Lessons learned, but we must be our own heretic

In his blog on LSE British Politics and Policy, Chile’s former finance minister Andres Velasco, now professor of public policy and dean of LSE’s School of Public Policy, listed five macroeconomic lessons that COVID-19 has taught us. Focusing these lessons on the Philippines should be very interesting and, yes, instructive.

Velasco shared the IMF’s description of the health crisis by saying “economists have never experienced a crisis like this one.”

It’s funny but it is sadly true that it was only during this pandemic that governments locked down workers to prevent them from working, and instructed firms to cease producing. Governments were forced to resort to mandating a freeze on business activities, even mobility of persons. Locking down office and work places, the best breeding grounds for COVID-19, breaks the transmission of the virus in the absence of the vaccines.

LESSON 1: “ECONOMIC CRISES CAN ALWAYS BE BIGGER.”
As Chile’s finance minister 12 years ago, Velasco was in the limelight, assuring the people that Chile would never have a crisis as big as the Global Financial Crisis (GFC) again. The pandemic proved him wrong. Chile experienced a definitely unprecedented 6% economic contraction in 2020. The COVID-19 virus clearly outclassed Lehman and the subprime mortgages.

This grey rhino of a crisis also proved more devastating to the Philippines’ macroeconomic performance. The GFC failed to interrupt our sustained economic growth since the first quarter of 1999 through its two-year duration, but the coronavirus snapped it in 2020 and 2021 with five quarters of economic decline.

What made it bigger was the uncontrolled spread of the virus that brought infection and mortality rates to alarming highs and, in the process, literally stopped consumption and activities in the workplace. Lehman and sub-prime mortgages brought havoc to the financials of both corporates and banks, something that could be compensated for in due time by subsequent production and consumption. In a pandemic, however, even public infrastructure projects stood still.

LESSON 2: “SUPPLY SHOCKS CAN BECOME DEMAND SHOCKS.”
Economic lockdowns dealt supply shocks to economies. With mobility and transport restrictions in place, the whole economy could not even deliver on what was produced during the non-lockdown days. Velasco argued that those who could not work from home and were physically barred from working also experienced loss or diminution of income. The world was therefore hit twice — both on the supply and the demand sides. Inflation could only be steady.

Velasco also observed the collapse of external trade. Export prices dropped while foreign capital inflows dried up because there was little incentive for people to invest outside their home countries. The debilitating impact of the pandemic was everywhere.

The Philippines actually saw it quite differently.

Some took pride in the balance of payments surplus, strong peso, and rising levels of the FX reserves. They were showing a good picture because we had a recession for five quarters. Imports were down and foreign loans multiplied; thus, the surplus in the external sector. The peso was strong because demand was weak. Most of the increments in the FX reserves were borrowed funds. These dynamics will reverse once the pandemic is over and an economic rebound begins.

LESSON 3: “RICH COUNTRIES CAN SIMPLY CARRY ON BORROWING.”
The pandemic challenge was many times more destabilizing than the GFC. “Whatever it takes” became the mantra of many central banks of rich countries in the crucible of the GFC and the pandemic. It could be a show of force, or putting up a brave face. But during the pandemic, it is difficult to tell because everyone is gripped by fear and nervousness.

With uncertainty as to the duration of COVID-19, governments have been forced to spend big, extend big support to vulnerable sectors, and borrow big. Many economists would argue that spending big is good for economic recovery even as governments have to borrow to fund the budget deficit. Since governments have the sole power to tax, the sky is the limit for public borrowing.

Velasco’s admonition was wise. The low-interest-rate-for-long regime might have to come to a close when global vaccinations bring herd resiliency in many jurisdictions. For some big economies like the UK’s, public debt is almost the same size as its total output. If interest rates normalize to their pre-pandemic levels, it is doubtful whether such exposure is viable.

The Philippines has also borrowed heavily because of Build, Build, Build and, lately, the need to fund the pandemic. This is understandable and we could be more forgiving. But the government should first consider the usual first lines of defense in budget management. Trim the fat, minimize discretionary funds, and reduce congressional insertions in the light of May 2022. The government should also have the brave heart to do the right thing in prioritizing allocations to health and the economy.

If the Duterte government detests leaving a legacy it cannot be proud of, excessive borrowing and poor budget stewardship should not be among them.

LESSON 4: “THE WORLD IS VERY UNFAIR.”
While rich jurisdictions have been pursuing public policy to achieve a quick win over the pandemic and economic recovery, the rest of the world can only do what they can afford, and it is not much. Velasco cited that “on average middle income countries spent half as much as rich countries as a share of GDP, and poor countries spent half as much as middle income countries.”

This is the major reason why some global initiatives have been launched by the IMF, the World Bank, the WHO, and the World Trade Organization — to push for a more equitable distribution of the vaccines. This is crucial to achieve the goal of vaccinating the world and ushering in a speedier return to pre-pandemic normalcy.

We have yet to apply this global approach in the Philippine setting because our health authorities are still trying to find their true north. There must be a plan, but the execution of the plan is far from military clockwork.

What is happening in the US is very instructive. Vaccines are rolled out strategically in civic centers, government and private hospitals. Drive-ins are common in Florida, for instance. One can simply walk in and Walgreens or CVS would offer him the jab, free of charge.

No wonder that, as of June 9, of the 2.2 billion doses already used in the world, the US accounted for nearly 304 million doses with 42% of their population having been fully vaccinated.

We are way below with 6.1 million doses or only 1.5% of our population getting the shot.

The worst case is that many countries in Africa have barely scratched the surface; many of them have jabbed just about less than 1% of their populations.

Yes, the world is very unfair.

LESSON 5: “INTERNATIONAL INSTITUTIONS HAVE COME UP SHORT.”
For Velasco, some multilateral institutions did not deliver much during this health crisis.

Against the backdrop of what he called “gigantic asymmetry” in countries’ ability to fund their budgets through borrowings, the IMF’s lending capacity of $1 trillion did not mean a lot because it lent out technically only $85 billion; “peanuts” said Velasco. Politicians would always be quoted as saying no one is safe until everyone is safe. Yet, these lofty declarations were scarcely matched by concrete actions to avoid deep and persistent crisis for most of the world’s countries.

This is not unique to politicians outside the Philippines. Filipino politicians themselves have been known to parrot each other’s passion for life and livelihood, health and jobs before politics. Yet in actual congressional deliberations, with executive blessing, they would rather fund non-priority public spending like counter-insurgency activities than those programs intended to benefit our frontline medical workers, increase the capacity of our public hospitals and make the government-funded vaccine program free.

The five lessons learned during this pandemic are truly precious. It must also be equally precious if we could also think of those lessons during the 18 months of the crisis that we must unlearn. An initial but strategic step is for us to be our own heretic. Some introspection could reveal genuine knowledge of ourselves. Being critical of ourselves will definitely keep our feet on the ground. How many times have we dropped the ball during this pandemic are as important as knowing how many times we picked up the ball and continued playing the game.

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.