The ongoing pandemic makes us realize that strategies that work in the short term do not have to work in the long run. And vice versa – what from the perspective of weeks and months seems to be a failure in relative terms (compared to other countries), turns out to be a victory over time. This applies not only to the approach to the virus (the scale and duration of lockdowns, sanitary requirements, etc.), but also to activities undertaken in the economic sphere.
In the latter case, the issue of the balance of short- and long-term benefits seems to be of particular importance. It may turn out that focusing on minimizing the effects in the short term (in the coming quarters) may have a negative impact on the longer, several years’ perspective. Therefore, there are several elements that need particular attention in relation to actions taken in the public sphere related to recovery from the crisis.
The first one relates to the issue of maintaining the possibility of action. One can get the impression that today many countries are adopting the principle let’s do everything we can, because the crisis is temporary – when the virus is successfully combated, we will have many years of good prosperity to stabilize the fiscal situation. Most likely this will turn out to be a wrong assumption; deep crises – like the current one – usually trigger “aftershocks”, generate new problems (e.g. the eurozone crisis that emerged as a consequence of the global financial crisis).
In the context of the above point, another issue is also important – the belief that governments and central banks can do anything, they have unlimited possibilities of action, which has been growing in recent months. This is a derivative of the dissemination of theories that as long as public debt is mainly local (the financing is for example from the local central bank), the scale of the government’s fiscal expansion is basically unlimited. This is a harmful illusion that is not worth succumbing to. It is true that when combining monetary and fiscal policy measures “you can do more”, but that does not mean there are no borders as such. These limits are elsewhere for small, open economies (such as ours), and elsewhere for reserve currency issuers (USA), but they always are.
A third important question is whether and to what extent state aid to firms distinguishes between liquidity problems and insolvencies. The crisis is changing the situation of many industries permanently. For some, these are changes for the better (e.g. e-commerce), for others for the worse. In the latter case, resources must be allowed (bankruptcies, liquidations) to be released as quickly as possible for use elsewhere, and not artificially kept alive.
The fourth point is partly related to the above. State aid cannot last too long, it cannot become a factor hibernating the structure of companies, industries and the economy. There are many dynamic changes taking place in the world (I wrote about it in “Pandemic, robots and the new socio-economic system”) and those who are not able to adapt to them – in all industries, not only those particularly affected by the virus – they should give way to others, better reading trends, more dynamic.
The fifth important aspect relates to the issue of having a good understanding of what state aid actually goes for and what its potential consequences are. A clear example of how unexpected they can be is the USA – there some farms and companies decided to use the funds obtained from the state to … multiply their assets on the stock exchange. Encouraged by all sorts of “beaters” – probably largely the same mortgage loans that were massively sold as a decade ago – have “hooked” under the technology bubble. Once it breaks, its social and economic impact will be much broader and deeper than normal.
Finally, the sixth issue concerns various types of public investments, including infrastructure investments. The high availability of funds for this type of project – for example EU projects – can easily become an inhibitor of the necessary systemic changes. Changes necessary from the point of view of the dissemination of the modern economic model – the knowledge economy. We cannot forget that apart from the current events (virus) there are also long-term trends and the related evolution of economic processes and models. Knowledge-based economy requires completely different institutional solutions in virtually every area: education, labor market, labor-capital relations, capital allocation, etc.
In summary, the economic policy of “getting out of the crisis” is full of potential pitfalls that it is easy to fall into. The combination of pre-Covid institutional solutions and hastily spent public money can create something like a sarcophagus effectively hibernating traditional structure and traditional solutions when there is a need for quick changes modernization and adaptation, transformation to a knowledge-based economy.
Although the temptation to get out of the crisis mainly by using easily available and cheap money is high, you have to be very careful not to wake up with a hangover in this case in a few years. As a result of hastily thought-out, largely public-sector investment, average asset productivity will decline, negatively affecting medium-term growth and international competitiveness. Over time, therefore, some of the infrastructure created will not be able to earn a living. At the same time, ineffective zombie companies will spread in the economy instead of modern companies – they are kept by cheap (more and more commonly state-owned) capital, e.g. in order to protect traditional workplaces at all costs.
Let’s make sure that this is not our script. So that in a few years we will not have to painfully realize that we have lost the ability to compete in the world that will emerge after the pandemic. In order for this not to happen, we need the right approach: we should start with a clear vision of the knowledge-based economy specific requirements in our country. Then, institutional solutions have to be adjusted to this vision. When the first two conditions are met, then the priorities of what and how much to spend will also become obvious.
Published: Parkiet, 01.09.2020