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Flattening COVID19 curve in developing countries

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29.03.2020


By Ricardo Hausmann

LEE, MASSACHUSETTS ― COVID-19 is ravaging advanced economies such as Italy, France, Spain, and the United States. Beyond the deaths and human suffering, markets are discounting a catastrophic recession accompanied by massive defaults, as expressed in the radical repricing of corporate credit risk by financial markets.

As horrific as this sounds, the situation in the advanced economies is likely to be much more benign than what developing countries are facing, not only in terms of the disease burden, but also in terms of the economic devastation they will face. And while two academic communities ― public-health experts and macroeconomists ― are starting to talk to each other, unfortunately the conversation has mostly involved only the advanced countries.

The public health community has made the differential equations that govern contagion almost mainstream. People now talk about the role of the R0 factor (the average number of new infections caused by each infected person) and about the need to flatten the contagion curve through social distancing and lockdowns.

Macroeconomists initially saw the pandemic as a negative demand shock that would need to be countered by expansionary fiscal and monetary policies to support aggregate spending. Soon enough, many of them realized that this shock is different. Unlike the 2008 global financial crisis, which led to a collapse in demand, the COVID-19 pandemic is first and foremost a supply shock. That changes everything.

If output is collapsing because people do not want to or cannot spend, adding spending power may help. But if Broadway theaters, universities, schools, sports arenas,........

© The Korea Times