[The Editors' Verdict] How to Minimize the Economic Impact of COVID-19

Published 10 Mar.2020 12:42(KST)

Professor Kim Kyung-soo, Department of Economics, Sungkyunkwan University

The novel coronavirus infection (COVID-19) is sounding an alarm for the global economy. Last week, the U.S. Federal Reserve (Fed) held an emergency meeting and cut the benchmark interest rate by 50 basis points (1bp = 0.01 percentage points). This is the first time since the Lehman Brothers incident in October 2008, which triggered the global financial crisis. Central banks in other countries are expected to follow suit.

There are differences and similarities between COVID-19 and financial crises. First, unlike a financial crisis where the financial system collapses causing a credit crunch, COVID-19 does not damage the financial system, so the effect of interest rate cuts is inevitably limited. The same applies to economic policies aimed at boosting aggregate demand, such as expansionary fiscal policy.

However, on the other hand, COVID-19 is spreading more widely than financial crises. More than 100 countries have reported over 100,000 infected cases, and the death toll has reached 4,000.

Last week, The Economist magazine provided useful information about COVID-19 that even non-experts can easily understand. The basic reproductive ratio (R0), which is the average number of people one infected person infects when there is no response, is estimated to be between 2.0 and 2.5. Based on this, claims have been made that 25-70% of the global population could become infected.

However, quarantine measures can reduce the actual reproductive number (R) below R0. Effective quarantine significantly reduces the number of infected people. While the time for the epidemic to disappear is delayed because the non-infected population that increased due to quarantine measures must be protected, the lower the R, the more time is gained for the quarantine system to respond better, and most importantly, the infected population is reduced. Therefore, the goal of quarantine is to minimize R as much as possible.

For effective quarantine, social distancing is essential. The problem is that social distancing restricts economic activities. This is why the effect of policies aimed at boosting aggregate demand is inevitably limited.

Currently, demand related to services such as travel, accommodation, and dining is sharply contracting. If quarantine does not effectively reduce R, production activities across the economy will slow down, leading the economy into a vicious cycle. Above all, it will be difficult to find workers. Therefore, to reduce the adverse impact on the economy, the top policy priority must be to suppress the virus spread to a controllable level.

Our country, which heavily depends on export manufacturing, is already experiencing disruptions in production activities due to damage to the global supply chain. The same applies to multinational companies in the U.S. and Europe. It is reported that the cargo volume at major U.S. ports has decreased by 20-25% compared to previous years.

International cooperation to prevent the spread of the virus on a global scale is urgently needed. In a closely connected world, it is difficult to expect the economy to recover soon just because one country overcomes the virus. A virus-exporting country can become an importing country at any time, and if the virus spreads continuously from one country to another, the global supply chain will eventually collapse.

International organizations such as the International Monetary Fund (IMF) and the World Bank have promised a package worth $62 billion, and finance ministers and central bank governors of the Group of Seven (G7) have pledged cooperation. However, at this point, it seems difficult to expect a role similar to that of the Group of Twenty (G20) in 2008. International cooperation has long bowed to nationalism. When international cooperation is weak, the economic damage caused by COVID-19 can be greater and last longer than expected.

The international community now views our country's quarantine achievements as a touchstone to determine whether COVID-19 can be properly overcome. We sincerely thank those who dedicate themselves on the front lines of quarantine to protect our lives.