As governments around the world are coming to terms with the dire consequences of the COVID-19 pandemic, policymakers are looking for expert advice on how to mitigate the health and economic shocks their citizens must face.
With impressive speed, the Centre for Economic Policy Research (CEPR) and VoxEU responded to this demand by releasing a comprehensive e-book titled Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes. Edited by Richard Baldwin and Beatrice Weder di Mauro, the volume aims 'to collect the thinking of leading economists on what is to be done'.
In this post, we collect insights from the book which we hope will be particularly useful for policy makers designing crisis support for businesses, and small and medium-sized enterprises (SMEs) in particular, during this time.
In the absence of an adequate policy response, temporary disruptions can have permanent effects, warn Christian Odendahl and John Springford:
'A wave of bankruptcies would leave permanent scars on the economy if firms that would have been successful go under. There would be scarring effects on the future wages of unemployed workers and firm specific knowledge would be lost, dampening the level of output in the future.'
According to Pinelopi Goldberg, the tools of monetary policy are limited at this point and aggressive fiscal measures, especially to support SMEs, are inevitable. However, many of the usual policy measures are unavailable at this time: ‘social consumption’, which brings people together physically, should not be stimulated, and classical investment programmes’ time horizons are far too long to make an effective contribution (Bofinger, Dullien, Felbermayr, Fuest, Hüther, Südekum and Weder di Mauro).
Luis Garicano reckons that the adequate solution would involve a Europe-wide programme with the level of ambition of the German “bazooka”, a package that involves guarantees, credit lines, and working capital loans as well as massive tax cuts and the activation of Germany’s short-term employment protection programme.
We could not agree more with Pierre-Olivier Gourinchas’ point: 'A modern economy is a complex web of interconnected parties: employees, firms, suppliers, consumers, banks and financial intermediaries… Everyone is someone else’s employee, customer, lender, etc'.
Beyond the very obvious fairness, equity and solidarity consideration, policies that smooth the dent in household consumption and reduce people’s uncertainty about their future income also limit the drop in the demand for businesses’ output and thus help avoid bankruptcies.
Different countries are trying various approaches:
Recognising that precarious employees on temporary or zero hour contracts and the self-employed will be the worst hit, Christian Odendahl and John Springford call for quick and unbureaucratic support to these groups, possibly in the form of a coronavirus basic income.
Assistance to businesses will require the most creativity, acknowledges Jason Furman, who served as President Obama’s chief economist. To help firms resume their activity soon after the pandemic-related restrictions are lifted, we need to keep them out of bankruptcy while ensuring that they can continue employing people.
Singapore’s Stabilisation and Support package, described in detail by Danny Quah, provides an innovative example. It involves:
Digital solutions can help with many of the pandemic-induced challenges: online shopping can mitigate losses in brick-and-mortar shops, telecommuting might allow employees to continue working even when self-isolating, and fintech applications can reduce the operational volatility and improve the survival rate of SMEs. However, as Shang-Jin Wei emphasises, this requires a broad reach of internet access, widespread acceptance of digital payments by merchants and households, and an efficient and inexpensive delivery system. Ramping up capacity in these areas should thus be a key policy priority, especially in Europe. In addition, 'SMEs should also be incentivised and supported to improve their digitalisation so they can better take advantage of internet-based financial platforms to resolve their financing difficulties', recommend Yi Huang, Chen Lin, Pengfei Wang and Zhiwei Xu.
China’s example demonstrates that the crisis affects businesses differently depending on the sector they operate in. Due to movement restrictions during the crisis, service industries such as hotels and restaurants, and labour-intensive manufacturing industries have been severely affected (Yi Huang, Chen Lin, Pengfei Wang and Zhiwei Xu). Even between these sectors, we may expect differences in post-crisis recovery: manufacturing will probably experience a sharp rebound while the services sector may struggle for a longer period of time. As Christian Odendahl and John Springford put it: 'If consumers planned to buy a new pair of spectacles but could not buy them when supply was disrupted, they are likely to do so once the epidemic is over. Consumers will not, however, make up for the meals out that they would have eaten while they were isolating themselves.'
Small and informal enterprises are more vulnerable to the crisis as they tend to have limited financial, managerial and information resources, and they are also less likely to be able to respond to the crisis with technological solutions such as teleworking, warns Ugo Panizza. Even the comprehensive support package offered by the German government does not necessarily help the self-employed and owners of smaller companies. For these people, there is no automatic stabilisation mechanism available such as unemployment benefit or reduced-time work. As mentioned before, the solution could be short-term and administratively simple aid, either in the form of direct transfers or interest-free loans with very long maturities (Bofinger, Dullien, Felbermayr, Fuest, Hüther, Südekum and Weder di Mauro).
Many experts emphasise how crucial it is to provide support quickly and with as little bureaucratic burden as possible. A cautionary tale comes from South Korea’s ‘emergency management’ fund for small business owners worth $1.4 trillion won (£960 million). According to Inkyo Cheong, the evaluation criteria for the funds are very strict and the procedure for preparing an application, the evaluation of the application and the confirmation of a guarantee may take more than two months, followed by another week to actually receive the funds. Unsurprisingly, only 4% of the government budget has been dispersed to date. To avoid such outcomes, agencies delivering the programmes need to ensure that support is not just made available, but can be used in a timely fashion by businesses.
This recommendation also comes from Jason Furman, who points out that 'the private sector has an existing infrastructure, can be nimble, and can form a diversification of the response'. For instance, private sector innovation and loans can be critical to the disaster response, but require additional incentives or guarantees from the government. Yi Huang, Chen Lin, Pengfei Wang and Zhiwei Xu provide an excellent example from China, where the Alibaba Group is leveraging its technology and experience with the 2003 SARS crisis to support SMEs through cloud computing, IT and QR health coding systems, as well as AI virus diagnosis and communications. The company’s Ant Financial and its virtual bank MYbank are working with other financial institutions in China to provide financial support to around 10 million micro-and-small enterprises.
Our bite-sized recommendations certainly cannot do justice to summarise the 227-page book. For those who have more time, we highly recommend reading Chapter 9 (Saving China from the coronavirus and economic meltdown: Experiences and lessons by Yi Huang, Chen Lin, Pengfei Wang and Zhiwei Xu) for its excellent case study of how the outbreak has affected SMEs, and Chapter 21 (Protecting people now, helping the economy rebound later by Jason Furman) for specific and practical policy recommendations.
The book’s subtitle, Act Fast and Do Whatever It Takes, provides a great guiding principle for designing the appropriate policy response. When it comes to implementing these policies, we urge government agencies to be as agile, flexible and evidence-driven as possible. An experimental mindset that involves setting out testable hypotheses, collecting data, evaluating progress, building on lessons learned and changing course if needed remains as relevant as ever, and we continue to offer our support and share insights with our policy partners and the public.