Gonzalo de Cadenas-Santiago, director of Economic and Financial Research at MAPFRE Economics.
Economies hit by COVID-19 are facing a resurgence of the supply constraints seen in March, with further disruptions in value and supply chains. These will once again be reflected in downward adjustments in global manufacturing production. Furthermore, given how the crisis is developing, unfortunately the worst could be yet to come.
We still don’t know exactly what a supply crisis looks like in the age of globalization (the last one was in the 70s), but we can assume that it will bring about a shift in the equilibrium, with lower growth, more inequality and greater political and social fragility.
It remains to be seen how governments will respond this time around, given that the stimuli used to cushion the impact of crisis have been depleted. In addition, there is also some consensus on the limited usefulness of demand stimuli in developed countries and on the high short-term costs in emerging countries in sovereign terms and in terms of foreign exchange.
That is why I believe that rather than trying to quantify a response, we need to focus on choosing the right response model when the second wave arrives. Economic policymakers cannot fall back on previous fixes — they need to find a fresh approach. What that approach is, I have no idea. But what we can assume is that the effectiveness of any response will determine and be determined by the perceived legitimacy of governments.
We are now looking for answers by looking at the legitimacy and management models of other countries. What about Singapore, for example? Trust in government there is high, meaning people are more willing to accept stringent (and well-prepared) containment measures. Or should we be copying China? The Chinese government has been applauded for its control measures, but has also been criticized for its slow response after the virus first emerged in December.
Without wanting to applaud autocracies, this is a far cry from countries like Italy or Japan, whose governments have been heavily criticized for their responses. And in the United States, there is a gulf between how the White House describes the threat of COVID-19 and how it is characterized by scientists at the Centers for Disease Control and Prevention.
It’s clearly politically difficult for democracies to impose draconian controls on their voters; it’s even more difficult if these governments are unpopular or considered incompetent. The weaker the government, the sooner the political blame game begins. And in Spain, the country with the most infections in Western Europe, the game could soon begin.