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Economy in the times of the plague

Warsaw, 12th March 2020

Economy in the times of the plague

The coronavirus pandemic will probably be the most important challenge for the world economy this year. Already at the turn of December 2019 and January 2020, when information about the outbreak of the epidemic in China began to reach the public opinion in the West, one could have suspected that this problem would quickly become a global issue. The intervention of the government of the People’s Republic of China, although probably a few weeks too late, was so drastic that only a careless observer could have disregarded it. Carelessness, however, came in abundance. During this early period, with the exception of the Taiwanese authorities, no government made any serious attempts to curb the spread of the virus to its territory. Planes flew just as before, people travelled according to their plans, and many commentators and politicians – also in Poland – downplayed the disease by calling it another flu. While European companies were beginning to report certain concerns regarding their deliveries from China being suspended, hardly anyone assumed that the epidemic would take place on such a significant scale in Europe or the United States. At the end of January, this picture began to slowly change with the rapid increase in the number of the infected, not only in the Middle Kingdom, but also in other Asian countries, combined with extreme inhibition of the region’s economy as a result of administrative restrictions trying to stop the epidemic. However, milk had already been spilt. A month later, the number of diagnosed carriers of the virus exceeded one hundred thousand worldwide and a more than a dozen thousand in Europe. At the same time, in some countries – primarily in Iran and Italy – new cases, including serious ones, became so frequent that the healthcare system ceased to handle them efficiently, which immediately translated into a dramatic increase in mortality rates compared to an already very high registered level in China. Other OECD countries have not experienced such a collapse yet at the time, but the number of diagnosed patients is increasing exponentially according to the same pattern as in Italy or – earlier – in China, doubling every 2 to 4 days. Poland is no exception here, although what plays to our advantage are our relatively more peripheral location and lesser integration with the world economy than the densely populated economic centre of Europe (the so-called Blue Banana) extending from northern Italy, through Switzerland, southern Germany and northern France, to the Benelux countries and England.

A relatively small number of infected people diagnosed in Poland (about 40 at the time of writing) should not reassure us. So far, it has been spreading rapidly in all affected countries and it takes about ten days to move from ten to a thousand identified patients. This means that the risk of repetition of the Italian scenario in Poland is very real, despite the fact that the Polish government and administration are trying to learn from the mistakes of other countries by responding relatively quickly, though not entirely consistently. So we do not know if the preventive measures we are taking since the beginning of March – cancelling mass events, quarantine for people who may have had contact with infected patients, measuring temperature at airports or closing universities and schools – will be sufficient. At the same time, despite the evident concern that is visible primarily in empty grocery stores and cancelled business meetings, we are still living quite normally: people meet in restaurants, go out to the park, shopping malls are full, and religious gatherings are held without obstacles. The question is whether this way we are not reminded of what we were doing in January and February when planes from China flew unhindered to Polish airports and back again, and thousands of us – not warned by the government and the media – went on holidays to Italy in spite of the fact that the number of new infections increased there at a staggering rate. Looking at the experiences of Asian countries such as China, Korea, Taiwan, on the one hand, and European: Italy, Germany, France, on the other, we can see that stopping the spread of the epidemic requires radical actions – the more so, the later and they are less consistently they are undertaken. Each day of delay intensifies the problem. It may therefore turn out that the drastic reduction of the mobility of people – not only those directly and indirectly exposed to the virus, but even all residents of the country – is the only way to fight the epidemic and to avoid a collapse in the Polish healthcare system or minimise the risk thereof, i.e. a situation in which overwhelmed doctors and nurses and an overloaded hospital infrastructure are not able to help not even all the infected people, but only those whose condition is critical. In view of the much worse initial state in comparison with not only to Germany or France, but also Italy, thus far the country most severely affected by the epidemic, it may turn out that such a radical intervention will not be avoided. The negligence of the distant and closer past is substantial and our carelessness – both social and political – during the virus spread is clearly evident. We have several dozen percent fewer doctors and nurses per 1,000 inhabitants than Lombardy, which is struggling with a humanitarian crisis. Life support equipment in Polish hospitals – albeit modern – is heavily burdened with regular patients. Drug reserves due to a production shutdown in China are very limited. And the number of tests to diagnose the virus we are carrying out is so small that the probable size of the epidemic is much larger than the Ministry of Health officially admits. So it may turn out that in the second half of March, we will experience the same shock that Italians are experiencing today, i.e. a mixture of direct and indirect effects of the epidemic. The severe cases of the disease too numerous for our healthcare to handle them and thus a significant increase in mortality, combined with strictly economic phenomena: supply chain breakdowns, shortages in stores, collapse in demand not only in selected industries, increasing payment and tax bottlenecks, and the beginning of avalanche of bankruptcies of smaller companies, might truly be a mixture conceived in hell.

