Raghuram G. Rajan: How COVID-19 could prompt global cooperation

A COVID-19 Q&A with the Katherine Dusak Miller Distinguished Service Professor of Finance

Jun 02, 2020

Sections Public Policy

Collections COVID-19 Crisis

This transcript is taken from an interview conducted March 26, 2020.

What have policy makers gotten right this time, and what have they done wrong?

As policy makers in many countries have become aware of the size of this problem, they certainly have reacted on the medical side by trying to bring more resources to bear; on the financial side, by flooding the markets with liquidity; and on the fiscal side, by making direct transfers to households, postponing tax payments, and issuing loans to small and midsize and even large enterprises to ensure their survival.

But one of the things that’s really missing this time is any sense of international cooperation. Countries are putting bans on exporting medical supplies and equipment, which is sort of natural, but also self-defeating at the global level because to kill this virus, we have to kill it everywhere. Otherwise, it will come back to infect countries in second and third waves, unless they can completely shut your borders, which is impossible in this world.

More broadly, the question that we have to address is, in this integrated world, is it even possible to go it alone? 

There is an impetus for global cooperation, to make sure that poor countries have a way of confronting the problem even as the rich countries confront it themselves. I believe that as the immediacy of the pandemic is behind us, we will see some movement toward stronger global institutions, to deal with this kind of problem. We may even start the process of dealing with climate change seriously—because this pandemic will increase the awareness of global problems that we may have to deal with in the next few decades.

What will the economic effects be?

To think about the economic effects, one has to first think about the medical consequences. How long is this going to last, and what kinds of lockdowns will we need to have? A lot depends on how long the medical emergency persists and what is needed to resolve it.

Let’s say we have 8–10 weeks of great uncertainty and constraints, after which the economy slowly comes back. Workers start returning to factories, restaurants start reopening, and slowly people wind their way back. The immediate effect of this quarter of loss in activity is a drop of 30 percent or more of GDP in the quarter on an annualized basis, which means double-digit decreases in GDP in the quarter. 

That will hopefully be offset as the economy comes back to life. Certain areas can return more quickly. For example, academic services can start operating, but factories are going to be slower. Right now, everybody’s watching China, which is coming back slowly but steadily, and where activity is increasing.

I have no doubt that this crisis will change our society.

My guess is that we will see significant negative GDP growth in most industrial countries for the whole year—with hopefully just the second quarter experiencing a big hit and substantial amounts of unemployment, which over time can be brought down as economies start recovering. A lot depends on how many companies we can keep alive over this period.

There are obviously parallels with the 1918 pandemic, but that also came at the end of a long war, and it’s hard to isolate the effects of each one. The current economic fallout does recall the kind of damage that is done in wartime, in that countries repurpose a lot of industries, among other similarities. 

To some extent, the buildup in debt will also resemble wartime. When this ends, will we feel safe enough to go back to a better equilibrium? That’s less clear. After World Wars I and II, people were so sick of war that when peace broke out, there was a sense that war wouldn’t happen again, particularly soon. I’m not sure that we can rest assured that we won’t have global problems once we’ve tackled this virus.

Will we have the money to tackle the next pandemic?

How will COVID-19 reshape the gig economy?

Could COVID-19 spell the end of political populism?

COVID-19 is a global problem that needs a global solution

How will poor countries cope with COVID-19?

How will poor countries cope with COVID-19 outbreaks?

There is a real concern about whether poor countries, which currently don’t seem to be experiencing the virus, at least to the extent that industrial countries are, have the resources to tackle it.

There are three reasons I can think of for why they’re not experiencing the virus as much. One, they’re not as tightly connected to the source in China. Two, they have it but aren’t able to measure it. And three, they tend to be hotter countries and, hopefully, the virus dies down in hotter, more humid countries. That’s an untested proposition.

It could be any of the three, and my suspicion is it’s a little bit of everything—that is, it took longer to reach those areas; it is spreading a little slower than in temperate climates; plus, poor countries are not measuring it, are not testing it enough, and simply don’t see it. These countries also typically have younger populations, so it may be that they are able to bear it a little better. But they do have their share of the elderly, who will be severely affected if the virus spreads widely, and their young are not always well fed and healthy.

