How robust are economic responses to coronavirus?

We lose jobs in recessions and citizens suffer, particularly in countries with no safety nets. [Peterson Githaiga, Standard]

The world is staring at a Covid-19 recession as economies slow down because of disruptions in economic activities.

The other recent medical recession was caused by the SARS virus in 2003, which like Covid-19, came from China.

We lose jobs in recessions and citizens suffer, particularly in countries with no safety nets.

The coronavirus is more than a medical emergence. It has elevated supply chain management to a new status.

Everyone is talking about how the virus has disrupted supply chains as factories are closed and raw materials or parts cannot reach their destination. Shortages could lead to price hikes.

In the last few decades, outsourcing has made it possible to get parts where they can be found cheaply anywhere on this planet.

While it has been attacked by Donald Trump, it has made lots of goods and services cheaper for the vast majority.

If you are making a car, one part might be made in Thailand, another in Japan, China and India. If the part is not made because a factory was closed, then finishing the car becomes a big problem.

It is paradoxical that a health problem is now a supply chain, and by extension, an economic issue. Who thought one day a virus, not a volcano or a nuclear accident, would disrupt the global economies?

Beyond the supply chain disruption, think of the wealth lost when stock prices fall.

We have written enough on the effects; is there any mitigation?

One is an old fashioned way; working from home. Technology had made it possible to work from home, so-called telecommuting or alternative workplaces.

But some jobs like policing cannot be done from home. Never mind what will happen to the transport business and its appendages.

Where would our matatus go? In Kenya, working from home is still unfashionable.

Upset markets

The other reaction is diversification of raw material sources and markets. This could upset current markets.

It does not happen overnight because of contracts, regulations, treaties and other safeguards. 

At the macro level, monetary policy has become the weapon of choice. Countries, from China to the US, have cut interest rates to stimulate their economies.

Low-interest rates make it easier to borrow money either to consume or invest; that keeps the economy humming or stimulated.

The problem of this approach is that in some countries the interest rates are near zero, making the policy impotent.

That is why the interest rate cap was opposed in Kenya; it reduces the effectiveness of monetary policy.

Cutting interest rates now makes economic sense, it is the best way to reduce the slowdown before it is too late. Will our central bank cut the rates?

Cutting taxes

Even without a recorded case of Covid-19, we are intertwined with other countries and their slowdown could be ours too.

The other option to confront the virus would be to cut taxes. That is not popular because governments must get another immediate source of income.

Government spending (remember Keynes) could also forestall or reduce the effects of a Covid-19 recession.

Tapping emergency funds is the other option. The World Bank, IMF and the European Union are providing funds to help reduce the effects of Covid-19. Do we have such a fund in Kenya?

We cannot rule out shifting of resources from some sectors of the economy to others to fight the virus. I doubt that any country had factored this virus in its budget.

But the best approach to confront the virus is to reduce fear and ensure we do not lose confidence in the economy.

How do we ensure there is no panic selling in the stock exchange or buying in the supermarkets?

Such behavioural issues can be more serious at times than the virus itself.

Developing countries’ economies are not as cyclic as developed ones. It might take time before we feel the Covid-19 recession.

We are watching if Central Bank of Kenya will cut the rates soon.

Any other envisaged economic stimulus? In some countries like the US, the cut was unexpected, which makes one feel the effect of the virus might be more than is being said publicly.

Some observers fear a recession could turn the political tide in the US presidential elections later this year.

Is that why America was so quick to cut the rates?

The good news is that we have had other pandemics in the past, though this is yet to be declared one. We overcame them. We shall overcome this one too. But we can’t bury our heads in the sand.

We have to act, not just in seeking the cure, but in mitigating the economic consequences thereof.

-The writer is an associate professor at the University of Nairobi