GDP growth matters very little in a pandemic

Among the many changes Covid-19 has brought to our lives is attention to statistics on a daily basis.  Number of infected cases, tests, hospitalization, deaths, recoveries.  People from all walks of life have interests in these statistics. Every now and then, some international institution produces GDP growth statistics as well.  These get attention too, but not even remotely close to Covid-19.

The reason is simple.  People care about the risks to their daily lives when living under pandemic conditions. The fear of contracting the virus keeps many awake at night, even causing serious mental stress.  Apart from maybe some nerdy economists, is there anyone who ever seriously lost sleep because GDP growth is what it is, pandemic or no pandemic, but particularly during this pandemic?  

This is not because GDP growth is unimportant.  The ecosystem around the individuals and their families matter more than the changes in an accounting construct such as the GDP, particularly so when public health is facing risks of the kind not experienced in over a century. 

When not worrying about growth is the best option   

Suppose you are adding a floor on your single storied house.  One fine morning, the construction workers show up as usual, put the construction materials together and start laying bricks to build the walls for the second floor.  This is growth in the making. Your investments to expand the capacity of the one-storied building to provide more housing services is moving forward.

Now suppose a fire breaks out downstairs—your existing house (read economy). Will you continue to let the workers lay bricks upstairs so that growth is not disrupted, or will you stop worrying about growth and engage all available resources to extinguish the fire first? Common sense, or for that matter all experiences with fire, suggest the latter.  When on fire, what matters is not expansion, but the safety of the existing house and the people engulfed in flames. If the underlying economy turns into ashes, so will everything on it.

The economic destruction Covid-19 is causing does not take the form of ashes.  It takes the form of jobs and income losses for millions from many different walks of life.  It is reflected in empty saloons, shops, footpath trades, tea stalls, restaurants, public transports, sports stadiums, among others.  It is manifested in closed factories and unsold farm outputs.

Covid-19 is damaging economic efficiency as well. For instance, incomes of the dentists, and more generally elective care providers, have taken a big hit not because the need and willingness to pay for such care has diminished.  The patients are afraid of the close contact that such care demands and so are the providers.  Restaurants are empty not because people are unwilling to pay for eating out; they are simply apprehensive.  Innumerable mutually beneficial trades are not taking place because of the fear of contracting the virus.

Hardly any choice other than containment

Covid-19 causes these damages by requiring distancing – physical (home quarantine, 6 feet rule) and social (masks, gloves, no parties and handshakes); costly sanitisation practices and undermining the confidence of consumers, workers and investors.  The fear of the invisible virus that mercilessly kills our beloved elderlies is crippling the workings of Adam Smith's "invisible hand" all over the world.  

Supply and demand are both down abruptly, causing unexpectedly far reaching repercussions.  Cost of living and the cost of doing business have both spiked.  The interconnectedness between the speed of lifting the mobility restrictions and the rate of community spread of the virus, as evident from the experience of countries attempting to reopen in phases, has deepened radical uncertainties related to the outlook on global economic recovery. 

This is the reality policy makers are contending with.  Their principal preoccupation, where science and sanity have a say, is to keep those in danger safe from the virus without worrying about the collateral economic disruptions. It is in this sense alone that growth no longer matters—a conclusion forced by the biology, physics and the chemistry of the virus.  A denial of these circumstantial compulsions is equivalent to denial of the laws of gravity. 

Just as putting out a rapacious fire requires the deployment of a well-equipped fire brigade and the demarcation of the area under fire, so does fighting the virus requires a health system capable of dealing with infected cases and a social response fortifying the non-infected.  

Until the world finds a way of permanently extinguishing the virus by producing an efficacious vaccine or therapy, virus containment is the only option.  You just cannot continue building the "second floor" the same way you were building before the fire set itself ablaze. 

A face-in-the-sands approach to budgeting 

The medium-term macroeconomic and fiscal framework underpinning Bangladesh's FY21 budget appears immune from the virus.  It seeks to revert to expanding the building without extinguishing the fire downstairs.  The presumption appears to be that the virus will extinguish itself early next fiscal year without leaving any scars.  

Never mind the high infection rates, despite limited testing, and the growing number of reported fatalities. Just as the economy stopped suddenly with private investment falling from 23.5 percent of GDP in FY19 to 12.7 percent in FY20, so will it suddenly restart with private investment rising to 25 percent in FY21.  The post-fire construction of the second floor will have a stronger vigor than pre-fire construction! Private credit growth will rebound from 8 percent in FY20 to 16.7 percent in FY21; exports will resurge from a 10 percent decline to 10 percent increase; and remittances will triple its growth from 5 percent to 15 percent.

This "face in the sands" approach to budgeting has blinded the medium-term expenditure framework to the changed economic priorities. There is no discernable effort to restructure expenditures to cope with the pandemic.  The traditionally big expenditure sectors continue to have a high share in the increases going forward in FY22 and FY23.

Allocation to public administration, transport & communication, local government & rural development, and power & energy are projected to increase by Tk 73,500 crores, accounting for 67.3 percent of the total expenditure increase in FY22.  The projected expenditure increases for FY23 get a bit of a curious twist with the share of these traditionally big sectors falling to 38.7 percent while the share of health and social protection rise marginally from 17 percent of the total increase in FY22 to 18.4 percent in FY23. 

The virus spread curve steepens more easily than it flattens 

A consensus is emerging globally that the recession will be deeper and the recovery slower than projected last April. The virus spread curve is declining in Europe while resurging in the US.  The stumbling reopening all the world over has made it clear that the speed of recovery will depend on the spread of the virus.  

Countries have built medical capacity and learnt enough to be agile in policies until decisive components such as a vaccine or therapeutic are in place.  The unprecedented policy responses across the world in the form of liquidity support and fiscal expansion has at best created a floor for the recession, not stimulus for recovery. There is a need to think of the state of the economy on the other side – higher unemployment, poverty, inequality, fiscal deficits and debt.  These are the issues that need immediate attention, not growth.  

Medium-term macroeconomic and fiscal frameworks are never written in stone.  Revisions have to begin with the recognition that the quest for GDP growth in a pandemic is like searching for a needle, in a haystack in darkness, that isn't there.  Business as usual in public expenditure planning cannot connect the economy with the health and social outcomes that will determine the quality of our belligerent coexistence with the virus. 

There are lots of things outside the counting of GDP we just do not have a handle on currently.  Whether economies can continue to grow forever was an unresolved debate before Covid-19. The virus has paused this debate by shifting attention to the challenge of making the economy thrive whether or not it grows.  This challenge can be unbundled into fortifying resistance to the virus and ensuring that no one falls short of the essentials of life.  These formidable challenges can only be managed through collective action that starts long before they become full blown crises.

Let science guide policies     

The evidence is firmly on the side of urgent action. Many countries would have saved trillions by acting early, not to mention the "known unknowns" that could end up costing a lot more. The attempt to continue growing without due regard for the science at the core of the virus will harm the long-term economic prospects more than help it. The costs of inaction are so steep that economists shudder to account for them.

If handled right, policies to contain the spread of the virus will actually deliver huge economic benefits. Many in the rest of the world, with some exceptions, are starting to get this. 

When shall we?