BY MUTAVA MICHAEL MULEI
I am listening to the radio and the presenter is boldly shouting that there is nothing new under the sun. What a scam! How can that be true? A few clean memories and ideas are going through my mind, never mind a lot of people’s bodies have been far from clean in these unprecedented times of the novel Coronavirus.
I have never seen anything like it, yet I have been under the sun for more than two decades now. Do I hear you ask what clean memories are going through my mind? Well, I am doing a mental comparison of past economic crisis with what Coronavirus is compelling us to accept and consider as a new normal. Yes, they are memories because the day I learnt about them. I was seated in a lecture hall full of other hope filled students. There was no one observing social distance then and the lecturer may have coughed once or twice but the class did not initiate any emergency self-quarantine procedures.
Economic crises are many, but the more recent ones are the great depression that followed the stock crash of 1929, the oil crisis of 1973, the Asian crisis of 1997 and the more recent financial crisis of 2007. Just when everybody thought everything was under control, the great lock down of 2020 came knocking, while wearing a Coronavirus garment. It will be noted that past crises have been purely economical and have often emanated from classical cases of market failure. For example, wild stock market speculation in the face of a struggling economy preceded the great depression and the housing bubble is associated with the recession of 2007. However, the current situation is a double tragedy of public health and economic crises, with one causing the other.
Given the unique and unprecedented circumstances of the current situation, it is interesting to see the measures governments are implementing to arrest the slump in the economy. The traditional textbook reaction to an economic slowdown is a choice between free market theory, Keynesian intervention theories or a monetarist approach. In the free market assumption, it is assumed that the market always autocorrects. In the Keynesian approach, government fiscal policy saves the day while in the last option; monetarist interventions provide the much-needed panacea. Often, one of these methods, or a mix, always succeeds.
In the present conditions, central banks and governments have swung into action, initiating various reforms to cushion their economies. What is unsettling is that despite the peculiar nature of the current situation, measures taken ape the traditional textbook reactions which are often aimed at lifting the economy out of inefficiency. The ammunition in those traditional methods has two broad themes of spurring demand or increasing money supply to revitalise the economy. Further, they are meant to restore confidence in bartered financial and economic systems. Considering the above, the question begs, whether the core of the markets is undergoing a fundamental concern like demand contraction that is altering its efficiency. The outright answer is “no” as we may understand well that beer sales are not plummeting because people suddenly prefer more water.
Coronavirus has snatched that liberty from them. In another example, there is only so much that easy money can do to a newlywed couple who want to fly out to Mauritius for a honeymoon. As a matter of fact, should they marry in Nairobi, the farthest they can go for the honeymoon is within the periphery of the city? One begins to appreciate the predicament of the state as it continues to pursue measures that increase government spending in the face of a public health black swan. It does not do much. The current crisis does not present itself in the conventional way of demand contraction, but it may become an eventuality.
At this point, we will appreciate that the counterfactual of not doing anything is not any better. It can be argued that having money ready in the pockets of consumers can at least speed up the recovery of the economy once the virus has been put under control. Therefore, the current interventions should not entirely be thrown out of the window, but they should be tempered with more efforts to cushion the supply side of the economy. Given that the bigger chunk of the labour force thrives off the small and medium enterprises, the government needs to make deliberate efforts to ensure that the business casualties arising from this group are minimised. Since spurring demand does nothing for the economy given the liberties curtailed by Coronavirus, then the focus should turn towards cushioning companies from collapsing.
Several developed economies including Canada and the US have already implemented this strategy, by setting up emergency small business funds and grants. Grants imply that some of these costs will not be recoverable and hence why the usual central bank monetary approach is likely to fail. Essentially, how well a country gets past a depression or a recession depends on how consumers get on the other side of the river, but the special public health element of our current crisis means that demand is unaffected, but even if it indeed is affected, it can quickly rebound. The real efforts should thus be geared towards getting the SMEs across the river for a change.
Writer is an economist, financial markets researcher and commentator