Viewpoint: Economic Policy and Covid-19

23 MAR,2020 | MEDC


The spread of Covid-19 across the world is as contagious economically as it is medically. This is being reflected in the heightened volatility of financial markets worldwide. Even though the human cost appears more visible, the economic cost (especially to small businesses) is no less devastating. Economic policy will need a fundamental shift to deal with the inevitable financial disruption of the crisis and its potential ability to derail global growth. In India, the government does not currently have the fiscal space to support the economy, but the RBI has done well by proactively intervening in the currency market to aid the macro stabilization process. While there is still too much uncertainty to be assured about outcomes, it is clear that Covid-19 is going to leave deep economic scars which are probably larger than anything in memory. Government reactions can create more and longer-lasting disruptions than the virus, and so it is important to get policy right. As a lesson from history, many of the economic problems from the 1970s oil shock arose from the inflation sparked by inappropriate macroeconomic policy responses, rather than the actual oil shortages. We need to ensure that the cure does not affect the system more than the disease. Individuals, companies, and governments across the world are experiencing disruptions that may question the very logic of globalization. Even if that occurs in the short run, in the long run we need to realize that all of us on Planet Earth are now bound by a largely common economic destiny. Technology has progressed sufficiently to make that a reality. Economic policy across nations could now move to an unchartered zone with ineffective monetary policy, rising public debt, and uncertainty of outcomes. In some countries this scenario will become inevitable and it will need to be dealt with carefully. The health and financial implications of Covid-19 go hand-in-hand. Economic policy across the world should focus on building capacity to treat the infected. This will also help to limit the pandemic’s economic downside.

*Photo Credit: Google

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