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Covid-19: Crash Test for 21st-Century Economies

Alexis Belianin speaks about how to experience the pandemic together

Alexis Belianin

Virtually the entire ‘golden billion’ is quarantined today. While different countries are facing the same challenge, they are implementing different response strategies. In his op-ed for IQ.HSE, economist Alexis Belianin speculates about who bears responsibility for the survival of national economies in different scenarios, and why this happens.

A spectre is haunting the planet — the spectre of the pandemic. The coronavirus cannot be seen, felt, or caught by the tail — but still, it is present. In less than a month, it has changed our planet beyond recognition — at least the part where the golden billion lives.

The first problem caused by the epidemic, which has evolved into a pandemic before our very eyes, is that people in developed countries turned out to be catastrophically unprepared for a situation when serious medical help (in this case, ventilation) is required by tens and hundreds of thousands of people at the same time. The most recent pandemic — the notorious Spanish flu, which infected almost one-third of the global population — happened exactly 100 years ago. No witnesses have survived today, and three generations of Europeans and Americans have grown up in full confidence that one thing is for certain — their health is protected by modern medical technology. As a result, healthcare systems in developed countries have relaxed or been tempted to reduce budgets, and as a result have simply became unsuited for masses of severely ill patients with the same diagnosis.

This is, of course, not about the doctors, who, without exaggeration, are heroically battling the pandemic literally at the risk of their own lives. This is about the margin of safety of contemporary healthcare systems. Even the most advanced of them, such as the American or Belgian ones, turned out to be insufficient — the United States is the absolute leader by number of cases today, while in Belgium, the mortality rate from the virus is almost twice as high as the global average.

The Soviet system, by the way, used to be much more conservative in this regard, and hence, more reliable. But Russia has followed the same path: over the last decade, infectious diseases hospitals in Moscow have seen mass reductions, infected by the same virus causing budget reductions. All countries where cases are counted in the thousands have only one hope — that they will manage to flatten the curve by stretching it over time (see more about this here). Only under this condition will they likely be able to deal with the inflow of sick people without applying military triage methods, which involves treating those with more chances for survival first.

For this reason, the ‘golden billion’ will spend the next month quarantined, regardless of how it’s called in each specific case.

All public events have been cancelled, shops and restaurants are closed, borders and transportation are being closed, residents’ opportunities to leave their homes have been limited, and deserted streets look like scenes from action films. All stories in the media are concerned with Covid-19, including information on hygiene rules and stay-at-home orders, which are being followed by most people who are simultaneously mastering Zoom, new DIY techniques, and cooking recipes.

The strategies employed in different countries vary in the details, which are often rather considerable. For a variety of reasons, it is impossible to assess their effects today. Almost all countries admit that the situation is extraordinary and are breaking their piggybanks to help their companies and citizens.

The United States urgently assigned $2 trillion for the epidemic relief — almost half of the annual budget. What is notable is that this was immediately agreed upon by both houses of Congress and the President, who do not show much goodwill toward each other under ordinary circumstances. In addition to support for key corporations such as Boeing, at least one-fourth of this money will be spent on direct payments to the population, and the same amount as subsidies for small businesses.

Germany allocated €50 billion, announced a delay in tax payments, provided subsidies and guaranteed loans to companies at an amount reaching one-fourth of annual GDP. British authorities have announced tax holidays and have also offered 80% of salaries to all non-working citizens for amounts under £2,500. During the peak of its outbreak, Italy, one of the most affected countries, allocated €10 billion for employment support and provided €350 billion in loan guarantees, which is equivalent to over 20% of GDP.

Russia, as usual, is making its own path. The President postponed the vote on constitutional amendments (which is highly reasonable during a pandemic), but has not introduced a quarantine, or state of emergency, when the state becomes directly responsible for its citizens’ well-being. There is neither peace nor war, but no one is letting the army relax (the spring conscription will be taking place as scheduled, despite the fact that recruiting stations are natural epidemic hotspots). Responsibility for survival lies with the population, which will pay increased taxes on interest from certain bank deposits, and companies, which are losing the lion’s share of their profits but will still have to make mandatory payments, such as rent, federal taxes (personal income tax), and wage payments. The advantages of such a policy are obvious: with successful implementation of fiscal plans, budgets will see almost no harm in the next month, which will probably be followed by a decline in the epidemic.

While big public corporations will survive the lockdown, small and medium-sized businesses — the long-discussed middle class, which, by the way, creates up to one-third of jobs and accounts for over 20% of taxes paid — are expecting a wave of mass bankruptcies. This means a loss of tax income, jobs, and a following avalanche of negative consequences. A sharp rise in unemployment will inevitably follow, along with a re-division of the markets with growing monopolization and prices, which means a growing gap between the rich and the poor, rising crime and social strain. This strike will be particularly painful for Russia’s regions, where demand is not big enough for big corporations and where small businesses are key employers. It’s possible that the authorities are relying on the assumption that citizens are stockpiling something apart from basic food staples.

In this situation, a policy of full support for wide groups of individuals, as well as small and medium-sized businesses using state reserves seems reasonable. The Central Bank’s gold and foreign currency reserves stood at more than $500 billion as of the beginning of April; the National Welfare Fund is another $120 billion, which makes up to at least 30% of GDP. Russia is quite capable of interventions comparable to those made by big developed economies, and these interventions don’t need to be made as direct payments.

But if an epidemic is a mutual catastrophe, we should experience it together, caring, first and foremost, about the future of the people and their well-being, not about the integrity of Eurodollars in the treasury.
IQ

Author: Alexis V. Belianin, May 08