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June 2021, No. 97


Millennium 21st Century

Government and Public Health


COVID-19 has a relatively high Basic Reproduction Number or R Number. This number indicates how the disease will spread if no protective measures are taken.


The economic consequences of the COVID-19 epidemic are likely to take longer than we thought. Describing the disease as unprecedented and its impact on the economy, Mohammad Hashem Pesaran, an Iranian economist and professor at the University of Southern California, says now is the time for the government to pay for the disease and save lives, and leave concerns about budget deficits and inflation to the post-corona era. 

In an article dubbed Economic Implications of COVID-19, which you co-authored with four other economists, you stated that this pandemic was unprecedented in terms of prevalence and impact in the world. With what components and characteristics have you described the coronavirus disease as unprecedented? Have we not had a similar example in history where a natural event has such an impact on the global economy?

The COVID-19 epidemic is truly exceptional, both because of its power to spread the disease and because of the high interactions and rapid and broad connections that people around the world have with each other. Note that the world has never been more connected than it is today in terms of trade, passenger and tourism and in terms of contact in general. These conditions have created a favorable environment for the high prevalence of infectious diseases such as coronavirus.

COVID-19 has a relatively high Basic Reproduction Number or R Number. This number indicates how the disease will spread if no protective measures are taken. This number is estimated to be 3 for the coronavirus. This means that if people do not take any protective measures, each person can infect an average of three other people. In these conditions, the number of patients increases about four times in one week and more than 15 times in two weeks. This rate increases exponentially rapidly. In this regard, the power of this disease in infection is very high.

In the past, there were other diseases that had a high rate of transmission, but the conditions of infection were not so high that, for example, a person is infected at a distance of one meter and is quickly infected through air and breathing. This disease is exceptional in this respect. At the same time, the situation in the world today is much broader and more complex than in the past in terms of the level and speed of communication and interaction. I do not think that such a phenomenon has occurred in the history of the world. Even the plague and the Black Death in Europe or in Iran during the Sassanid period, which caused a lot of damage, did not spread in the world and was mostly regional. Even catastrophic events such as the First and Second World Wars were not designed to engulf the entire world at the same time. The war spread from one region to another. But the spread of this disease is global.


The current situation is almost the opposite, it is better to have more costs for the transition now and then compensate these costs with more work in the normal conditions of the economy.


Of course, there is a major difference between war and the disease, which is related to the destruction of infrastructure and capital. In times of war, various parts of the economy are paralyzed and capital is destroyed by human casualties and the widespread destruction of physical capital. COVID-19 does not destroy economic capital, i.e. public places, cinemas, restaurants, planes or trains are not destroyed, but their use is reduced or stopped, and when the disease is controlled, the return of the economy begins, in this respect compared to war, the post-COVID-19 economic conditions could return to normal more quickly, but it was initially thought that the post-corona economy would face many problems. Because the prolongation of the illness causes some businesses to be permanently closed, for example, a restaurant, although not physically destroyed, is closed due to long-term closure process. In the stock market, different businesses are affected to different degrees by this disease, and with the help of the government, such as short-term loans, it is possible to gradually accelerate the return of the economy because the root of this crisis is not financial and is peoples health. Consider also the promising point that the mortality rate in this disease is not higher than other infectious diseases, but its transmission is high, and because the number of patients is high, the mortality rate has also increased.

Therefore, one cannot remain passive in the face of this epidemic. Because the situation is getting worse and worse. The primary effect of this disease is on the labor force, meaning that people become infected and are unable to work due to the disease, and the economy suffers in this regard. The secondary effect is that the government has to shut down some businesses to fight the disease so that the death toll does not increase. The side effects of this disease on the economy are also significant.

How did China cope with the disease and improve its economic situation?

Because the policy of the government and the behavior of the Chinese to deal with the disease was very fast and decisive. In a relatively short period of time, China completely isolated and quarantined important cities affected by the disease and did not allow anyone other than members of a family consisting of parents and children under their care to travel together. Existing statistics on call volume in China confirm this. For example, before the disease reached Shanghai and Beijing, the average number of people a person came in contact with was 12 to 13 a day.

After quarantining the cities involved in coronavirus, this number reached 2.5. That is, people were only at home and in contact with family members. China was able to create a combination of strong government policy and popular behavior that played a key role in controlling the disease. It is a behavior of the government that China has strictly enforced, in which the offender is punished and even imprisoned, and another behavior is personal and must be done by the people. This combination of behaviors has not occurred in a country other than China.

