ASSIGNMENT 3
COVID-19: The Global Shutdown & Fiscal Responses to COVID
Case Background:
In early 2020, the world grappled with a global crisis as the COVID-19 pandemic, originating
from China, was officially declared a pandemic on March 12, 2020. This unprecedented health
emergency brought fears of substantial loss of life and strained healthcare systems due to the
absence of a cure or vaccine. Governments worldwide swiftly implemented measures aimed at
"flattening the curve" to slow the virus's spread and prevent overwhelming healthcare
infrastructures.
Economically, the pandemic had a profound and multifaceted impact. It commenced with the
initial disruption in China, causing disruptions in global supply chains, effectively creating a
supply shock. Flights were cancelled, large-scale events were postponed or cancelled, and
businesses shuttered. As the virus continued to spread, government-mandated closures of
nonessential activities led to diminished consumer demand, investment uncertainty, and
liquidity constraints, resulting in a significant demand shock. This dual shock system led to a
substantial global economic contraction, with predictions of a 3% decrease in global GDP for
2020.
The pandemic raised challenging questions about striking a balance between safeguarding
public health and preserving the economy. Policymakers were confronted with difficult
decisions regarding lockdowns and restrictions, plunging the world into what was aptly named
"the Great Lockdown" and the "mother of all crises." Devising strategies involving the
participation of governments, businesses, communities, and individuals to mitigate economic
and financial distress proved to be an intricate challenge.
Diverse countries enacted various containment measures in response to the pandemic. China,
being the initial epicentre, imposed strict movement restrictions. Italy, one of the earliest hardhit nations, implemented nationwide lockdowns, setting a precedent for other countries. The
United States grappled with inconsistent messaging and a fragmented response, while
European countries adopted their measures, with Germany receiving accolades for its
approach. Sweden took a more relaxed path, whereas the United Kingdom initially pursued a
herd immunity strategy before shifting towards social distancing measures. Brazil, Mexico,
and India faced criticism for their handling of containment measures. In contrast, countries like
South Korea, Taiwan, and Iceland emphasized extensive testing rather than strict lockdowns.
New Zealand aimed to completely eliminate the virus through stringent policies. These
disparate responses underscored the pivotal role of leadership, communication, and community
engagement in controlling the pandemic.
Recurring outbreaks and concerns of second waves persisted as countries attempted to reopen
while remaining vigilant to prevent a resurgence of cases. The COVID-19 pandemic presented
a complex challenge that demanded a delicate balance between safeguarding public health and
managing economic consequences.
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The COVID-19 pandemic precipitated a profound economic disruption through a combination
of supply and demand shocks.
The Supply Shock was initially felt in China, a global manufacturing hub. Lockdowns and
production slowdowns in China disrupted global supply chains, affecting companies like
Hyundai, Apple, and Chrysler and causing supply chain disruptions for around 95% of Fortune
1000 firms. Shortages of essential medical equipment, including personal protective gear and
medicines, prompted international responses like the European Commission's joint
procurement procedure involving 26 Member States. Many companies, such as GE and Ford,
pivoted to produce medical supplies. Lockdowns and social distancing measures disrupted
essential supply chains, leading to challenges like a shortage of seasonal migrant workers for
fruit picking in the UK. The US and Canada faced threats to their agricultural production due
to restrictions on the import of queen bees necessary for pollination. Additionally, the closure
of meat-processing plants in the US, exemplified by Tyson Foods, jeopardized the meat supply
chain, eventually leading to food waste as restaurant demand dwindled.
The Demand Shock resulted in a global economic recession, affecting both affluent and
developing economies. The International Monetary Fund (IMF) estimated a cumulative output
loss of $9 trillion over the first two years of the pandemic. In the US, unemployment claims
reached record levels, surpassing figures from previous crises like the Great Recession. The
drop in international demand for goods, coupled with the disruption of global trade,
foreshadowed a contraction in global trade volume. The oil industry suffered severe
repercussions, with oil prices plummeting to historic lows, causing concerns of oversupply and
storage space.