The problem in poor countries is that the kind of social distancing that is possible in developed countries is much harder. If you’re in a slum in Mumbai, India, it’s hard to stay some distance from people within your community. And if you are in a state of lockdown, public services are less well developed. How do you get milk? How do you get bread or naan every day? That becomes a big problem.

When the poor countries in emerging markets have to fight this virus, they will need all the help they can get. The availability of ventilators is much lower. Hopefully, they reach their peak later than the industrial countries, at which point there will be resources and treatments to spare. And hopefully, we can do a better job of fighting the epidemic than we are currently doing, but it remains to be seen. 

How will COVID-19 change attitudes about the gig economy?

I have no doubt that this crisis will change our society. We certainly will spend a lot more time thinking about the value of human relationships, especially because we’ve isolated ourselves from direct physical contact for some time. 

Technologically, this doesn’t really change the nature of jobs, but it does raise awareness about the fragility of a variety of occupations within the economy and the need to put them on a more stable footing.

One hope is that, politically, this will reestablish the value of competence and professionalism and give those with credentials greater credibility.

You will see a certain number of jobs become less appealing. Clearly, the gig economy, which looked so wonderful when things were going swimmingly, looks a lot more precarious, at this point, without having health-care benefits—or effectively any work over sustained periods of time, if disruptions such as the pandemic recur.

My assumption is that this will change the way we look at safety nets and health care, and we will think about reforming them to make sure that more people are covered on a sustained basis. People may not want gig jobs as much as they want more stable jobs, and more people will advocate for good benefits.

Could COVID-19 spell the end of political populism?

This crisis comes at an interesting time across the world. We see the rise of populist national governments and the undermining of professional capabilities. The elite are biased and think only for themselves, or at least that was the narrative going into this crisis. 

Now, unlike the 2008–09 financial crisis—for which many people blame the bankers, as well as the administrative elite who let the bankers take the risk—this crisis is what economists would call exogenous. It’s coming from the outside and is “an act of God,” as they sometimes define this. To that extent, it’s harder to find somebody to blame. Politicians are doing their best to blame someone else, but it is not easy. 

We’ve seen countries that have more-reasonable administrations take early action—for example, Taiwan and South Korea. We’ve also seen more populist administrations acting as though somehow magical thinking will be enough to stave off this pandemic, and we’ve seen administrations finally come to recognize the value of professional expertise and bring more competent people on board in managing the crisis.

One hope is that, politically, this will reestablish the value of competence and professionalism and give those with credentials greater credibility, something that is necessary if we are to navigate the challenges of the future. How the medical and administrative establishments perform in this crisis will be important. Will they regain the credibility that professionals had before the global financial crisis?

That change may also imply that people now will demand more and be less willing to elect leaders who talk a good game but who lack administrative capabilities. But that remains to be seen. I think it depends on how this plays out and whether our populist leaders can claim credit for whatever happens, regardless of their direct contribution to the outcomes.

Can countries pay for future economic-stimulus measures?

The broader issues are going to be: What structures do we need in place to deal with such global events? Are we adequately buffered globally? What kinds of new, stronger international structures are required? 

But also, there is going to be a real question of whether the 2008–09 global financial crisis and this global pandemic are once-in-a-lifetime or once-in-a-century events, or if we are going to see a major crisis happen every 10 years or so.

Are we justified, as societies, in pouring so much money into defending against them when we are mortgaging our children’s inheritance and their children’s inheritance, and we’re building up an enormous amount of debt? Should we take a different approach? How much is OK to spend on these calamities? It seems as if countries across the world are saying, “Whatever it takes!” But is it really feasible to spend whatever it takes every 10 years?

We haven’t brought down the debt from the last time we dealt with problems in the global financial crisis, and we’re going to add to it substantially. Is this going to handicap future generations? What is their say in all this, especially when we are trying to save the elderly in our societies? These are the kinds of knotty issues we’ll have to deal with.