The potential economic effects of a global pandemic on the Guyanese economy

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Bobby Gossai, Jr.
Bobby Gossai, Jr.
Bobby Gossai, Jr. is currently pursuing the Degree of Doctor of Philosophy in Economics at the University of Aberdeen with a research focus on Fiscal Policies and Regulations for an Emerging Petroleum Producing Country. He completed his MSc (Econ) in Petroleum, Energy Economics and Finance from the same institution, and also holds an MSC in Economics from the University of the West Indies. Mr. Gossai, Jr.’s professional experiences include being the head of the Guyana Oil and Gas Association and senior policy analyst and advisor at the Ministry of Natural Resources and Environment.

The global economic activity will be more strongly affected by a pandemic with high infection rates rather than high virulence rates, all else being equal. At the regional level, regions with a higher degree of economic integration with the world economy will be affected more strongly than less integrated regions. Infectious diseases are a leading cause of death worldwide, accounting for a quarter to a third of all mortality. In most industrialised countries, infectious disease ranks after cancer and heart disease as a leading cause of mortality. Despite developments in pharmaceuticals, infectious disease rates are rising due to changes in human behaviour, larger and denser cities, increased trade and travel, inappropriate use of antibiotic drugs, and the emergence of new and resurgent pathogens.

Infectious disease outbreaks can easily cross borders to threaten economic and regional stability, as has been demonstrated historically by other epidemics. Emerging diseases, by definition, are not commonly encountered by physicians, and are therefore capable of generating widespread infection and mortality prior to identification of the etiologic agent (Verikios et al. 2011). Furthermore, the drug development and approval timeline is offset from the emergence of disease and sufficiently long enough for the initial infection to result in significant mortality. The constant adaptation of microbes, along with their ability to evolve and become resistant to antibacterial and antiviral agents, ensures that infectious diseases will continue to be an ever-present and ever-changing threat.

The Effect on Human Behaviour

Direct economic effects of illness resulting from influenza include increased healthcare expenditures by patients and funders (e.g., governments, insurers), and increased workloads for healthcare workers. Indirect effects include a smaller labour supply due to deaths, and increased absenteeism from work by sick workers and by workers wishing to reduce the risk of contracting illness in the workplace, i.e., prophylactic absenteeism.

Prophylactic absenteeism is one example of voluntary risk-modifying behaviour in response to a pandemic. Other examples are reduced domestic and international travel and reduced public gatherings at sporting and other events. Non-voluntary risk-modifying behaviour may be imposed on workers with children by school closures intended to mitigate the spread of the virus (Beutels et al. 2008). Thus, some workers will be forced to take leave to care for young children. Workers who take paid leave from work, whether forced or voluntary, reduce their firm’s labour productivity i.e., output per worker, unless other workers can fully replace output lost due to absenteeism. This may be difficult during an influenza pandemic because the virus will be widespread and while many workers may not present to the health system, they are likely to be less productive than would otherwise be the case.

It is unclear what attitudes firms have towards absenteeism during pandemics, including whether they prepare for such events or whether it affects their hiring behaviour. A related question is whether firms utilise workers differently during pandemics, e.g., do they expect present workers to work harder or longer to compensate for output lost due to absent workers? And do pandemics directly impact investment behaviour by firms? These issues must be given much attention by firms and governments.

Fan (2003) argues that a pandemic will reduce business investment due to increased uncertainty and risk, leading to excess capacity. Similarly, consumer confidence will decline due to uncertainty and fear, leading to reduced spending as people elect to be homebound to reduce the probability of infection – this is another example of risk-modifying behaviour. Reduced consumer confidence may particularly affect services involving face-to-face contact (e.g., tourism, transportation and retail spending). James and Sargent (2006) argue that evidence from past pandemics suggests that it is mainly discretionary spending (e.g., tourism and transportation) that is reduced. Fan (2003) also argues that an epidemic does not need to be of high morbidity and mortality in order to exert a large psychological impact on attitudes to risk.

