Lockdowns are not sustainable, says economist Hausmann

A lockdown is not sustainable and can bankrupt economies, especially those without fiscal space, says renowned economist Ricardo Hausmann.

Fiscal space generally refers to the availability of budgetary room that enables a government to provide resources for a desired purpose without compromising its ability to finance its operations and other obligations such as debt servicing.

According to the IMF, fiscal space exists if a government can raise spending or lower taxes without endangering market access and putting debt sustainability at risk.

 Like many other countries around the globe, SA started a three-week nationwide lockdown last week Friday in a bid to contain the rapidly spreading coronavirus. This has  brought most economies to a standstill. But while the lockdown could well slow the spread of the disease, this is set to come at a huge cost to the economy and lead to a jobs bloodbath.

Hausmann, who is director of the Growth Lab at Harvard’s Center for International Development and the Rafik Hariri professor of the Practice of International Political Economy at Harvard Kennedy School, said that governments had to make decisions quickly and without much time to think.

“They are facing difficult moral trade-offs,” Hausmann said in an online presentation this week focusing on the macroeconomic impact of Covid-19 in  developing countries.

He said that countries, in spite of their small or dwindling fiscal space, had opted for lockdowns and social distancing, but lockdowns were not sustainable.

“At the limit, people will have to decide between a 10% chance of dying from the virus and a 100% chance of starving to death. Unsustainable situations cannot last.  So you will eventually need to resume production, but how? How can the cost of the lockdown be lowered, and how should it be shared?”

Hausmann said general lockdowns were costly as they lacked or did not use information about who was susceptible, who was infected and who was immune.  They could bankrupt the economy, he said.

“Countries need more information-intensive strategies. One ‘poor man’s’ strategy is to isolate the elderly, suggested by Israel. Other smarter strategies would require much more testing.”

Hausmann said countries should, however, move from lockdowns gradually and isolate the elderly before fully reopening. They should test a lot, quarantine the affected and allow others to work, starting with the most critical sectors.

“Covid-19 is a short-term situation, not a permanent shock. [Developing countries] should mobilise the maximum amount of fiscal resources [they] can get their hands on so you can fight Covid-19 ... Get all the money you can from the IMF.”

Hausmann said developing countries should press the G7 and the G20 for rapid financial solutions through the IMF and other international institutions to help fund the fight.

“Let’s focus on pressuring the G7 and the G20 for rapid financial solutions through the IMF, the Fed [US Federal Reserve] ... The others [institutions] are just too small,” Hausmann said.

The G7 (or Group of Seven) is an organisation made up of the world’s seven largest advanced economies: Canada, France, Germany, Italy, Japan, the UK and the US. The G20 is an informal group of 19 countries and the EU, with representatives of the IMF and the World Bank. Its mandate is to promote global economic growth, international trade and regulation of financial markets.

Earlier this week, finance minister Tito Mboweni said SA would consider approaching international financial institutions such as the IMF, the World Bank and the New Development Bank to help fund health interventions against the coronavirus crisis. Alongside World Bank support measures to help health authorities respond to the crisis, the IMF has put in place facilities to help developing nations hit by a combination of a health crisis and a sudden reversal of capital flows.

phakathib@businesslive.co.za