Coronavirus forces economics profession to leave comfort zone. By Mohamed El-Erian
With the coronavirus devastating one
economy after another, the economics profession – and thus the analytical
underpinnings for sound policymaking and crisis management – is having to play
catchup. Of particular concern are the economics of viral contagion, of fear
and of “circuit breakers”. The more that economic thinking advances to meet
changing realities, the better will be the analysis that informs the policy
response.
That response is set to be both novel and
inevitably costly. Governments and central banks are pursuing unprecedented
measures to mitigate the global downturn, lest a now-certain global recession
gives way to a depression (already an uncomfortably high risk). As they do, we
will likely see a further erosion of the distinction between mainstream economics
in advanced economies and in developing economies.
Such a change is sorely needed. With
overwhelming evidence of massive declines in consumption and production across
countries, analysts in advanced economies must reckon, first and foremost, with
a phenomenon that was hitherto familiar only to fragile/failed states and
communities devastated by natural disasters: an economic sudden stop, together
with the cascade of devastation that can follow from it. They will then face
other challenges that are more familiar to developing countries.
Consider the nature of the pandemic
economy. Regardless of their desire to spend, consumers are unable to do so
because they have been urged or ordered to stay at home. And regardless of
their willingness to sell, stores cannot reach their customers and many are cut
off from their suppliers. The immediate priority, of course, is the
public health response, which calls for physical distancing, self-isolation and
other measures that are fundamentally inconsistent with how modern economies
are wired....
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