Branimir Jovanovic
Public health and the economy go hand in hand during a pandemic, so the best way to help the economy in the current crisis is to introduce adequate restrictions to control the pandemic.
The COVID-19 pandemic gave rise to the biggest economic crisis since World War II. Global economy is expected to contract by 5% this year, which is the highest contraction in 75 years, and almost no country is left unaffected by the crisis.
Yet, this is not the only thing that differentiates this crisis from others. Another distinction is that it has originated outside the realm of economics, i.e. it originated from the spread of a virus. It also begs the question - from an economic point of view, is it better to introduce restrictions to prevent the spread of the virus, or is it better to do nothing? Sweden and Macedonia, both analysed during the pandemic, provide the answer.
The Swedish experiment
Sweden had an atypical reaction to the COVID-19 pandemic. While all other European countries imposed restrictions and "shut down" their economies to prevent the spread of the virus, Sweden decided to do nothing. Thus, it served as the greatest natural experiment in recent history.
The short-term results of the Swedish experiment are already evident and can best be seen when compared to its Scandinavian neighbors - Denmark, Norway and Finland.
Health outcomes are by far the worst in Sweden. The COVID-19 death rate there is five times higher than in Denmark, ten times higher than in Finland and twelve times higher than in Norway.
No wonder. Without restrictions, this was expected. But what are the economic results? Those, too, are worse in Sweden. Sweden’s GDP fell in the second quarter by 8.3%, while in Denmark GDP fell by 6.9%, and in Norway and Finland by 5.1% and 4.5%, respectively.
Source: Worldometers и Евростат
Why is Sweden seeing worse economic results than its neighbors, even though it did not shut down the economy, unlike them?
The fact that Sweden did not shut down the economy did not spare the country from the economic shock at all. All its economic partners did shut down, which caused a decrease of external demand for Swedish products, ergo Swedish exports fell, just as if it had imposed restrictions.
But the fact that Sweden did not impose restrictions caused additional harm to them. Their number of new infections and the death rate was much higher than in other countries, which caused people and companies to refrain from spending and investing much more than in other countries. Thus, in April, when the number of new cases decreased in Norway, trade increased by 4.8% compared to the previous month, while in Sweden, in that same month, the number of new cases increased, and consequently trade decreased by 1.5%.
The results of the Swedish experiment are unequivocal. The fact that Sweden did not impose restrictions during the pandemic did them no good, it only fanned the pandemic, worsening the health outcomes, and consequently worsening the economic outcomes.
Macedonia was a positive example in the beginning
We were a positive example when the pandemic started. In its April projections, the International Monetary Fund predicted that our economy would contract by only 4% this year. Serbia, Moldova and Malta were the only European countries that were expected to fare better than us.
Why were the expectations so positive? The first factor was that our economy is considered a relatively closed economy, much less integrated into global economic trends than other European economies, much more dependent on domestic factors. That is why we do relatively well in global economic crises, such as in 2008-2009, when we were one of the least affected countries in Europe.
Source: balkaninsight.com
The second factor was that, at the time when these projections were made, in late March and early April, we were one the countries that were least affected by the coronavirus in Europe. We had introduced timely restrictions, the measures were consistently implemented, the spread of the virus had slowed down and there were expectations of a total of about 2000 cases of infection.
With the recent publishing of the economic data for the second quarter, it became evident that we are actually one of the worst in Europe. The decline of our GDP in the second quarter is 12.7% (compared to the same period in 2019), which is better than only around 10 other European countries, and worse than 20. Why did we do so poorly, despite the positive initial expectations?
Mistakes with economic measures
Undoubtedly, mistakes in government economic measures also have an impact. The government was late to adopt them, the main set was adopted as late as March 31, about 20 days after schools, kindergartens, restaurants and malls were shut down. The measures themselves were aimed primarily at large companies - the largest portion of state aid went to large companies that make millions of euros in profits, such as private hospitals, casinos, sports betting companies or foreign companies operating in tax-free zones. Small businesses were overlooked. We had only one measure dedicated to micro, small and medium enterprises - interest-free loans in the total amount of EUR 14 million, which were gone in a very short time. Many well developed countries had special sets for small businesses only, precisely because they were most affected by the crisis. Germany, for example, provided € 10 billion in direct subsidies to the self-employed and micro-enterprises (with up to 10 employees) alone.
The aid was also poorly designed, so some of the money that was supposed to end up with the workers, ended up with the owners of the companies. There were also cases of suspected corruption, when companies owned by state officials received state aid.
Citizens were almost completely exempt from the measures. The measures that applied to them (payment cards) were adopted with the third set of measures, in mid-June, and were quite modest. The total announced amount of funds was 28 million euros, which is only 0.25% of GDP and only 1/6 of the total funds that the state spent on dealing with the Covid-19 crisis. This is not enough to mitigate the harmful effects of the crisis on citizens and to restart the economy.