Governments worldwide adopted economic policies to address the economic crisis. These
policies included stimulus packages, tax cuts, and subsidies for individuals and businesses,
particularly those affected by lockdowns. Central banks lowered interest rates and introduced
various lending facilities to provide liquidity and support businesses and financial institutions.
Emerging markets also initiated monetary injections to mitigate economic damage.
Additionally, various other policies were implemented. Multilateral organizations such as the
IMF and World Bank offered financial support to vulnerable countries to address healthcare
needs and economic challenges. Initiatives for debt relief were launched for the world's poorest
countries, and numerous countries introduced social protection and job programs to address
the immediate effects of the pandemic.
As countries gradually commenced reopening their economies, the process and timing of
reopening varied across regions. The pandemic prompted profound changes in people's
behaviour, raising questions about the "new normal" and the path to global economic recovery.
While some advocated for a swift economic reopening, others emphasized the paramount
importance of controlling the virus to prevent further economic disruptions. The pandemic
underscored the necessity of a coordinated global response to such crises.
Analysis of Case:
In 2019, world saw an unprecedented crisis which forced the world to revisit many economic
concepts. It was last in 1929, where the world seen something this severe in degree and
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extent.
This pandemic forced countries to choose between two equally important alternatives, those
are, economic growth and life of a human being. The response to this dilemma was not
uniform. Many countries like Italy, USA, China, India were labelled as mis managers. While
on the other hand, we got examples like South Korean and New Zealand where the fatality
rates were way below the world average. One important factor in this was the low population
which was easy to manage.
The fiscal policy measures that were taken by the National Govt. can be divided into 3 main
categories:-
•
Immediate fiscal impulses: This involves government spending on medical
resources, keeping people employed, and public investment. It also includes tax
cancellations. This category represents the direct financial support provided to
combat the crisis.
•
Deferred payments: Governments allowed the deferral of certain payments, such
as taxes and social security contributions, with the expectation that these would be
paid back later. This approach aimed to provide relief to individuals and
businesses facing financial constraints.
•
Liquidity provisions and guarantees: This includes measures like export
guarantees, liquidity assistance, and credit lines through national development
banks. These were intended to maintain financial stability and support businesses
through credit and liquidity support.
However, the degree of these responses varied from government to government. For
example, Government spending ranged from 0.4% of GDP in Hungary to 5.5% in the
United States.
ANALYSIS OF SUPPLY DEMAND:
Supply Shock: The COVID-19 pandemic created a massive supply shock in the global
economy. The lockdowns and restrictions in China, a major manufacturing hub, led to
disruptions in the global supply chains. Many countries relied on components and products
supplied by Chinese factories, causing a ripple effect across industries. This had a significant
impact on various sectors, including technology, consumer electronics, apparel, and more.
Supply of Medical Equipment: The pandemic also disrupted the supply of essential medical
equipment, including personal protective equipment and medicines. The European
Commission and various businesses, such as GE and Ford, shifted their production to address
the shortage of critical medical supplies. The pandemic highlighted the importance of
adapting quickly to meet the changing demands of the healthcare sector.
Disruptions in Essential Supply Chains: The disruption caused by lockdowns extended to
essential supply chains, including seasonal labor in agriculture and pollination processes.
Migrant labor shortages affected fruit picking in the UK, while restrictions on beekeepers and
flights impacted pollination in the US and Canada.
Agricultural Supply Chain Disruptions: The pandemic not only disrupted agricultural
supply chains but also led to food wastage due to a lack of demand from restaurants and
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cafeterias. This resulted in the disposal of large quantities of food, including the destruction
of eggs that could not be resized for household consumption.
