SEMANA, April 7, 2020


(Translated by Eunice Gibson, CSN Volunteer Translator)

Richard Baldwin[1], Professor of International Economics in Geneva explains how to flatten the curve of contagion and the curve of economic recession to mitigate the devastating effects of the pandemic.

Baldwin says that the quarantines and other measures of containment are a moral imperative in the face of the pandemic “because people are dying who shouldn’t be dying,” in countries that are able to take on the costs of containment and of the financial rescues needed to protect the economy.

“If you fail to implement a quarantine in order to save money, you are facing a moral and not an economic issue,” says the professor of international economics at the Graduate Institute in Geneva in an interview with BBC Mundo. He has researched subjects related to globalization and commerce for more than three decades.

This expert has been the director and president of the Center for Economic and Political Research (CEPR) and an academic at the Universities of Oxford, the Massachusetts Institute of Technology (MIT), and Columbia University. He argues that we have to flatten both the curve of contagion and also the curve of recession.

“You have to act fast and do whatever is necessary,” says Baldwin.

What is the connection between the health measures and the economic measures required by the pandemic?

The disease is very contagious, but not as lethal as other pandemics. It propagates with incredible speed and will end up overwhelming the capacity of the hospitals. That has happened in Italy and Spain and now in New York, and that will happen all over the United States and in most of the world.

The problem is that the hospitals are not able to provide appropriate treatment. And some people are dying because they aren’t receiving the treatment that they need. That’s why you need the quarantines and the containment measures that try to diminish the speed of contagion, so that the number of people arriving at hospitals slows, and is spread out over time. That is the connection between the medical shock and the economic shock.

But there are some business owners, politicians, and other opinion leaders arguing that it’s necessary to lift the quarantines to protect the economy, because if the economic system remains profoundly damaged, the majority of the population will end up paying the cost of not having work and the countries will go bankrupt . . .

There’s no dichotomy between saving lives and saving the economy. It’s a false dilemma in rich countries like the United States, which can provide support to people and businesses so that they don’t go bankrupt during the confinement. You just have to apply policies that are appropriate.

You can’t allow the disease to propagate without containment because more people are going to die than would die with proper treatment. You have to close up the economy in order to diminish the contagion, but at the same time you have to have an economic policy to make sure that you protect the economy for when this is over and people go back to work.

Basically, what we have to do is quarantine and spend a great deal of money.

And how can emerging economies and countries that don’t have the financial resources confront the pandemic while protecting their economies?

In the emerging markets it’s a completely different story. Many of those countries don’t have the fiscal capacity to protect people with low incomes, or businesses, or banks. And trying to do so can create other crises such as, for example, a debt crisis.

In these cases the situation is much more difficult and can produce a real dilemma between people’s lives and the economic effects of a quarantine, and that can also seriously affect people’s lives.

That is more complicated. I don’t know where they can go.

What’s the double curve all about?

There is an epidemic curve that measures the number of new cases per day. It’s a bell-shaped curve. It begins fairly flat; later it accelerates because the sick people pass the disease on to other people, until it reaches a maximum point and then begins to descend.  The problem is that if there are no containment policies, the curve rises and falls extremely, so that the number of people that need hospitalization exceeds the capacity of the hospitals.

The double medical and economic curve

What’s important is to flatten the contagion curve, lowering the rate of infection. And to achieve that, we have to maintain social distance. And what happens is that when you apply a policy of containment such as a quarantine, you make the recession worse, much more extreme.

Then there is a curve of negative growth of Gross Domestic Product (GDP), which is also bell-shaped. The recession increases, reaches a maximum and then improves. If you don’t control the epidemic, that economic curve will be brief and very acute.

But if you implement containment policies focused on having people avoid working and consuming, the recession is much worse.

So what is the solution?

It’s there where the governments’ emergency packages to protect the economy come in. You have to have a policy of containment to flatten the curve of the epidemic and take fiscal measures to diminish the curve of the recession. That’s what it’s about, flattening both curves.

You’ve written that it’s necessary to act now and do whatever is necessary to confront the pandemic. What are the economic measures that ought to be implemented urgently and how can we put them in practice?

What is provoking this crisis is that businesses have to close. Then they either go bankrupt or discharge their employees. The first thing that has to be done is protect businesses, especially small and medium businesses, so they don’t go broke. In Europe, for example, the government pays part of the salaries of the workers so that they will not be unemployed. In some European countries, small businesses can seek long-term loans that don’t charge any interest.

Next, in the case of individuals with low incomes, they have to receive financial support, whether it be through direct delivery of resources or through payment of part of their wages, even though they aren’t working. They might also have problems paying their mortgage. And then the banks will have problems extending credit. Because of that, the governments have to make sure that the banks don’t go bankrupt.

The principal measures are protecting the most vulnerable families, protecting businesses so that the jobs are available when the shock is over, and protecting the banks to make sure that they don’t go bankrupt.

Creating a shield, these are the policies that protect the economy.

Will we be seeing more financial rescues of businesses?

The largest economies have approved gigantic fiscal packages for financial rescue of businesses, especially small businesses. And I think there will also be rescues of large companies.

We are asking governments to spend all that may be necessary to confront the crisis. What will happen with the fiscal deficit, with government debt?

That’s why we have to take care that this crisis doesn’t generate other crises; that the government does not have a debt crisis. That depends on each country. The United States will not go broke, and neither will Japan, in spite having gigantic debt. Their sustainability won’t be affected.

In Europe there are more problems, like the case of Italy and other countries that have large debt in relation to their GDP. At this moment in Europe they are looking for a way for the weakest economies to avoid bankruptcy, so as not to have another Eurozone crisis.

And what can countries do in this crisis when they already have serious economic problems, such as in Latin America.

In that case the only thing left is financial help from the International Monetary Fund, or from benevolent organizations, help that probably won’t arrive. Many of the emerging markets may have the kind of debt problems that we saw in 2009, 2011, or in the ’90’s.

In a lot of countries the levels of unemployment are going to shoot up . . .

In almost all of the countries.

What lessons can we learn from other pandemics that have occurred in the past?

The Spanish flu in 1918 was similar to this pandemic, but much more lethal.

In the United States the cities with more severe quarantines suffered recessions that didn’t last as long. Even though this was in another era and governmental support did not exist. The idea is that if you impose a quarantine rapidly, the economy gets a big shock, but you will return to normal more rapidly.

If you don’t do the quarantine, the pandemic causes more problems and more economic damage.

In the midst of the economic debate, what is the moral imperative in this crisis?

The quarantine and the containment measures are a moral imperative because people die who ought not to be dying, and in countries where they can deal with the costs of the quarantine and of the financial rescues that protect the economy.

If you fail to implement the quarantine in order to save money, that’s a moral issue, not an economic question.

[1] Professor Baldwin is a native of Madison, Wisconsin, where he graduated from the University of Wisconsin. He received his Ph.D. from MIT, now teaches in Geneva, and is  the founder of Vox. His most recent Vox article on the pandemic is “The Supply Side Matters: Guns Versus Butter, COVID Style”, March 22, 2020

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