While many mistakes have been made in prescribing and implementing economic measures, this is still not the main reason for the poor economic results.
Catastrophic health outcomes
The main reason for the poor economic results is that, since the end of April, our health outcomes has deteriorated catastrophically. A blind eye was turned to various influential social groups, such as religious communities and certain business groups. No accountability was taken for organizing liturgies while a ban on gatherings was in effect, churches were allowed to work for Easter, Iftar gatherings were disregarded, mosques were allowed to hold prayers for Ramadan. Abatements were made for caterers and sports betting places, which were allowed to start working, despite the fact that cultural facilities remained closed. The Minister of Interior did not want to sanction those who violated the measures, with the excuse that it could worsen their already difficult economic situation. In the end, the measures completely slackened, prematurely, at a time when the health results were actually deteriorating.
So, from the initial expectations of a total of 2000 infected, we got ourselves in a situation to have 1000 newly infected persons each week and 700 dead so far. Thus, our health results are now among the worst in the world and only around twenty countries in the world have had more deaths per capita than us.
We used an example to illustrate the most important economic lesson from the current course of the crisis - that the worse the health results are, the worse the economic results will be. The countries that had the worst health outcomes in the pandemic, such as Italy, Spain, Britain, France and Belgium, also had the highest GDP decline in the second quarter. We infamously entered this group of countries.
Source: China Data Lab и Евростат
The reason is the same as in Sweden, and, in fact, has long been known in economics - expectations. Poor health outcomes worsen society's expectations, generate uncertainty about the future, and cause people and businesses to refrain from spending and investing, which, in turn, reduces aggregate demand and slows down economic activity. The role of expectations in economy was emphasized by Keynes in 1936, and today it is widely believed among economists that overcoming the Great Depression of the 1930s is due to improved expectations. But our policymakers seem to be more willing to trust local restaurant owners and bookmakers than economists.
What now?
Why is it important to know all this? The purpose of this text is not just to show that something was done wrongly in the past. The aim is to indicate what needs to be done in the future.
In a situation where many European countries are beginning to face a second wave of the pandemic and many of them are considering reinstating restrictions, we, too, will have to start thinking about the same. Yes, the restrictions do not have to be as strict as those of March-April, they can be both milder and more selective, and surely that is the way to start. However, if other European countries decide to once again impose strict restrictions and shut down their economies, we would have to do the same. We mustn’t allow ourselves to follow in Sweden’s footsteps. It would cause enormous damage, both in terms of health and the economy, and this must be crystal clear to everyone.
In this regard, we do not have to look far for guidance, it is enough to look around the neighborhood. Greece is a great example of successfully dealing with the crisis - there are 10 times fewer deaths per capita caused by COVID-19 than in our country, despite the fact that they heavily rely on tourism. Even the decline in GDP in the second quarter was not much higher than ours - 15.3% as opposed to 12.7% - even though their tourism income was decimated. They have already started introducing new restrictions, although in the past few days they have about 300 newly infected people per day (which in our country would translate to around 60).
We mustn’t repeat the mistakes of the past and make concessions and give in to pressures, as was done in recent months with religious communities, the hospitality industry and caterers, bookmakers and other influential groups. Everyone must consistently adhere to the measures, and if someone fails to do so, the competent authorities should severely sanction them. Excuses of the likes of doing harm to the citizens are absolutely untenable. Non-sanctioning is detrimental, because that is how the virus spreads, which then endangers both public health and the economy.
For the period of restrictions, new economic measures will have to be prepared to support those affected by the restrictions. Essentially, the measures should not differ much from those that have been introduced so far, but they must be better designed and their shortcomings must be eliminated. They must be more targeted, i.e. end up with those who need help the most, such as small businesses, workers, those who lost their jobs and the poor.
There must be a special set of measures intended only for small companies, following the example of many developed countries. That set, in addition to support for overcoming liquidity problems and workers’ wages, must also provide support for digital transformation of small companies, i.e. switching over to online operations, electronic sales and the like. This is also the first recommendation of the OECD to help small businesses in this pandemic.
The new economic measures must focus more on citizens. Support for them mustn’t be reduced to payment cards worth 3000 or 9000 denars. That is a disrespectful tossing of a few crumbs. In the country with the highest social differences in Europe, systemic changes are needed to address poverty, as well as a social system that will take from those with plenty and give to those with none, and crises such as this are the best opportunity to implement such major changes.
Finally, we must all realize that public health and the economy go hand in hand. If public health is not in a good condition, neither will be the economy. This goes for pandemic times, as we are currently in, as well for times with no major disturbances. So, let's start taking much better care of public health.
This blog is published as part of the regional blogging initiative “Tales from the Region”, led by Res Publica in partnership with Analiziraj.ba (BiH), Sbunker (Kosovo) Ne Davimo Beograd (Serbia), PCNEN (Montenegro), Prlija (Croatia), ABCnews.al (Albania) and SEGA (Bulgaria).
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Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of the Institute of Communication Studies or the donor.