Change in Food Production and Distribution: The way food was produced and distributed
changed significantly due to the pandemic. There was a shift from away-from-home dining to
cooking at home, with increased demand for home delivery and drive-by pick-ups. This shift
affected farm laborers, supermarket employees, and other essential workers in the food
industry.
Demand Shock: The COVID-19 pandemic caused a demand shock, pushing both wealthy
and developing economies into recession. This led to a decline in consumer spending, a drop
in labor demand, and an increase in unemployment. The IMF estimated a significant global
economic output loss, making it the deepest economic dive in over a century.
Impact on Global Trade: The pandemic severely affected global trade, with the World Trade
Organization forecasting a substantial contraction in trade volume. The drop in demand for
commodities, especially fossil fuels, led to a collapse in oil prices. International demand for
goods continued to depress the global economy.
Challenges for Developing Countries: Developing countries faced unique challenges during
the pandemic. They were hit by economic shocks even before the health impacts fully
manifested. The collapse in commodity prices, tourism, and remittances created severe
economic difficulties for these nations. Additionally, limited access to capital markets and
inflexible exchange rates hindered their ability to respond effectively.
Food Insecurity: The pandemic exacerbated food insecurity, especially in developing
countries. The existing food crises in 2019 left millions of people vulnerable to the virus.
Food supply chains needed to be maintained to ensure people had access to essential
sustenance.
ANALYSIS OF FISCAL RESPONSE
Germany Response:
Germany faced a significant economic challenge during the COVID-19 pandemic, with
predictions of a substantial decline in GDP and a tax revenue shortfall of €33.5 billion.
Extending lockdowns even by a week could lead to additional costs of €25 - €57 billion and a
GDP drop of 0.7% to 1.6%. To address the crisis, Germany needed to borrow approximately
€156 billion, surpassing constitutional debt limits by nearly €100 billion.
In response, Germany implemented an array of fiscal measures, including increased
government spending, assistance from the state-owned development bank KfW, tax relief for
businesses, enhanced health insurance funding, and support for small and medium-sized
enterprises (SMEs). They also established an Economic Stabilization Fund to protect critical
companies from takeovers, allowing the government to acquire direct holdings in companies
and impose restrictions. German banks, particularly KfW, played a pivotal role in rapidly
implementing relief measures. Additionally, a second stimulus package worth €130 billion
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focused on rejuvenating severely impacted businesses, with tax cuts, infrastructure
investment, climate-friendly mobility support, and direct financial relief to families.
Remarkably, by June 3, Germany had committed about 48% of its total 2019 GDP to various
fiscal measures, illustrating the significant resources allocated to combat the economic impact
of the pandemic. This comprehensive and substantial fiscal response showcased Germany's
dedication to addressing the crisis's economic challenges through a multifaceted approach.
French Response:
France's fiscal response was extensive, comprising an initial economic support plan of €45
billion and an increased fiscal impulse support plan of €106 billion. This approach pushed the
budget deficit to a postwar record of 9% in 2020 and raised the debt to 115% of GDP,
signifying a substantial commitment of resources to address the crisis.
A significant portion of the fiscal impulse, €31 billion, was allocated to maintaining stable
employee-employer relations through the chômage partiel scheme. This program allowed
companies to temporarily reduce or halt activities while the government provided financial
support to employees, particularly those earning minimum wages.
The wide-scale adoption of the chômage partiel program is noted, with more than half of all
French companies and over 12 million workers benefiting from it. Tax deferrals, liquidity
measures, and public guarantees for loans were also introduced, amounting to €210 billion
and €342 billion, respectively.
France's existing social safety net played a crucial role in mitigating the impact of this
pandemic. The response was termed as cost effective, ensuring relative economic stability
during the crisis. It also emphasizes that the magnitude of the response wasn't solely
determined by national fiscal capacity but was influenced by administrative efficiency and
program conditions.
American Response:
Unprecedented Fiscal Response: The United States mounted an unprecedented fiscal
response to address the economic impact of the COVID-19 pandemic. The response included
various legislative measures that aimed to support individuals, businesses, and healthcare
systems. These measures constituted a massive government intervention in the economy.
