Signs and Wonders

While COVID-19’s full impact on economic thinking and policy cannot be gleaned from a quick survey of current economic literature, there is still useful information.

For instance, the IMF’s Policy Tracker summarizes 196 member governments’ fiscal, monetary, macro-financial, exchange rate and balance of payments policies responding to the pandemic. The countries’ responses are similar, with modifications depending on the expected depth and duration of the pandemic crisis. The report has dedicated sections on how each country will reopen their economies with discussions on public spending priorities.

As the pandemic evolves, and is fluid, there is much uncertainty despite earnest efforts to understand its effects. This is to be expected and reminds me of how the 2008 Global Financial Crisis (GFC) rocked and disrupted monetary policy making.

Before the 2008 GFC, monetary policy was neat and straightforward.

The long Great Moderation was rather intoxicating. There was a morphing of the “Jackson Hole Consensus” into what Neil Irwin (The Alchemists, 2013) referred to as a recipe for sustaining it. Central bankers and monetary economists agreed that monetary policy was the best means of macroeconomic stabilization. Messy politics rendered fiscal policy unfit to dealing with economic moods and cycles. Monetary operations are capable of calibrating the necessary adjustments. In addition, central bank independence was required to promote the long-run goals of public policy. Price stability was the prescribed goal of monetary policy. Because there could be unavoidable episodes of irrational exuberance, it was suggested that it would be best to “clean up” after the fact given that bubbles are hard to predict. There was then much knowledge about managing previous financial crises in the 1980s and 1990s. Financial crises can be put behind us.

In hindsight, we are wiser to know that the impact of the 2008 GFC was deep-seated, forcing central banking and monetary policy to go through more than a facelift. There was a Great Awakening in economics — as a profession, in the academe, and in central banks.

How is COVID-19 changing the dynamics of public policy? Should central banks consider goals other than price and financial stability? Is there scope to consider policies other than macro-financial policies? Should parameters like “low disease transmission” around pandemic moments now become relevant variables to predict and sustain quick economic recovery?

In an article dated June 4, the IMF’s Sweden team detailed Sweden’s health strategy. The strategy was premised more on recommendations to civil society and on social responsibility than on issuance of public obligations.

Based on cell phone data, mobility in Sweden was lower than in other Nordic countries. The number of workers reporting for work was lower than predicted despite less restrictive containment policies. Even though there was no prohibition or closure orders, restaurants, malls and other commercial places were less frequented. Nonetheless, it is not certain if herd immunity has been achieved in Sweden. It is also still an open question if its mitigation approach is sustainable in the long run.

Does the Swedish experience evidence voluntary changes in behavior regardless of regulations? What factors other than mobility affect economic activity?

In a June 5 Forbes article, John Koetsier quoted the recent results of Deep Knowledge Group, part of a Hong Kong investment firm. Based on 130 quantitative parameters and over 11,400 data points in categories like quarantine efficiency, monitoring and detection, health readiness and government efficiency, the top five post-COVID-19 safest countries in the world are Switzerland, Germany, Israel, Singapore, Japan, and Austria. The US was only 58th while the Philippines ranked 55th and India, 56th .

In the beginning, countries that ranked highest were those that reacted quickly to the crisis, and exhibited high levels of emergency preparedness. Over time, the more resilient economies started to score higher. For instance, Switzerland and Germany rankings are attributable to their economic resiliency.

Indeed, political economy will play a relevant role when analyzing this pandemic, even 10 years from now. Quarantine decisions can be driven by a leadership that puts a premium on science and evidence. Or they may not. The nature of these decisions, and on how they are made, will have consequences that will be felt for years. Monitoring and detection efforts and a reliable public health infrastructure are keys to economic bounce back. Government efficiency is nothing complex if governance is good and the rules of the game are early on spelled out and any departure therefrom is fairly dealt with, with or without mañanita.

Hindsight is 2020. Clarity comes with time and distance from a crisis. But we cannot afford to be caught flat-footed. The decisions made today will have consequences that will unravel in the years to come. Again, this column reiterates the danger of guesswork. Even the 2008 GFC had its warnings.

As early as 2005, during the Jackson Hole conference, then IMF economic counsellor Raghuram Rajan delivered a paper highlighting the likelihood of a crisis. Rajan stressed that risk-taking was making the global economy more dangerous. He said that fantastic executive compensation incentivized risk-taking.

Hyun Song Shin, then at LSE and now BIS economic adviser and head of research, also foretold of the 2008 GFC. He began with the story of London’s Millennium Bridge, celebrating the year 2000. When it was being inaugurated in June, everyone was on the bridge. It suddenly lurched to one side. To avoid a fall, people adjusted their footing in exactly the same direction at the same time. In doing so, a synchronized oscillation took place. Shin observed that — “the wobble of the bridge (fed) on itself.” Shin indicated that the probability of people adjusting their positions at the same time is almost zero, but it could — as the bridge incident showed — happen anytime.

Analogous to this, global financial markets comprised the Millennium Bridge. When signs of unsustainable finance became more obvious, market players adjusted their stance in the same direction and at the same time — away from weak assets, away from emerging markets — and everyone refused to lend. There was almost complete chaos. The markets wobbled and the global economy was condemned to several years of desolation and risk-off sentiments.

There were warning signs as there are now. The challenge is to heed them. Hindsight is 2020. Our perspective cannot be inferior.


Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.