Macroeconomic Policy in the Time of COVID-19 : A Primer for Developing Countries

Abstract

COVID-19 not only represents a worldwide
\n public health emergency but has become an international
\n economic crisis that could surpass the global financial
\n crisis of 2008–09. Right now, containment and mitigation
\n measures are necessary to limit the spread of the virus and
\n save lives. However, they come at a cost, as shutdowns imply
\n reducing economic activity. These human and economic costs
\n are likely to be larger for developing countries, which
\n generally have lower health care capacity, larger informal
\n sectors, shallower financial markets, less fiscal space, and
\n poorer governance. Policy makers will need to weigh
\n carefully the effectiveness and socioeconomic consequences
\n of containment and mitigation policies, responding to
\n epidemiological evidence on how the virus spreads and trying
\n to avoid unintended consequences. Economic policy in the
\n short term should be focused on providing emergency relief
\n to vulnerable populations and affected businesses. The
\n short-term goal is not to stimulate the economy—which is
\n impossible, given the supply-restricting containment
\n measures, but rather to avoid mass layoffs and bankruptcies.
\n In the medium term, macroeconomic policy should turn to
\n recovery measures, which typically involve monetary and
\n fiscal stimulus. However, in many developing countries,
\n stimulus may be less effective because monetary transmission
\n is weak and fiscal space and fiscal multipliers are often
\n small. A more viable goal for macroeconomic policy in
\n developing countries is avoiding procyclicality, ensuring
\n the continuity of public services for the economy, and
\n supporting the vulnerable. Because COVID-19 is truly a
\n global shock, international coordination is essential, in
\n economic policy,health care and science, and containment and
\n mitigation efforts. Critical times call for well-designed
\n government action and effective public service
\n delivery—preserving, rather than ignoring, the practices for
\n macroeconomic stability and proper governance that serve in
\n good and bad times.