The Economic Shocks

Previous analyses of pandemics and their potential economic effects highlight a number of channels through which an economy might be affected by a serious outbreak of influenza (Dixon et al. 2010). These channels include:

  1. Reduced consumption by households on tourism, transportation and retail spending;
  2. Increased absence from the workplace due to illness or for prophylaxis;
  3. School closures; and
  4. Higher demands for medical services.

Considering these channels, there are four types of economic shocks to simulate a pandemic:

  1. a surge in demand for hospital and other medical services;
  2. a temporary upsurge in sick leave and school closures requiring withdrawal of parents from the labour force;
  3. some deaths with a related permanent reduction in the labour force; and
  4. temporary reductions in inbound and outbound international tourism and business travel.

Increased demand for medical services

Each pandemic event generates an increase in demand for medical services relative to baseline (or business-as-usual).

Lost workdays

Each pandemic event causes lost workdays via two routes: workers falling ill and parents caring for children. In calculating lost workdays from workers falling ill, assume that:

  • each subclinical case of working-age misses 0.5 workdays;
  • each flu clinic and physician case of working-age misses 2.4 workdays;
  • each hospital and ICU case of working-age misses 13.9 workdays.

The second effect relates to parents staying home to take care of children, either because (i) the children are sick and are not allowed to attend school, or (ii) schools have been closed by authorities for prophylactic purposes. It can be assumed that the calculated lost parent workdays are a proportion (75%) of workdays lost due to workers falling ill.

Permanent reductions in the labour force

Deaths of working-age are assumed to reduce the workforce permanently as a proportion of the existing workforce in each region.

Fiscal Policies to Protect People during an Outbreak

A key role of government is to protect the well-being of its people – most crucially and visibly during emergencies such as the recent outbreak of the coronavirus (COVID-19).

Saving Lives

The priority for governments and the global community is to prevent people from contracting the disease and to cure those who do. More health spending can save lives both at home and globally. Given the virus’ rapid contagion, action can help ensure that countries’ health systems – including those that have limited capacity, such as Guyana – do not become overwhelmed.

The health spending must occur regardless of how much room in the budget a country may have. Low-income countries urgently need grants or zero-interest loans to finance the health spending they might not otherwise be able to afford. Experience with past epidemics, such as Ebola, shows that speed in deploying concessional finance is essential to containing the spread of the disease (Gaspar Mauro 2020).

Protect People and Firms

Governments should protect people from the economic impact of this global health crisis. Those who are hit the hardest should not go bankrupt and lose their livelihood through no fault of their own. A family-operated restaurant in a tourism-reliant country or the employees of a factory shut down because of a local quarantine will need support to weather the crisis.

Depending on their administrative capacity, governments can help people and firms right now in several ways:

  1. Spend money to prevent, detect, control, treat, and contain the virus, and to provide basic services to people that have to be quarantined and to the businesses affected. For example, national governments can allocate money for local governments to spend in these areas or mobilize clinics and medical personnel to affected places, as China and Korea have done.
  2. Provide timely, targeted, and temporary cash flow relief to the people and firms that are most affected, until the emergency abates.
  • Give wage subsidies to people and firms to help curb contagion. For example, some countries are providing subsidies to firms and individuals for leave taken to stay home to care for children during school closings. Offer sick leave to people directly affected by the virus who have to self-quarantine.
  • Expand and extend transfers – both cash and in-kind, especially for vulnerable groups.
  • Provide tax relief for people and businesses who can’t afford to pay.
  1. Create a business continuity plan. Whether you are a ministry of finance or a tax or customs administration, you need to provide services to citizens, taxpayers, and importers in case of widespread contagion, relying as much as possible on electronic means.

Some of these measures can occur through administrative means and others would require an emergency budget, which would also take stock of the overall fiscal cost. It is also important to communicate to the public how emergency action and changes to original budgets are compatible with stability and sustainability.

Guyana must strengthen its administrative emergency response capacities in public financial management and revenue administration. Right now, the most effective fiscal support measures to the economy will help to prevent or limit the spread of the disease and protect the people and firms most affected. A country’s so-called automatic stabilisers – the fall in taxes and rise in unemployment and other benefits for those whose incomes and profits decline – must also kick in.

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