The Impact of Covid-19: Can the Free Market Help?
Updated: Sep 11, 2020
Statistics out today have shown the UK economy to shrink by a record 20% in April, placing all recent downturns in its shadow (figure 1), with the UK economy currently 25% smaller than it was in February (FT, 2020). Similar outcomes have been witnessed around the world, with shops being forced to shut and people told to stay at home. The optimistic recovery predictions from the Bank of England in early May have since been undermined by the comments of US Fed chair Jay Powell, stressing that entire industries may be inactive for long periods, with millions in sustained unemployment in the US. Such an industry in the UK is aerospace, which has seen major redundancies in order to survive. As a capital-intensive industry, the 9,000 redundancies are likely to have a strong knock-on effect on many more businesses and its local area.
Social distancing rules will limit the number of industries that may open, with some not being able to cater to such requirements, and some industries not being able to feasibly function for the foreseeable future; such as clubs, bars, sports and music. Due to such concerns, the UK government is discussing a relaxation of the two-meter rule, such as those of France and Germany, allowing more places to open. This may allow sports venues to reduce the number of empty seats required between supporters, increasing ticket revenues and allowing more match-day staff in catering for example. however, firms are likely to tread cautiously in rehiring workers, with those being rehired likely being offered less secure contracts such as extended probationary periods and limited hours. This is qualitatively significant as it makes any recovery in employment statistics exposed to second waves of the pandemic or reductions in other business confidence.
(Figure 1: ONS, Refinitiv, in The FT)
Such occurrences will be more prevalent in countries with weaker employment protection regulation, such as the US, and less in countries with stronger protections such as France. A low regulatory environment has its benefits, allowing a recovery to be spread across a wide variety of individuals as businesses look to take advantage of an oversupply in the labour market. In countries with higher regulations, workers maintained on the payroll will be offered more hours, reducing the need for more employment. This then leads to a disparity between countries where some continue to prop up their labour markets using public funds and others leave their recovery to the free market. Therefore, recovery in a country with a free labour market will likely be more equitable and requiring fewer public funds, hence taxation, leading to an increased economic multiplier in a reduced taxation environment. This is extended when combined with reductions in social distancing.
This economic growth leads to ‘spillover’ effects into the industries most impacted by the epidemic, with household incomes rising, social distancing reduced and confidence in the economy leading to investment in household goods and large purchases, which had previously seen stark contractions. Furthermore, once the likelihood of a second peak as been all but diminished, travel may resume and linked industries such as aerospace may see a recovery. This, however, cannot happen in isolation. In the globalised and connected world where ‘global production networks’ (GPN) are required for many industries to function properly, if at all, this form of liberalised recovery needs to be embraced by all nations. This allows the full spectrum of factor inputs such as human capital in developed and developing nations, specialised production facilities and natural resources to combine and allow a fast and equitable global recovery.
This is, however, dependant on political decision making and human health. It is unlikely that countries with formal and informal institutions of strong labour rights will relax these to allow for economic recovery and many countries are ill equipped to deal with a rise in cases from relaxed social distancing and global activity. Furthermore, many political leaders in democracies have, and are, using strong protectionist policies as means to enhance political capital. The trade-off between economic control and health may be mitigated with restrictions on leaving the house without a mask and good reason, the requirement to use hand sanitizer in all stores and on public transport and a public ad campaign on personal hygiene. This transfers the libertarian argument away from that of free markets into the realm of individual freedoms, which is a trade-off some political leaders may deem acceptable, and some not. These measures are impeded by the outcomes in which they seek to repair, with global supply chains for essential goods such as personal protective equipment (PPE) and sanitizer being seriously affected and not accessible to a number of less economically developed countries (LEDCs). A global response may limit this, although not likely given the vested interest of political leaders in their own political capital. This analysis is therefore not a recommendation, but a justification of why some countries may recover quicker than others.
By Matthew Stevens, Editor