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The Economic Impact of Covid-19

These two articles draw on experiences of earlier pandemics and reach different conclusions about the possible economic impact of coronavirus. Richard Hughes of the Resolution Foundation considers three previous outbreaks: Spanish flu in 1918 to 1919; SARS in 2003; and Ebola in 2014 to 2016. Based on these, he suggests that some countries will see “high single digit or double digit” falls in gross domestic product (GDP). Moreover, he does not expect a rapid (or ‘V-shaped’) recovery from the crisis, but instead a “more fitful” trajectory. In each past case, Hughes says, governments played a “central role” in mitigating the impact on the economy. However, he suggests that they should not provide “universal or open-ended” support for workers because of the possible fiscal consequences. He instead argues for targeted assistance. Hughes also considers how governments can finance their increased spending. He says that central banks may need to provide the necessary liquidity, but that this should be temporary and withdrawn once the crisis has passed. 

Costas Milas, professor of finance at the University of Liverpool, considers the Spanish flu and the black death of 1348 to 1350. He agrees with Hughes that the current economic downturn may be significant but argues that it will be “short-lived” and V-shaped. He states that previous episodes saw increases in wages resulting from a higher demand for labour, at least in some sectors, and a reduction in supply. Based on this, Milas calls for pay rises for NHS workers. However, he says that other industries will lay off workers. Discussing this, he describes UK unemployment support for those affected as low relative to other countries and suggests that it should increase to support workers who lose their jobs.  

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The Impact on Global Poverty

Sherillyn Raga from the Overseas Development Institute argues that the drop in oil prices caused by the virus could push some developing countries into a “full blown economic crisis”. She estimates that falls in oil prices will reduce exports from sub-Saharan African countries by $30 billion and will lead to lower tax revenues. Raga suggests this could weaken these countries’ currencies, which would then threaten higher import prices, inflation, and government debt servicing costs. She describes how these, in turn, could discourage foreign investment, particularly given an already reduced supply of international capital. Turning to her recommendations, Raga highlights the role of multilateral bodies such as the United Nations, World Bank, International Monetary Fund, and the International Finance Corporation in assisting developing countries. She calls on these organisations to do more, given that individual donor countries are dealing with the “increasing economic fallout and loss of lives in their own jurisdictions”. 

Academics Andy Sumner et al estimate that, in the worst of three economic scenarios they consider, the virus might lead to half a billion more people living in poverty worldwide. They analyse falls in per capita income or consumption of 5%, 10% and 20%. They also look at several definitions of poverty. The paper suggests that the additional numbers below the poverty line range from 85 million to 135 million in the 5% scenario, and from 420 million to 580 million in the 20% scenario. It finds that the worst affected areas would be the Middle East and North Africa, Sub-Saharan Africa, and South Asia. Any increase in the number of people in poverty would, the paper says, be the first since 1990 and could reverse the progress on poverty reduction made in the last decade. The authors believe that 30 years of progress could be undone in some regions. They conclude that the virus represents a “real challenge” to the UN sustainable development goal of eliminating global extreme poverty by 2030. They call for international efforts to assist countries less able to face the consequences. Commenting on the paper, the charity Oxfam appealed for the immediate cancellation of $1 trillion of developing country debt repayments due in 2020, and for the creation of a further $1 trillion of international reserves known as special drawing rights. 

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