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[ANALYSIS] COVID Keynesianism: Beyond bailouts and Build, Build, Build

Marjorie Muyrong, Jerik Cruz

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[ANALYSIS] COVID Keynesianism: Beyond bailouts and Build, Build, Build
'If there is one risk that we should avoid at all costs, it would be of banking all our planning and resources on the delivery of a vaccine, only to discover that the virus has mutated past that vaccine’s efficacy'


We bring bad – but necessary – news. Though billions worldwide are pinning their hopes on the development of a COVID-19 vaccine, some new scientific evidence points to the possibility that a vaccine may not be the “ultimate game changer” in humanity’s fight against the pandemic.

The novel coronavirus underlying COVID-19 has been mutating. In a pre-printed study last week, a group led by Li Lanjuan, one of China’s top epidemiologists, has identified at least 33 significant mutations of the virus, with some of them “substantially changing its pathogenicity” for the worse. 

In another pre-printed study, scientists in Australia and Taiwan have suggested that one strain of the virus in India already possessed a new mechanism for attaching itself to human cells. In its authors’ words, these mutations could render current vaccine efforts against the pandemic “at great risk of becoming futile.”

Finally, though COVID-19 mutations are occurring at only one-third to one-half the rate of the flu, real financing, scaling, institutional, storage, and logistical challenges could impede the rapid immunization of billions of persons for months, if not longer. This will extend the virus’s window to develop vaccine-neutering mutations. 

The COVID-19 pandemic continues to surprise us with unexpected risks – but if there is one risk that we should avoid at all costs, it would be of banking all our planning and resources on the delivery of a vaccine, only to discover that the virus has mutated past that vaccine’s efficacy.  

Bailouts, BBB, and strategic investments

Bogged down by the sound and fury of the past month, policymakers in the Philippine government have yet to wrap their minds around the implications of these risks and possibilities. Though the Duterte administration’s long-term economic recovery plan against COVID-19 is still under development, lawmakers at the House of Representatives have already proposed P1.65 trillion, P1 trillion, and P370 billion packages to keep the economy from free-falling. Among others, these packages have endorsed expanded safety nets for vulnerable workers and households; zero-interest or negative-interest loans, grants, and subsidies for business resilience; and bailouts for distressed industries.

We agree that we need to sustain business resilience in the face of the pandemic, especially to prevent our “lockdown recession” from being compounded with financial instability. And in the next few months, we will clearly have to find ways to responsibly ease lockdowns, while enhancing our capacity to test and treat COVID-19 patients, protect vulnerable populations, and help businesses transition into the “new normal.” But if a pandemic is stretched out for years to come, we face challenging questions. To begin with, how much ability does the government have to bail out the worst-hit industries more than once?

Difficult trade-offs also confront planned “recovery spending” in infrastructure. Both DOF and NEDA have underscored the role of the Build, Build, Build (BBB) program in the government’s “bounce-back” efforts. Certainly, this infrastructure drive could help stimulate the economy in the short-run. Yet if international air travel is restricted, and physical distancing measures are enforced in public transportation for the foreseeable future, will new airports and commuter railways really possess long-term economic viability? 

In short, while we believe that much of the aforementioned programs are critical, the Philippine government must also prepare for a scenario where the economy does not return to a semblance of normalcy, even if a vaccine is developed, and where COVID-19 and social distancing measures result in the partial “hibernation” of both supply and demand across numerous sectors

In this scenario of a radically-different “new normal,” the necessary task for government, along with the private sector and civil society, will be to spearhead a reallocation of productive resources in the economy toward essential sectors, as well as sectors needed in keeping the pandemic at bay in the long-term. Apart from direct coordination efforts, a vital tool of government to facilitate restructuring in this “COVID Keynesianism” strategy, will be its ability to strategically invest in sectors to bolster employment and domestic demand, while bolstering the country’s resilience against the medium- and long-term impacts of COVID-19, on top of other critical risks.

Priority sectors for investment: health, agriculture, infrastructure

Which sectors should government prioritize for such investment? Which sectors are especially promising for simulating activity in COVID-stricken economy? To identify these, we simulated the employment impacts of separately investing P1 billion on sectors of the economy deemed essential in the “new normal,” and which have already been engaged by government in pandemic-response efforts. While our estimates allow us to compare sectors’ job-supporting potential, we caution against a literal interpretation of our figures due to effects of the pandemic on the “ripple effects” (i.e. multipliers) of economic activity across sectors.

Figure 1. Projected Employment Impacts of Investments

Source: Authors’ calculations, using PSA 2012 Input-Output Tables, with employment/poverty satellites using 2015 FIES-LFS

With regards to employment supported, garments, construction, health services, and land transportation are among the sectors where investments could have strong catalytic effects on employment. This bodes well for maintaining some BBB projects – particularly for social, digital, and basic transport infrastructure – as well as beefing up public spending for the health and other critical COVID-response sectors. 

But it is spending on agricultural sectors that consistently reaps the greatest spillover impacts in terms jobs and livelihoods, especially among the poor. Not only is agriculture critical to sustaining domestic food supply in an upended international trade environment, we find that it could also be a leading sector for supporting employment, and absorbing workers who will be displaced by the pandemic for the long-term.

In 1923, John Maynard Keynes enjoined economists not to tell people “that when the storm is long past, the ocean will be flat again.” In the same vein, our discussions today should not discard the possibility that COVID-19 could be here to stay, and that our economy may have to be repurposed for this “new normal.” A long-term recovery strategy by government must be prepared to grapple with all scenarios – including that of the worst case. –

Jerik Cruz is an incoming PhD student at the Massachusetts Institute of Technology. Marjorie Muyrong is a PhD student at La Trobe University. Both are affiliated with the Department of Economics of the Ateneo de Manila University. This piece was based on a longer ADMU Econ-ACERD policy brief.

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