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  • Writer's pictureGEO Strategic Partners

Economic Policies for the COVID-19 War

This blog is part of a special series on the response to the coronavirus.

By Giovanni Dell’Ariccia, Paolo Mauro, Antonio Spilimbergo, and Jeromin Zettelmeyer

he COVID-19 pandemic is a crisis like no other. It feels like a war, and in many ways it is. People are dying. Medical professionals are on the front lines. Those in essential services, food distribution, delivery, and public utilities work overtime to support the effort. And then there are the hidden soldiers: those who fight the epidemic confined in their homes, unable to fully contribute to production.

In a war, massive spending on armaments stimulates economic activity and special provisions ensure essential services. In this crisis, things are more complicated, but a common feature is an increased role for the public sector.

At the risk of oversimplifying, policy needs to distinguish two phases:

Phase 1: the war. The epidemic is in full swing. To save people’s lives, mitigation measures are severely curtailing economic activity. This may be expected to last at least one or two quarters.

Phase 2: the post-war recovery. The epidemic will be under control with vaccines/drugs, partial herd immunity, and continued but less disruptive containment measures. As restrictions are lifted, the economy returns—perhaps haltingly—to normal functioning.

The success of the pace of recovery will depend crucially on policies undertaken during the crisis. If policies ensure that workers do not lose their jobs, renters and homeowners are not evicted, companies avoid bankruptcy, and business and trade networks are preserved, the recovery will occur sooner and more smoothly.

This is a major challenge for advanced economies whose governments can easily finance an extraordinary increase in expenditures even as their revenues are dropping. The challenge is even greater for low-income and emerging economies that face capital flight; they will require grants and financing from the global community (a focus for a subsequent blog).

Read full article on IMF

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