Economic Impact: The pandemic caused severe damage to USA economy as compared to
Europe. This was because of absence of a robust public support system vis-s-vis Europe. A
record number of people filed for unemployment benefits, and millions of jobs were lost.
This economic shock was more abrupt and significant than in many European countries,
leading to urgent government action.
Political Complexity: The American system of governance, with its separation of powers
between the executive, legislative, and judicial branches, complicated the response. The
division of powers, political polarization, and the role of states in decision-making made it
challenging to coordinate a unified response. The passage also notes that the Trump
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administration had officials who favored tax cuts as a primary solution, which contributed to
political divisions.
CARES Act: This legislation was the primary legislative response to the economic impact of
COVID-19. This act included provisions for direct stimulus payments, expanded
unemployment benefits, loans to businesses (Paycheck Protection Program), and other
financial support mechanisms.
Economic Inequality: Also, there was the unequal impact of the crisis on different segments
of society. "K-shaped" recovery, where higher-wage earners recovered more quickly than
lower-wage earners was observed.
Job Recovery and Uncertainty: Despite initial job gains in May and June, there was still
uncertainty due to the resurgence of the virus. Economic analysts observed that the economic
slowdown was driven by uncertainty related to the virus rather than just the direct impact of
outbreaks.
Debate Over Fiscal Response: The effectiveness of the American fiscal response was a
subject of debate. While the U.S. deployed a massive fiscal stimulus, questions arose about
its efficiency and design, particularly in comparison to other countries like France.
Critical issues and challenges
•
•
Supply Chain Disruptions: The COVID-19 pandemic caused substantial disturbances in
global supply chains. China, a pivotal manufacturing centre, had to close a
considerable number of its factories, impacting companies globally that depended on
Chinese components and goods. This disruption in the supply chain had far-reaching
consequences across different sectors, resulting in a noted 95% interference in the
supply chains of Fortune 1000 corporations. These interruptions underscored the
fragility of worldwide production networks and supply chains, carrying implications
for businesses and economies on a global scale.
Challenges faced by Germany and France: One critical issue and challenge faced
by countries, such as Germany and France, in implementing fiscal responses to
COVID-19 was the need to provide substantial economic stimulus while managing
the growing levels of government debt. As the pandemic led to widespread economic
disruptions, both Germany and France rolled out comprehensive fiscal measures to
support businesses, individuals, and healthcare systems.
In Germany, the government faced the dilemma of managing increased debt levels
while ensuring a robust fiscal response. They predicted a significant decline in GDP
and had to borrow approximately €156 billion to address the crisis, which exceeded
constitutional debt limits by almost €100 billion. Germany's challenge was to provide
extensive fiscal support, primarily through state-owned development banks like KfW,
to businesses and individuals while maintaining a sustainable fiscal framework.
In France, a similar challenge emerged. The French government launched a
substantial fiscal impulse support plan of €106 billion, which pushed the budget
deficit to a postwar record of 9% in 2020 and increased debt to 115% of GDP. The
challenge was to provide support through measures like the Chômage Partiel scheme
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and direct payments to businesses and individuals, all while dealing with the longterm consequences of increased debt levels.
•
Challenges faced by the USA:
Division of powers in the country's government- The Federal Reserve, which is
America's central banking system, had limited authority in crafting a fiscal response,
as it possessed "lending powers" but not "spending powers." The American Congress
was the supreme authority in deciding the avenues of spending, However, Congress
was divided along the political lines which made any effective decisions by the
executive much more difficult. For example, Republicans considered the best solution
will come from supply side and hence, focused on keeping supply side going by
giving them fiscal incentives in form of tax cuts, reimbursement etc. On the other
hand, Democrats were more vocal about the taking care of demand side of the
economy.