The main question currently facing the Polish government is the following: in order to take the control of the epidemic, is it enough to undertake preventive action combined with an autonomous social response leading to a self-imposed decline in mobility around the country? It can be assumed that the answer is unfortunately negative and it will be necessary to introduce more radical measures, going far beyond the current status quo, although at the same time leading to a temporary restriction of certain civil liberties by administrative means. It is first and foremost about strict border controls with accurate registration (also electronically by means of mobile communications) of the place of origin and accommodation in Poland of individual persons, perhaps even in combination with the mandatory temporary quarantine under pain of severe financial or criminal sanctions. A similar quarantine would also encompass the identified outbreaks in the country, not limited as it is today to individual households, but rather covering whole houses, streets or even the recognised sources of infection, as it took place in China. The implementation of such drastic measures is not easy for any democratic government, which explains the slow reaction of Western states, including ours, but at the same time their lack makes the most negative epidemiological and economic scenarios more probable. Moreover, it is not an easy thing to execute in Poland, a country not only affected by the experiences of the 1980s, but also by the lack of lack of trust between the authorities and the opposition. Therefore, it would require urgent cross-party agreement, democratic control, and close cooperation between the central government and local authorities, and readiness to take actions that are negatively perceived by one’s own political supporters (closing of churches, restricting freedom of movement in cities, punishing people breaking the bans with high fines etc.). Is this possible in Poland? One can be doubtful.

Even if such a radical scenario proves to be unnecessary and we go through the epidemic with a limited number of infected patients and relatively mild preventive measures, it is basically impossible today that we will not be affected by a serious economic slowdown and consequently its effects: an increase in unemployment, a decrease in tax revenues, companies going bankrupt etc. The scale of the crisis is still unknown, but we have to take into account a slowdown at least on a scale comparable to that of 2011-2012, and perhaps even the first recession since 1990 which means a decline in GDP and a large increase in unemployment. An additional problem, absent during the previous recessions, of an extent that is hard to predict today is what will happen with our healthcare system and more broadly what will happen with key infrastructural services: water, energy and food supplies. Therefore, the government has to decide now not only how to limit the spread of the virus to levels that can be accommodated by Polish hospitals, but also how to ensure the functioning of the country at a basic level even if the health situation gets out of control. These questions also touch upon the issue of what economic price are we ready to pay for the potential reduction of the risk of a humanitarian collapse in the country and whether this price will not be even higher if such a collapse occurs. A related problem is the question of the instruments that public authorities will be able to use to at first ease the upcoming economic shock and secondly to facilitate a quick recovery when the epidemic is over. Finally, an important point is the question of the long-term effects of the epidemic as well as whether and how we will take care of potential deficits exposed by the virus in healthcare as well as in the entire economy.

It seems that in the first of those areas (ensuring the functioning of basic services during the crisis), the government is currently undertaking actions adequate to the scale of the problem, while also dealing with problems of a deeper, structural nature. Emergency management and procedures have been set up in the financial and energy sectors to enable them to work even in the event of an epidemic spreading to some key personnel. The state budget has reserves allowing it to handle payments for at least several months of crisis without significantly intervening on the market, even in the event of a drastic decrease in revenues. At the same time, the statements of doctors, nurses and public health experts reaching the public opinion indicate that the financial, infrastructural, material and human capital neglect accumulated over the years in our healthcare system will hit us with doubled force when the number of diagnosed cases reaches Western European levels. Attempts at accelerated purchases of medical equipment have not – as yet – brought adequate results.

