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Thursday, May 28, 2020

The stress of the pandemic is often robbing us of consistency

You cannot replace the invisible hand of the market with the visible hand of the bureaucrat and the police, telling people what to do and doling out money and food.

Written by Kaushik Basu | Updated: May 15, 2020 9:52:38 am
Economists have written about the need for governments to allocate more money to help workers, migrants, and small informal businesses. This is absolutely essential.

The risk of COVID-19 is widely misread. This is causing a fear psychosis and can do great harm to the economy, creating shortages in food and essential services. All over Europe and in many East Asian nations, people have come to grips with the fact that we may have to live and function alongside COVID-19 for some time to come. In contrast, several developing nations, especially in Africa and South Asia, remain shuttered and closed.

My argument is not about how risk-averse we should be but the need to be consistent in our response. The stress of the pandemic is often robbing us of consistency. In India, roughly 10,000 people die from malaria each year, and close to 200,000 are killed in road accidents. But every time we go out for a stroll, we do not worry about contracting malaria or being hit by a car.

There is literature in psychology on “salience”. Depending on how saliently a piece of information is presented to people, rational responses can be drowned out. If, for instance, accounts of COVID deaths are presented in vivid detail while the risk faced by a driver not wearing a seat belt is given in pure numbers and relegated to the back pages of our newspapers, people will perceive the two risks differently. This is happening in a big way today, especially because we live in the age of social media, and instant news.

Much of the pandemic data from the rich countries are presented without correction for population size. This is causing people in populous regions like Asia and Africa to misread the risk. Thus, many Indians may panic on learning that more than 2,500 people have died of COVID in the country while the virus has claimed less than 1,500 people in Ireland. But correct these figures for population size, and the risk of an individual dying by COVID in Ireland is about 260 times greater than in India. These kinds of differences in risk exist not just between Ireland and India, but all of Europe and North America compared to all of Africa and Asia.

Some will counter my analysis by arguing that I am discounting the future. Is it not possible that Africa and Asia are on the brink of a huge surge? And in that case, should we not lockdown our economies totally? The answer to the first question is yes, and the second no. Let me explain. About the future, at the best of times, we know little. COVID-19 is new, and so we know even less. The pandemic could slowly go down, remain flat, or surge into a mega pandemic. We cannot rule out any of these situations, but that should not mean that we always think of the worst-case scenario and live by that. By that reasoning, nations should have locked down their economies even before Wuhan happened. After all, the risk of new viruses has been known for a while.

On April 27, 2018, at an event organised by the Massachusetts Medical Society, Bill Gates and several others warned us of the possibility of a new virus and pandemic. By the reasoning some people are using now, economies should have been shut down then. Clearly, Gates was not suggesting that. He was urging for more research and better health preparedness. Moreover, by focusing on the worst-case scenario, we are ignoring why the risk of COVID fatality is, in general, several hundred times lower in all of Africa and Asia compared to Europe and North America. The lower risk may well be rooted in past illnesses and, therefore, resilience, in these regions.

This is not to deny that there are some irresponsible leaders in the world, such as Brazil’s Jair Bolsonaro, who have gone to the other extreme by ignoring all scientific evidence and treating COVID-19 like the common cold. Luckily, we have outstanding leaders, like Germany’s Angela Merkel and France’s Emmanuel Macron, who are reminding people of the risks of the pandemic but also pointing out to them that we have to take the hard decision of unwinding from the lockdown and enabling the economy to function.

Even though there has been a worrying outflow of capital from India over the last two months, there is hope in the country because several corporate leaders, senior bureaucrats, and some political leaders, across ideological lines, have begun speaking up in recent days, showing awareness that a protracted lockdown can do more harm than good. We also have remarkable examples of good practice — most strikingly in Kerala, which is talked about all over the world, but also in some other areas such as Delhi.

But there are many countries which are running big risks of ending up with major economic setbacks. Argentina is a case in point. The country is not completely to blame for the situation it is in now. Argentina is about to be declared in debt default by its private international lenders, who have shown an unfortunate lack of empathy in the midst of the pandemic. But some of Argentina’s problems are because of the country’s over-zealousness in shutting down the economy and mobility in the mistaken view that this will save lives.

When it comes to the economy, the question is not whether or not there should be a lockdown but what kind of a lockdown. There is growing evidence that we can create a few social-interaction rules, such as no large gatherings, buses and trains running but with limits on the number of people allowed in each compartment, planes with alternate seats vacant. This will mean a rise in fares but that is a price we will have to pay. The government can shield the poor with directed subsidies. We will need new staff to manage this, which will also create jobs. When someone contracts coronavirus we should ensure that the household concerned follows quarantine rules, instead of shutting down a whole area or a housing complex. In western nations and in East Asia, there is now a lot of writing about opening schools (some have already done it), because otherwise we can damage the nation’s human capital and long-run growth. I would not take this step in India at this time but take a decision sometime in June when we have even more evidence. And, we need to work relentlessly on testing and contact-tracing. This will enable us to do a curated lockdown in a much more effective way, cutting down the risk of capital flight and economic crash.

Economists have written about the need for governments to allocate more money to help workers, migrants, and small informal businesses. This is absolutely essential. However, this is also time to recognise that the economy is an unbelievably complex organism. One critical factor that allows it to survive and flourish is the invisible hand of the market, which has evolved over thousands of years. The market’s invisible hand enables collaboration among millions of individuals each taking his or her own decision concerning what to produce, and what to buy. If the market is brought to a halt through excessive control, there is no way you can replace the invisible hand with the visible hand of the bureaucrat and the police, telling people what to do and doling out money and food. It was Deng Xiaoping’s recognition of this in the late 1970s that enabled China’s economy to flourish. These are challenging times but it is important for emerging nations in Africa and Asia to be aware that a controlled economy and society is a recipe for disaster.

This article appeared in the print edition of May 15, 2020, under the title ‘Things not to do in a pandemic’. The writer is C Marks Professor at Cornell University and former Chief Economist and Senior Vice President, World Bank

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