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Saving our livelihoods from COVID-19: Toward an economic recovery

McKinsey 19 Apr 2020 12:00

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We are now living through the most uncertain moment of our times. Many countries have been in lockdown since early March 2020. Even Japan, once a beacon of hope for controlling COVID-19, is now moving toward total isolation. Many political leaders realize that physical distancing might be the norm for at least several months. They wonder how—or if—they can maintain indefinite lockdowns without compromising the livelihoods of their people.

Political leaders aren’t alone in their fears. As the pandemic continues its exponential course, workers in most countries wonder what will become of their jobs when the lockdowns end. Businesses struggling to pay their employees and cover operational costs wonder if they will have clients or customers when they reopen. Banks and investors realize that many companies, especially small and midsize ones, will default and are trying to protect both financial stability and public savings. Meanwhile, governments are working to calculate the magnitude of the shock and sharpening their tools to save economies from collapse. They know that history will judge them by the decisions they make now.

Countries can avoid the worst scenarios if they work quickly along three principal lines of action: first, minimizing the impact of physical distancing on the economy; second, spending deeply to keep it afloat; and third, spending even more to accelerate the crisis recovery and to close historical gaps.

Individual countries that implement localized physical distancing might be able to keep track of how many people are in the streets at any given time and how much economic activity those people generate. But approaches to physical distancing will probably vary a good deal from country to country, depending on how they balance public-health issues with privacy concerns. Countries could plan prolonged lockdowns for the elderly and children and estimate their levels of consumption. They could quantify the number of employees in essential sectors that continue to operate (health, security, food and beverages, agriculture, utilities, and transportation). They could determine which regions or states should remain under complete lockdown and which sectors are operating under strict health protocols in other places. And they could track how many people are working from home in each sector and their contributions to the economy.

This granular level of information might help countries quantify the weekly impact of physical distancing on GDP, productivity, aggregated demand, income loss, unemployment, poverty, and fiscal-deficit levels by region and by economic sector (Exhibit 3). If countries knew all that information, they would know the cost of the lockdowns on the livelihoods of their people.

Spend deeply to keep the economy afloat

To recover from the pandemic’s health and economic consequences, we must uphold the social contract—the implicit relationship between individuals and institutions. The market economy and the social fabric that holds it together will be deeply compromised, or perhaps undermined, if massive numbers of jobs are lost, vendors can’t fulfill their contracts, tenants can’t make their rent, borrowers default at scale, and taxes go unpaid. Governments could therefore quantify the minimum level of income that households need to cover their basic necessities, the minimum level of liquidity that companies need to cover their costs (including payrolls) and to protect their long-term solvency, the minimum liquidity levels that banks need to support defaults, and the minimum amount of money that governments need to supply all those requirements. Let’s examine each of them.

Since revenues have plummeted, many companies require help to safeguard employment. Their needs vary widely among sectors of the economy; professional-service firms, for example, usually have twice as many working-capital days as restaurants do. What’s more, physical distancing will affect different kinds of companies in different ways. As a first move to help them, several countries have already frozen short-term fiscal, parafiscal, and social-security payments. Some are using innovative instruments to irrigate money—for instance, capitalizing national reinsurance agencies to cover most of the expected losses from the new loans required to bridge payroll payments and working capital.

The COVID-19 pandemic is a global tragedy. But that shouldn’t—and needn’t—prevent us from finding innovative ways to accelerate progress. It would not be the first disaster to do so. This may be the right time to introduce fiscal, labor, pension, social, environmental, and economic reforms to speed up progress toward sustainable development. Ameliorating poverty, diminishing inequality, and protecting the environment could figure prominently in global and national agendas. Governments, companies, and social organizations could act quickly to promote full financial inclusion, the transition to cashless economies, and the provision of better and more efficient social and public services. Political leaders might condition access to massive economic-stimulus programs on efforts to reduce informality, rethink healthcare systems, digitize entire sectors of the economy to accelerate productivity, and encourage digital innovation—especially high-quality public education with universal internet access.

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