Federal form of Government created problems in planning and execution of a single
strategy. Many US States opened up their economies without considering the
possibility of 2nd wave. This made another lockdown necessary. This not only delayed
the recovery process but also increased the cost of recovery for American economy.
Lack of Funds for Local Govt.-While Federal Government was well equipped to
fight the pandemic, both State Governments and Municipal Governments found
themselves in dire need of funds to take steps to fight this pandemic.
Major Economic Tools:
Unemployment Rate- This indicator measures the percentage of people (between 14 to
59 years) who are who are willing to have jobs at present point of time, don’t have jobs.
For example, if there are 100 willing people in the economy who are capable and are
willing to work but only 80 people have jobs then the unemployment rate is 20%. High
unemployment rate while brings down inflation also results in less consumption. This in
turn can disincentivize the firms to produce. Also, the burden on the Govt. increases as
they have to increase Transfer Payment in form of Subsidies and Allowances.
Fiscal Policy- It is the tool which is used by Government to impact economic growth.
This is generally of two types:
•
•
Expansionary Fiscal Policy- Government itself undertakes huge expenditure both
in terms of Revenue Exp. And Capital Expenditure. Also, tax rates are cut down to
improve Private Consumption Exp.
Contractionary Fiscal Policy- Government itself cuts expenditure both in terms of
Revenue Exp. And Capital Expenditure. Also, tax rates are increased to limit
Private Consumption Exp. It is generally done to control the inflation in the
economy.
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Monetary Policy- It is the tool used by Central Banks to control the liquidity in the
economy. The various tools that are used can be classified into Qualitative Tools and
Quantitative Tools. Similar to Fiscal Policy these are also of two types:
•
Expansionary Monetary Policy- Federal Bank increases the liquidity in the
economy by undertaking various monetary operations like OMOs, decreasing Repo
Rate and Reverse Repo Rate etc. It decreases the cost of capital for the firms thereby
creates a positive sentiment in the market.
•
Contractionary Monetary Policy- This policy type is generally used by the
Federal Bank to suck out the liquidity from the economy, It results in the decrease in
the liquidity and hence will decrease demand for the commodities. Less demand and
more supply will result in the decrease in market prices. This hawkish stance is taken
by Central Banks to meet inflation target rates.
Aggregate Supply- The aggregate supply is defined as the total value of produced goods
and services in the economy.
Aggregate Demand- The aggregate demand is defined as the total value of demanded
goods and services in the economy.
Major Learnings:
•
•
•
•
Supply Chain Diversification- It is very vital for the businesses that there is a robust
supply chain in place. Overdependence upon one country, like China, for raw material
and value-added operations can become a bane in crisis situations as highlighted by
the COVID scenario.
Crucial Role of Govt. in Crisis Situations- This case has again highlighted the
important role the State has to play when the whole economy is in doldrums. For
example, USA Congress passed CARES Act where tax breaks were given, more
liquidity was infused in banks to make lending cheaper, fiscal budgetary constraints
were eased to help citizens in managing their out-of-pocket medical expenditure,
unemployment benefits were increased, food rations were given to the needy. Federal
Government ensured that the gap which was left by reduced spending of the firms,
result of this unprecedented situation, wasn’t huge and if needed, State will ensure
fiscal measures even if the fiscal deficit has to increase.
Collaboration between different State Entities- While making different investment
decisions in any economy it is necessary that the political dynamics in the country is
observed. If there is a political instability in the country or the various State entities
are in conflict with each other, the managers must take enough risk mitigation steps to
ward off the negative impacts.
In times like these when the employees are facing mental stress regarding layoffs and
pay-cut, it becomes important for managers that they keep the employees motivated
so that their efficiency doesn’t come down. Managers are also expected to bring
innovative ideas during times like these. One good example for this was the adoption
of work from home for industries where the interactions between employees can be
managed virtually. Virtual teams were created for IT industries which resulted them to
sustain their growth even in these troubled times.
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