The economics of the coronavirus disruptions

The government’s decision to put the whole island of Luzon under a lockdown is a public health measure designed to prevent a catastrophic medical problem for the nation.

The measure will also contribute to the containment of the pandemic on a global scale, because what we do to succeed helps the world in dealing with the pandemic.

In its early stage of taking hold on the country’s health vulnerabilities, the pandemic already has (as of deadline) 140 confirmed cases, among which 12 have died.

The lockdown of Luzon is a draconian measure. A Metro Manila community quarantine was deemed inadequate by the decision makers. It will likely be debated in the future as to whether it was a timely measure or an over reaction to a health threat.

The perspective economic view. The public health crisis was entirely unexpected at the end of 2019. Originating in China, it was transmitted quickly to other countries through the movement of people in a highly globalized world. It has now spread to all continents and it has also engulfed us.

Undoubtedly, the health crisis will impose problems upon our and the world’s economies because it also has the same serious dimensions in other lands. In fact, further aggravated by the results of the US-China trade war, its overall impact is a world recession.

For the Philippines, a reduction in the nation’s rate of economic growth is expected. How large it will be depends on how soon the economy gets back on track again.

As the lockdown continues, it will cause an upsurge of government spending. Firstly, to help contain the virus transmission and to alleviate the welfare impact on citizens, and finally, to minimize the damage to the economy.

But the immediate impact of the lockdown is loss of jobs and output, and disruptions of other sectors of the economy. All these costs are likely to be higher the longer the lockdown and the public health emergency.

The important issue is how quickly recovery could happen, which partly depends on when the global recovery takes place. Philippines growth should actually be determined by its own economic fundamentals. But one fundamental element of its economic structure is linkage with the world through trade.

Fiscal spending. By the sheer requirements of the crisis, public spending will go up.

With respect to fiscal spending, the demands on government will increase during the crisis. There are measures that are in the nature of raising government services to contain the public health crisis. This requires additional administrative effort in enforcement, in public health services, in medical supplies, in new or additional manpower. The government must also spend for the rescue of citizens stranded abroad.

As to public revenues, the health crisis and its economic impact would strain tax income. The global recession contributes further to this scenario.

The result is an increase in the fiscal deficit. This could threaten the government’s program of public infrastructure investments, which are a high component of current government priorities.

This will have a serious impact on the nation’s economic fundamentals, as they are likely to worsen in the near term from their current position.

Balance of payments. The earnings of OFWs are likely to fall since many other countries where they work are also facing crises. Industry disruptions could affect major earners of foreign exchange. To be affected would be the BPO industries that contribute earnings in foreign exchange.

Disruptions of the labor market in other export manufacturing industries are likely to happen, causing losses in export income.

Monetary policy will have to complement and support the measures taken by the government to make a meaningful response to the crisis. Along this line, the monetary policy will facilitate greater liquidity and credit expansion in the economy.

Households: jobs and incomes. The lockdown and the seclusion of families and workers who are not considered essential to public safety and the commerce of food and other consumer essentials would lead to a loss of jobs for many.

The Philippine economy has a high proportion of workers in the informal sector. In this sector, too, we find the poorest people struggling with their livelihoods.

Within the formal sector of jobs, many are in the service industries which are part of the lockdown. The schools and malls are closed as well as bars, movie houses and entertainment. Restaurants are on limited operations, and athletic events are suspended. Foreign and domestic tourism are badly off. Hence, a great many people will lose their income.

In the meantime, panic buying by households has increased the demand for goods in groceries and food stores, and traditional supplies are disrupted too.

This temporary state of affairs creates major problems. The pressure for the price of consumer essentials to rise in the immediate term is likely. The supermarkets could be held accountable to keep prices from rising too much. That is not guaranteed in the open market, where mainly informal trades happen.

In the immediate period, the possibility of price increases is very likely, since new supplies may not be easily available. To begin with, some disruption in transport and the difficulties of transport raise cost of goods.

The most vulnerable. The most vulnerable groups are the poor, those without jobs or with informal jobs that are marginal in earnings. These are people who work mainly in the service sectors, some in direct commerce. They are the bulk of workers in the service sectors, and they often have to be on hand-to-mouth type of existence. If wage earners cannot go to their jobs, they have no income.

These groups pose a major challenge for the government’s programs of welfare support. It is possible for big enterprises to survive this period. But many companies will find it difficult to pay wages of workers who are not contributing to production, which is likely to fall, if the workers are not able to reach their work places.

My email is: [email protected]. For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.p h/gpsicat/