At the same time, the government – the Ministry of Development to be more precise – undertook the first economic countermeasures, announcing help for industries affected by the crisis, primarily: tourism, mass events, and transport. The proposals presented by the government include, among others, reliefs and deferrals in the payment of direct taxes and social security contributions, facilitation of VAT settlements consisting in earlier enforcement of the new Standard Audit File by three months, earlier VAT refunds. The government also proposes to extend the liquidity support for companies forced to shut down by virtue of the instruments at disposal of Bank Gospodarstwa Krajowego (loan subsidies, guarantees, increasing the guarantee in de minimis aid to 80% of the loan amount, subsidies to interest on loans by covering the disaster fund also in the event of an epidemic). These actions are undoubtedly justified, although the experiences from eight and ten years ago – when the PO-PSL (the Civic Platform and the Polish People’s Party) government introduced similar packages addressed to SMEs in response to the crisis in the Eurozone and the Great Recession in the global financial system – stress the importance which lies in the details of government support, and the significance of an information campaign among companies and the reality of implementation of assistance packages through public institutions: BGK, Social Insurance Institution or Tax Offices. A challenge currently underestimated by the government may be the loss of liquidity by enterprises, not only as a result of falling demand or production downtime caused by the coronavirus epidemic, but also terminations of loan agreements by concerned banks. Not restricting oneself to the tools directly accessible to the administration through Bank Gospodarstwa Krajowego and establishing close cooperation with the entire banking sector may prove to be crucial in this respect. This requires commitment not only on the side of the Ministry of Development, but also the Minister of Finance and the Polish Financial Supervision Authority.

It may be necessary to supplement the government package with well-known solutions from, among others, Germany, including the possibility of a universal adoption of shortened working hours, that is a situation in which employees make use of service days (additional days off during downtimes) and the government subsidises companies with funds for wages and salaries by returning part or all social security contributions. This will create an opportunity to reduce the scale of layoffs in the economy and thus also curb unemployment. Companies should also become able to temporarily renegotiate contracts, for example, by reducing remuneration by 30-50% during the epidemic. This will result in an increase in the public finance sector deficit, which requires an urgent budget amendment taking into account the correction of the GDP growth this year, for instance to 0-1%, and the inclusion of a so-called “bad times clause” in the current expenditure rule. This would increase the deficit by 0.5-1% of the GDP. In case of a very bad turn of events, it will be necessary to announce the state of emergency and increase the deficit by several percent of the GDP, so as to finance the most urgent expenses and thus saving the liquidity of companies and limiting the increase in unemployment. In such a situation, however, the government should simultaneously reconsider certain ongoing commitments, for example, suspending the payment of 500+ childcare benefit for the period of the epidemic for some of its beneficiaries. If things take a very bad turn not only in Poland, but also around the world, it will be necessary to undertake more radical measures that go beyond deferring or suspending tax payments and financing public expenditure with a deficit in hopes of maintaining demand in the economy. Such a non-standard solution (implemented nonetheless in the US during the Great Recession) could be a significant subsidy to the Polish Development Fund (PFR) and greenlighting of share takeover in failing companies (for a pre-limited time).

The final group of challenges that the Polish authorities are facing in connection with the epidemic are long-term activities. Unfortunately, it may turn out that the financial outflow sparked by the coronavirus will demonstrate which segments of our state operate de facto without underwear (as the Polish saying goes), hiding this fact from the public opinion with a veil of prosperity. The Polish health policy is one of the most obvious suspects. One can, however, have almost equally justified doubts concerning the broadly understood public policy that places current transfers over expenditure strengthening the ability to act in crisis situations. The fact that we are carrying out so few tests for the coronavirus is indirectly a consequence of our underinvestment in science. Therefore, the conclusions from the epidemic should first of all be direct: resulting in a rapid and significant increase (approx. 2-3% of the GDP) in healthcare expenditure supplemented with activities leading to an even larger increase (approx. 30%) in the number of doctors and nurses working in the country and subsidising (with medical equipment and material reserves) of hospitals and other facilities that make the whole system operational. Secondly, there must also be indirect conclusions, thanks to which the state will become aware of its own insufficiencies that reduce its ability to act effectively in crisis situations. The strength of individual countries in the face of epidemics (but also other natural disasters, wars or economic crises) is differentiated by what they do in normal times. Do they invest in real capabilities in terms of innovation, organisation, equipment and infrastructure, or do they prefer to spend each zloty or dollar of revenue on current consumption for this or that social group.

It would be a mistake if we did not take advantage of this time of the plague for this kind of reflection on the state of our country, especially since the pandemic – just like any other crisis – will probably be connected with many new opportunities for development in the global system. Above all, those countries will benefit that correctly identified the changes it will have caused, and in particular the transformations that international value chains will undergo, both to the benefit and to the disadvantage of Poland. The countries that will have best survived the epidemic from the humanitarian and economic point of view will probably attract more attention from investors interested in a different distribution of their own business risks. Not without chance, however, will be the hard-hit countries, too, provided they learn from their own weaknesses and consequently will respond with decisive reforms. The worst thing when the epidemic is gone that could happen to us is passivity and a quick return to status quo ante. Will it be different this time?

Author: Maciej Bukowski, Faculty of Economic Sciences of the University of Warsaw


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