What is Different About the Coronavirus Recession?

Interview by El Pais, Madrid, May 9. 2020

In the GFC of 2008/2009 the world fell into recession for a while (one year), but the emerging world almost didn’t suffer: they kept growing, mostly thanks to commodity prices. Now, the story looks pretty different: even emerging countries will experience negative growth in 2020… It seems to be a truly global crisis. Should this worry us more?

JF:  Almost everything about the Coronavirus Recession of 2020 should worry us more than the GFC.  Yes, Emerging Market countries will experience negative growth in 2020, and it will probably be worse than the IMF’s recent forecast of -1.0%.   They have been hit by a loss of export markets (especially in the case of the oil exporters), a loss of emigrants’ remittances, and a loss of capital inflows, not to mention the direct effects of Covid-19 on the health of their populations (which so far looks particularly bad in Latin America, but not as bad in Africa).  If the 2010 rise in commodity prices was an important part of the economic recovery in developing countries, the mechanism was resurging demand from China, which bounced back quickly at that time.  This is less likely to work this time.  Also, many EM countries entered the 2008 GFC with newly strengthened balance sheets (higher foreign exchange reserves and lower dollar-denominated debt) and in some cases with stronger budgets.   That helped them weather the GFC.   But it is less true this time.   Backsliding in areas such as corporate borrowing in dollars has left EMs more vulnerable.

What distinguishes this recession from all previous ones?

JF: The big distinction: History does not give us many examples of pandemics leading to severe recessions.  Many aspects are new.  To take just one implication of the sudden origins of this recession, it is probably the first time that economists have been able to be sure that we are in a recession before it is confirmed by GDP and other economic statistics.  More importantly, though macroeconomic policy can help, it cannot fix the problem by itself.  Public health policy  — such as testing — matters more.

Have we learned any lessons from the past (especially from the GFC of 2008/2009) in the management of this crisis? How?

JF:  Some important reforms to strengthen banking and financial regulation were made after the GFC, such as the Basel III Agreement and the Dodd-Frank Bill in the US. They have helped in the current crisis.  But in the run-up to the crisis, many of our current leaders had forgotten important lessons of history (if they ever knew them).  These include the desirability of counter-cyclical fiscal-policy, counter-cyclical monetary policy, and counter-cyclical regulatory policy.  To be sure, the fiscal and monetary easing of the last two months has been impressively rapid, by historical standards.  But I fear we may soon have a repeat of past mistakes, where victory was declared too early and policy measures were withdrawn too soon.

At the beginning of the crisis, we saw a great boost from stimulus programs or the freezing of the economy, but in recent weeks the pace has slowed down. Should we be concerned about this?

JF: Yes.  In some places, especially developing countries, their debt is already too high and so they lack fiscal space.  But some countries do have the fiscal space to sustain stimulus programs.   The United States should avoid repeating either the mistakes of the global flu pandemic of 1918 when public health measures were withdrawn too soon, resulting in a second and third wave or the mistakes of the recession of 1937, which resulted when Great Depression monetary and fiscal stimulus was withdrawn too soon.