s population was infected, leading to at least 50 million deaths worldwide, with 550,000-675,000 occurring in the United States.
● The economic consequences included labour shortages, wage increases and increased use of social security systems. It is hard to quote a figure for GDP losses because the economic effects of the pandemic cannot be dissociated from that of the First World War.
● Quarantining and social isolation (Non Pharmaceutical Intervention or NPIs) were adopted as containment measures. The US cities that implemented these measures earlier and more aggressively were not the worst economic performers. They grew faster after the pandemic.
● NPIs reduce economic activity by preventing certain people from going to work, but also increase economic activity indirectly by preventing large-scale transmission. NPIs solve coordination problems and also mitigate the pandemic-related economic disruption. They lead to better health outcomes and better economic outcomes.
● Similar mitigation policies are being applied in the current COVID-19 situation, in an effort to soften the economic blow.
Why is the global economy vulnerable unlike ever before?
We live in a world that is not only deeply interconnected and intertwined with capital, technology, resources, and humans, but also has few central points. The vulnerability of our economic systems stands exposed, with the economies of developed nations plunging, and the standstill in supply chains.
Our systems are not independent of each other and hence their ‘functional sizes’ are continuously expanding. There is a coupling of global economy components and increased chances of propagation of systemic changes to distant parts of the world. This tight coupling and slow systemic decision making render our global structures vulnerable to exogenous shocks and reduce economic resilience. It is no surprise that future crises are predicted to occur increasingly sooner.
The shock of a health crisis is exogenous in nature. However, the shock waves can disrupt an economy and its productive capabilities, value chains and human resources. Economic systems may seem too big to handle all at once. Hence, micro units like businesses have to design their functioning in a way which is resilient.We will discuss this aspect in the article.
Dimensions of Economic Resilience
Macroeconomic resilience is what we generally talk about when we mention economic resilience. Macroeconomic resilience has two components: (i)instantaneous resilience, which is the ability to limit the magnitude of immediate production losses for a given amount of asset losses, and (ii)dynamic resilience, which is the ability to reconstruct and recover. This demarcation highlights various dimensions of macroeconomic resilience – capacity building, response when the crisis strikes, and recovery of the economy. Before a health crisis strikes, we can make our systems less vulnerable, construct adequate infrastructure, and propose a flexible way for our systems to function. This is the capacity building aspect of macroeconomic resilience. During the times of crises, various policy responses - both fiscal and monetary - are announced to minimize the damages. This is responsive resilience. The effectiveness of the fiscal and monetary policies determines the recovery trajectory of an economy, highlighting the recovery aspect of macroeconomic resilience. Responsive macroeconomic resilience can be thought of as a function of fiscal and monetary space. Fiscal space is the government’s ability to spend safely, for a specific purpose, without compromising fiscal sustainability and macroeconomic stability. Monetary space is the ability of a financial system to implement expansionary monetary policy—to accommodate expansionary fiscal policy or to substitute for it—without creating extraordinary problems of inflation, surges in real interest rates, or disequilibria in international payments.
There is another aspect of economic resilience: microeconomic resilience. Microeconomic resilience depends on the distribution of losses; on households' vulnerability, such as their pre-disaster income and ability to smoothen shocks over time with savings, borrowings, and insurance, and through the social protection system. Microeconomic resilience in health crises can be thought of as efficacious channels of social welfare in place (bank accounts, intermediaries ), a social protection system (insurance), etc. Microeconomic resilience tells us how the impacts of an economic downturn get distributed among the different strata of society.
Building Resilient Economies
The impact of Coronavirus on global supply chains has been massive. Accenture reported that 95% of Fortune 1000 companies are reporting supply chain disruptions from COVID-19. Efficient supply chains are necessary in such crises where we need essential goods and services, safe and secured, to citizens of the world, especially pharmaceutical equipment to the medical community. China is a major hub for the supply of inputs as well as a market for goods produced globally. As plants in China produce lesser, and Chinese citizens do not buy as much as they did before, the global pipeline of goods is becoming lighter.
Economies thrive on supply chains. Hence, there is a need to intertwine our supply chains with risk mitigation strategies. A resilient supply chain must be able to detect early warning signs of a disruption and it must respond by shifting production to alternative sources. It must have either a diversified supply base or some contingency plan to utilize backup suppliers. Businesses should also map out their supply chain properly by looking at who their suppliers’ suppliers are. Thereby, a transparent, X-ray understanding of their extended and complex supply chains will impart resiliency in their systems.
A resilient economy also needs a stable and strong financial system. The economic mitigation policy responses, that is, monetary and fiscal responses, are seeped into the system through the financial system. The systemic risk lies in our failure to impart resiliency at the community and individual level. The lack of access to capital and financial services to the population makes it hard for welfare measures to be properly delivered and thus impeding microeconomic resilience. Moreover, there is a need to prepare our labor markets by facilitating flexible working hours, diversified skill sets of labourers and imparting other such beneficial measures so that they do not bear so great a brunt during a health crisis.
In conclusion, while it is inevitable that the world will face unprecedented crises of all kinds at one point or another, what we can do to combat them is have measures and funds ready to be utilized. This is easier said than done as it is almost impossible to factor in all the hardships that have to be faced and storms that have to be weathered. It is important that we, as global citizens, do not leave the responsibility of crisis management completely to the policy makers, but rather exercise our discretion and do what is expected in order to resume a situation of normalcy with minimal damage.
References
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