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Story | Education
29 March 2020

Op-ed: Saving the economy from the coronavirus

Op-ed: Saving the economy from the coronavirus

Image source: OSORIOartist, via Shutterstock

Image source: OSORIOartist, via Shutterstock

Agustín Indaco, Assistant Teaching Professor of Economics at Qatar Foundation’s partner university Carnegie Mellon University in Qatar, speaks about how service industries are being impacted by the pandemic and why the role of governments is crucial in salvaging workers in need.

Several governments and international organizations around the world have announced that, at the moment, the only remedy we have to contain Covid-19 is avoiding all forms of social gatherings. This policy will hopefully limit the spread of the virus. But one of its undesired side-effects is that it may damage the economy in the long-term as well.

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The pandemic has already plunged the world economy into uncharted waters. While recent recessions began in the manufacturing or financial industries, this one seems to start in the service sector. The various forms of lockdowns governments have implemented has practically halted revenue streams in the lodging, restaurant and airline industries in many countries. One concern is that unlike other types of industries that tend to recover some of the lost revenue once the crisis is over—those who decide against buying a new car during the recession might do so once the crisis is over—revenues from a restaurant meal not consumed today or a forgone haircut are lost forever.

To make matters worse, a clash between Russia and Saudi Arabia over an oil price strategy has sunk the price of oil to roughly $20 a barrel, which represents the lowest level in nearly two decades. These two circumstances are particularly relevant for a country like Qatar: hydrocarbon represents a third of GDP and deliberate efforts in the past years to diversify its economy has increased its reliance on the service and tourism industry.
Faced with this two-headed monster, Qatar has enacted policies to contain the socio-economic ramifications. The government acted swiftly by injecting QR 75 billion ($20.6 billion) into the private economy, together with a series of other financial relief measures. These policies, aimed at protecting businesses, were a welcome step in the right direction. The government has exempted small and medium-sized businesses of their rent obligations and exempted firms in the service industry of their electricity and water fees for six months.

The level of uncertainty gripping the world has affected nearly all the areas of our daily lives. As confidence wanes, so does expenditure and consumption.

Agustín Indaco

These measures will have two positive effects. Given the sudden halt in revenues, relieving firms from some of their fixed costs lessens the financial strain on them, allowing them to stay afloat during months of uncertainty. This is particularly important for small firms with less access to credit. Maintaining open businesses is crucial in order to reduce the number of layoffs. This not only has a direct benefit on these employees, but it also has a spillover effect on the rest of the economy. These workers will continue spending part of their income on groceries and other goods, thus sustaining revenue for other businesses that in turn will not feel the need to lay off workers themselves.

The US, in contrast, is looking at another route. They are considering channeling money directly to consumers instead of businesses, by indiscriminately sending $1,000 checks to every adult. Although this clearly makes everyone better off, evidence from previous financial crises has shown that this measure is inefficient. Economists point to the marginal propensity to consume when analyzing such policies (i.e.: how much of the increase in disposable income individuals destine to consumption). In general, during times of crisis the marginal propensity to consume is low. For those individuals not in need, the one-time transfer has a negligible effect. On the other hand, while the transfer helps alleviate some of the psychological stress for those in need, people tend to save a large share of this cash given the uncertainty. Thus, the transfer does not flow into the economy.

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Image source: Migren Art, via Shutterstock

Nonetheless, other governments could perhaps consider an improved version of this policy to complement the financial package already in place. While targeting businesses alleviates workers in the formal sector, it only indirectly affects workers under other forms of labor. Individuals working in the gig-economy, freelancers, hourly workers, delivery and cab services have also seen a sudden plunge in their income. But they are currently not contemplated under the announced measures. Creating a targeted cash-transfer program for these workers would dramatically alleviate their situation.

The level of uncertainty gripping the world has affected nearly all the areas of our daily lives. As confidence wanes, so does expenditure and consumption. A sharp V-shaped recovery would require a drastic change in confidence, which seems unlikely given the circumstances. This is why the role of governments is crucial in salvaging the economy and its workers, especially targeting those in need.

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