Are the “Copycat” Government Responses Worldwide Appropriate or Excessive?
What is driving this “copycat” behavior on the part of all nations? Is it an excessive reaction? What will be the consequences? A faster return to normalcy, or plunging the world into a prolonged recession? Governments are closing businesses, and imposing quarantines or travel restrictions with the idea of slowing the spread of the coronavirus. But will slowing its spread also prolong the economic anguish? Will it also reduce the number of persons eventually infected?
For readers interested in the above questions, this piece is intended as an update to my earlier post (Contractor, March 20, 2020) with additional references from medical experts and economists. (I also caution below that there are no definitive answers yet (Knowledge@Wharton, March 24, 2020) and the estimates in the scholarly references below should be read with circumspection).
What Does “Flattening the Curve” Mean?
The expression “flattening the curve” is already a popular cliché. What a government means by this – and it is an admission of unpreparedness – is that, unchecked, infections would grow at an exponential rate so as to exceed the capacity of hospitals to cope with the numbers of patients. For a graph and additional details, see my earlier post (Contractor, F., March 20, 2020).
By forcing quarantines and social distancing, governments hope that the growth of the infections will slow to a rate that remains below the maximum capacity of hospital beds, equipment such as ventilators, and doctors and nurses available in their region or country. If not, the medical establishment will be overwhelmed. This is already happening in Italy, Spain, New Delhi, and New York (as of April 2, 2020). For a while, it happened in Wuhan and Hubei Province, whereupon the Chinese government introduced a severe lockdown on January 23, 2020.
But What About the Severe Impact of Shutting Down Some or Much of the World Economy?
While restrictions are being gradually eased in Hubei, scant signs of an economic recovery there are evident as yet. As the diagram in my previous post (Contractor, March 20, 2020) schematically illustrates, “flattening the curve” also means prolonging the economic dislocation, precipitating mass unemployment (perhaps more than 60 million have been laid off worldwide in just the last two weeks), bankruptcies, and the mental and physical health effects of an extended downturn in the medium to long term.
Are Governments Acting Appropriately or Over-Reacting?
Candidly, we have no definitive answers as yet. While economic papers (e.g., Bonaparte, 2020; Fernandes, 2020; Gourinchas, 2020) try to model the effects, all modeling is based on assumptions, and the current situation poses way too many unknowns or gaps in data (Stock, 2020). For example:
- Using the 1918 pandemic experience as an example is hardly analogous.
- The coronavirus is different, and its virulence, mutation rate, propensity to linger in warmer weather, persistence, and return are unknowns at present.
- The world of 2020 is vastly more globalized and interdependent than ever before.
- Supply chains in world trade are orders-of-magnitude more complex. Subcomponents, parts, and components cross country borders multiple times before being finally assembled, all under the aegis of multinational companies (MNCs). For example, UNCTAD (2013) estimated that in 80 percent of all world trade (amounting to around $US 20 trillion in 2019), a MNC was either an exporter or an importer, on one side of the trade deal, or participated as an orchestrator of a global value chain. Equally remarkably, the same MNC was both the importer and the exporter (i.e., simultaneously on both ends of the shipment) in approximately 40 percent of world trade, and Lanz and Miroudot (2011) found that in 2009, 58 percent of US goods imported from OECD countries were intra-firm.
- With 93 percent of the world’s population living in countries with restrictions imposed because of the virus, the scale of this slowdown or shutdown is utterly unprecedented.
- Companies, municipalities, and individuals are more vulnerable because, tempted by historically low interest rates post-2008, many borrowed recklessly, and their leverage or debt:equity ratios are dangerously near record highs (Srivastava, 2019).
- Epidemiological modeling (e.g., Flaxman, Mishra & Gandy, 2020, or Correia, Luck & Verner, 2020) is also prone to greater uncertainties because the behavior of the current virus is not exactly mapped yet.
- The world population is at an all-time high of 7.7 billion.
- Crowding or urbanization now includes over 60 percent of humanity, which is at a record level.
- Average temperatures worldwide are higher, which may decrease the incidence of certain viruses, but increase disease transmission in general (World Health Organization, 2020; Luber, et al., 2014).
- In 2019, 4.7 billion airline tickets were sold, and cross-border tourist visits numbered more than 1.5 billion.
- All of the above elements point to increased vulnerabilities of the global economy, but on the positive side,2 billion − or almost half the planet − had access to the internet, were better informed and more educated, and were more likely to comply with government orders or recommendations.
The degree of uncertainty in modeling is illustrated in Flaxman, Mishra & Gandy (2020) and in The Economist (April 1, 2020), where the “95% confidence” interval is itself as broad as 50 percent for more than half of the countries studied.