South Korea and New Zealand also had some control, but the geographical and specific conditions of the two countries also helped them. But, the United States, has shown that it is not possible to implement a full quarantine policy. The Europeans also failed to fully implement such a policy. Italy and some other European countries did so, but lifted the quarantine prematurely, and a second wave of outbreaks began because the people had not yet been vaccinated in groups. The same thing happened in Iran. Before Nowruz, the disease was on the path of control but with the arrival of Nowruz and the change in peoples behavior and increased contacts, the disease re-emerged. After that, the government took a break, and the outbreak came down again to some extent, and people thought it was normal, and everyone started working again, and as a result, the number of casualties rose. I give people the right. They have the right to work and live, but the fact is that the disease will continue until the vaccine is produced and distributed and injected worldwide. I see this as a long time because we are not sure about the time of mass production of the vaccine and its effectiveness, and the effective vaccine must reach all the people of the world in order to be effective. Continuing this uncertainty is likely to delay further investment. At the same time, repaying capital or replacing lost capital is not a short-term task. Schumpeter also points out that in a very acute economic crisis, some parts of the economy, such as what happens in war, disappear. 

In the article, you emphasize that no country can escape this disease. You also specifically mentioned Sweden. What components does the situation in this country show us?

Let me first point out that our article is based on statistics and data published until the end of 2019. The only statistics for 2020 are from the revised IMF report. The report examines the outlook for economic growth in countries and is revised in April 2020 after the release of the initial version in January 2020. The model we use to examine this data is the GVAR model, which I designed and developed in collaboration with others. GVAR is a relevant global model. In this model, all markets, including money, oil, stocks, etc. in the world are interconnected, so when a pervasive shock like COVID-19 occurs, all of these markets are affected.

All major countries in the world, which account for 95% of world production, are connected through channels such as trade, transportation, tourism, etc., and as a result, the shock is transmitted from one market in one country to another market in another country. For example, the disease may not spread directly from China to New Zealand, but it will negatively affect its markets. The result is that action by all countries is necessary to deal with this shock. The reason we specifically mentioned Sweden was its different strategy against COVID-19. Sweden, unlike other European countries, did not go into a general holiday and left protection to the people in particular. That is, the government did not enforce closure, social distancing, or coercion, arguing that the people themselves were wise and decided what to do. Sweden behaved differently from other European countries in this respect and even became known as the Swedish model.

But this issue did not make the Swedish economy completely immune to the consequences of COVID-19. The growth of the Swedish economy was also affected and slowed down because about 60 to 70 percent of Swedens trade with European countries, especially Finland, Norway and Denmark, which implemented a policy of comprehensive closure and their economy grew slowly and as a result of these measures, also lowered the Swedish economy. The result is that no country can be safe from the consequences of COVID-19 and cannot deal with it alone. It may be slightly less harmful than others, but ultimately it is not immune to the negative global effects of the disease due to the extensive connections between countries. 

What advice do you have for Iran, where the government is facing a budget deficit and an economy with high inflation and recession?

In my opinion, in this situation, there is no question of budget at all; because if the necessary support is not provided, its negative economic consequences, both in terms of budget and in terms of recession and inflation, will be much greater; human casualties will increase and its social and political consequences will escalate. In some very exceptional times, such as the present, one should not look only at the financial aspect. The government has to spend now though it is true that inflation is likely to increase in the future, but this must be compensated in the future.

The government must, at the same time as it presents its plans for the transition from this period, have plans for the post-corona period and explain it clearly to the people and say what it will do then to curb inflation or the budget deficit. But now is the time to spend. Consider the opposite situation: You have a lot of work and activity periods, after which you can have a more comfortable period and use the savings and investments you have already made.

The current situation is almost the opposite, it is better to have more costs for the transition now and then compensate these costs with more work in the normal conditions of the economy. Otherwise, the losses and injuries may be so great that they cannot be compensated at all. This is the most important issue in economic policy, and we need to think specifically about the post-corona period. In the current situation, nothing can be done but to support the more vulnerable classes because of the coronavirus. The health of the people must be ensured. This is not the responsibility of the government alone. All people are responsible and must support those around them. Lets not forget what our great poet Saadi says in this respect: All human beings are in truth akin; All in creation share one origin.When fate allots a member pangs and pains, No ease for other members then remains. COVID-19 is not a side issue; Its an issue for all of us.

 

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  June 2021
No. 97