The COVID-19 health crisis is difficult, no doubt about it, but the economic and social crisis that has already started may be equally or much worse if the economy is not allowed to exit the idle mode as soon as possible.
Is it that bad for everybody in the economy? There are apparently a few winning industries in this pandemic mess: IT and anything related to digitalisation (companies which used to think about digitalisation as a nice to have are now forced to embrace the digital transformation on fast forward), food (people may live without many of the modern life luxuries, but nobody can live without food and in times of pandemics people start buying impulsively and stocking up even if not really necessary), e-commerce (with shopping malls closed, e-commerce is flourishing and couriers are running round the clock to satisfy delivery orders), pharma (people will always need medicines, so there is probably not much elasticity of this market) and producers of medical supplies (masks, gloves, disinfectants and other supplies for the fight against the disease are now rare commodities and whoever can produce them when they are the most needed has a clear advantage). But most of the other industries are in free falling.
What do we learn from history? History has taught us that economic crises may lead to social unrest. To take just one example, one of the earliest events in the French Revolution was the so-called October March. Do you think it had anything to do with the intellectually enlightening ideas generally associated to the French Revolution? No, it was in fact the high price and scarcity of bread that led to the people marching the streets of Paris in October 1789. And our society may be over 200 years ahead on the evolution timeline, but the pyramid of needs has not gone through dramatic changes.
If we look at what happens at global level now, many states (especially the western ones) start to acknowledge one of the main effects of the globalisation which must be adjusted somehow: a high increase of the services weight in the economy compared to production. Most of the global production has moved to China and other emerging countries in the last 30 years. This creates a high dependency of the world on these countries which may not be always transparent or willing to observe the same rules of the game as practiced or expected in the western world. We can look for example at the crisis of the medical supplies, medicines or raw materials essential for many other industries. This is unfortunately a reverse of the medal for the western approach on margins: producing or buying for USD 1 in China and selling for USD 15 on western markets.
In these historical times, no matter how much we may admire the laisser-faire theory of Adam Smith, we do not allow the luxury of letting our economy to be run only by the invisible hand. The economy needs a wake-up call and the government must step up and use every single available tool to avoid an L-type recession. Nobody is probably still dreaming of a V-type recovery curve, but with the right measures both from the state and from the private sector, the boomerang hitting the economies at full speed may at least slow down and lead us to an as short as possible U-type recovery. Such governmental strategies must be tailormade. They have to take into account the features of each economy and society. Otherwise, they are very likely to rather have an adverse effect on a medium and long run.
What to expect in the private sector? In any scenario and irrespective of the recovery type curve we will see more or less lay-offs, some bankruptcies, debt restructurings or write offs, fire sales, contract renegotiations, litigation over force majeure or hardship clauses or other contract walk away or renegotiation manoeuvres, further digital transformations. Work flexibilization may be the new normal wherever possible.
However, we can only hope that banks will not be affected too much (through debt restructuring, write offs, bankruptcies etc), because if the credit goes down the recovery will take much longer. Also, let’s hope that the serious investors adding value in the economy will not leave our market moving to other markets which can offer more, because this would lead to a new wave of speculative investments (as we have seen in the recent history) which do not add any real value.
If we look at the economic crises throughout the history and the lessons learnt from mistakes, we can predict that visionaries who will be able to adapt, reinvent their businesses and identify the opportunities that arise in every crisis will be the big winners. So why not:
- Speed up digitalisation
- Allow for work flexibility (wherever possible), it may also increase the efficiency and allow for some HQ cost cutting
- Be flexible in renegotiating contracts to adapt to the new realities, where reasonable. Companies may lose a bit on the short term but win a client or a supplier or maybe just more awareness on a long term. Nobody can save itself alone, we can do it only through cooperation. Those who will learn the true meaning of reasonability and solidarity and who will be able to give up a bit on their greediness will also have better chances to survive. And be it crisis or no crisis, no one can survive on the long term relying on the moral hazard. This will apply both to SMEs but also to large corporates (we have already learnt from the Lehman Brothers collapse that nobody is too big to fail).
- Reconvert people and/or lines of business to respond to the new realities. For example, if online orders work better than brick and mortar stores in certain industries, why not switch to online, entirely or to a larger extent than before? Changing is challenging but it may sometimes be the only way forward.
What to expect from the government? Nobody says it is an easy choice between keeping the current restrictions in an attempt to save as many lives as possible and starting a relaxation which would allow the economy to gradually go back to life. It is, indeed, l’embarras du choix. But sooner or later we will need to acknowledge that the economy must get out of this hibernation, as the well-intended measures taken by the state so far are insufficient and cannot keep the businesses floating. EU rescue schemes and IMF financing are not to be missed out, but these are just not enough for everybody.
How could our government find a balance in the management of the two crises and start taking the economy out of this comma? A few ideas:
- We can continue the isolation of the vulnerable categories (elderly or even younger people with pre-existing medical conditions putting them at risk) and of those confirmed with the disease, presenting symptoms or who are contacts of infected persons, but all others should be allowed to go back to work, especially in the production sectors (industry, manufacturing, agriculture, food). It is not a risk-free solution, obviously, but we will end up here at a certain point in time, so why not sooner rather than too late? Nobody says that we should be allowed to gather in large numbers in crowded places right away or that we should drop the reasonable protection measures such as telework (where possible), flexible working schedules to avoid the crowd in public transportation at rush hours, keeping a reasonable distance in a shop/restaurant or the very basic hands washing (which should be our normality, not just an extraordinary thing to do in times of an epidemic). We are looking forward to seeing if and when the state will press the restart button, every day of delay will probably cost us much more in the future.
- The state should go the extra mile not to miss the opportunities available under the EU rescue scheme and IMF financing to give a helping hand to SMEs and perhaps not only. And make this work quickly and smoothly, as paperless as possible. If in other geographies (such as Switzerland) SMEs applying for the state incentives in the context of the pandemic can see the money in their account in less than 24 hours, this is just proof that it can be done. If it can be done elsewhere, it can be done in Romania as well, if there is will.
- Relaxation of taxes (at least suspension/postponement) and postponement of deadlines for nonessential tax filings for a sufficient period of time would be beneficial for most of the taxpayers struggling to survive in these times. This should be carefully regulated so as to avoid encouraging the others to moral hazards, but on the contrary. The state must maintain a good level of collection during times like this.
- Digitalisation in the public sector replacing the bureaucracy would make the life of the private sector easier and would also cut some costs both in the public and private budgets. Many private companies had to digitalise overnight since the beginning of the pandemic to survive and public institutions have also taken some much-appreciated steps into this direction at least for the duration of the state of emergency. But there is still room for improvement and some of the digitalisation measures taken for the state of emergency should become the new normal once the state of emergency is over.
- Business leaders have already unified their voices and ideas for restarting the engines of the economy in position papers sent to the government. Listening to what the private sector has to say is more important than ever and the public-private real dialogue will be instrumental for the success of the recovery. A strategic sustained approach, based on the public private partnership and with a growth based more on productivity than on consumption (with a more rational balance between industrial production, services and agriculture) would be a rational way forward.
Conclusion: Sooner or later the health crisis will slow down and, as the song which was the symbol of hope in the World War II says, We will meet again. But the length and painfulness of the economic recovery depends both on how quickly and efficiently the state will allow the economy to go back to life and how each business will be able to adapt to the new realities.
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