COVID-19 — Social distancing the goats from the sheep, and Noah
A mashup of three (unrelated) axioms “you reap what you sow, so make hay while the sun shines, and save some for a rainy day” epitomizes what I don’t see when I look around the Caribbean. One country, the Caribbean’s metaphoric Noah, has consistently over the past seven years, built an Ark of fiscal surpluses and buffers in preparation for the inevitable flood. As far as I can see, the only country in the Caribbean with ample fiscal space and therefore the fiscal capacity to respond meaningfully to tourism sector and broader macroeconomic collapse as a result of the COVID-19 response, and engage in targeted fiscal spending without (significant) borrowing, is the Cayman Islands — and they are doing just that.
Others, including Barbados, Jamaica and Trinidad and Tobago, are responding with fiscal and monetary stimulus in most cases. These countries, however, could end up at least partially financing their relief with debt. This is not necessarily an unjustified approach given the circumstances, once the intervention is targeted specifically where it is most needed and therefore most likely to be effective right now. Barbados and Jamaica in particular, with their high debt loads and limited fiscal space, have clear medium-term fiscal deficit and debt reduction targets, have made significant progress with respect to fiscal responsibility, and are responding appropriately in my view.
Trinidad & Tobago however, has maintained expansionary fiscal policy for the past decade, overspending and unsustainably financing its deficits via debt, asset sales, and drawdowns on the Heritage and Stabilization Fund (HSF), irrespective of the business cycle or economic conditions — which by the way has generated ZERO growth in that space of time. This is neither pro-cyclical nor counter-cyclical fiscal policy. This is pure irresponsibility. T&T’s plan to widen the budgeted fiscal deficit at this time, and finance it with more debt and further drawdowns on the HSF, is anything but an exceptional approach for these exceptional times. This is their business as usual, and in these months leading up to the General Election, this approach is simply being amplified. And while higher spending is needed now to respond to the crisis, it is unclear whether or how this spending in T&T is targeted. Furthermore, there is no articulation of any plan to return to a more fiscally responsible stance at any time. This is, in my view, not an appropriate approach to coping with this or any crisis.
The global economy itself, financial markets, and COVID-19 have perhaps created the conditions for a deep and protracted global economic downturn. Some say the recovery will be V shaped, some say U shaped, but I think there is a risk that this can be more L shaped, whether independently, or seen as a continuation of the Great Recession. Here is why:
1. It is arguable that the global economy had never fully recovered from the Great Recession. After all that was thrown at it — Unconventional Monetary Policy, Quantitative Easing (massive printing), negative interest rates, etc. — global growth never returned to pre-crisis levels.
2. As a matter of fact, 2019 was the THIRD consecutive year of progressively SLOWER global growth. We were already in another slump.
3. Furthermore, the global economy grew only 2.9% last year, meaning it was already in a recession. And what was being done about it, on a global scale?
4. Nothing. The retreat of multilateralism and (in)formal cooperation on global policy matters has resulted in individual / siloed policy responses, with ongoing negative implications for policy effectiveness and for confidence. As such, the global recession of 2019 was likely to continue into 2020 anyway. In the Caribbean therefore, we were already likely to suffer tourism sector declines and the related economic pressures this year.
5. COVID-19. We are yet to see peak infection and mortality, according to the pundits. As such, the true socio-economic impact, direct plus indirect, measurable and anecdotal, real and perceived, is yet unknown and unknowable.
6. And as the Great Recession taught us, there are unknown unknowns. Not all of them will be negative, though.
The Great Recession left global structural weaknesses that this crisis will crack wide open, such as obscene wealth and income inequality (which has driven all kinds of political extremism and social disharmony), the retreat of true democracy and freedom, the unwinding of multilateralism, and underinvestment in infrastructure, health, and education (to name a few) — all of which ultimately have damaged confidence. And it is wounded confidence that is perhaps the most lasting and itself damaging consequence of the Great Recession and its aftermath.
But to me, the most important and terrifying lesson of (the policy response to) the Great Recession, is that (experimental) unprecedented monetary stimulus largely proved relatively ineffective — as evidenced by lower global growth rates post-Great Recession — and there were untold unintended (and unanticipated) negative consequences that persist today.
What to do when printing doesn’t work? Fiscal stimulus, in the form of Helicopter Money or Universal Basic Income is the (unlikely) policy choice of the day, and I believe this could work in the short-term to keep some economies afloat. But as sensible as this option seems now, it is only open to the countries with the requisite fiscal space. And so, if no other good comes of this crisis, at the very least it will separate the goats from the sheep. True leaders and states(wo)men will be revealed, especially the Noahs who were prepared — who sowed seeds, made hay, and saved for this rainy day.
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