The “Wartime” Economics of COVID -19 and the Scopes of Structural Reforms

“Structural reforms are easier to implement at the time of great peril. One of the key reasons behind this is that reform is basically a political decision and in peacetime, it’s really challenging to rally the whole nation to take groundbreaking reformative measures the result of which is yet unknown.”

Part 1: COVID -19 and the Wartime Economics

COVID -19 has shaken the world and everything in it. Leaders and economists around the world have already declared the pandemic as the worst crisis after world war II and frequently referring the ongoing crisis management measures as a battle against this disease; thus comparing the current economic condition to wartime economics. Wartime economics, as we know it, is the complete mobilization of resources for utilizing as the fuels of war. The optimum outputs of this type of economics are the fine-tuned engines of war (i.e. superior military hardware and other great technological advancements), the improved system of managing collateral damage of war (i.e. advancement in medical sciences) and the structural reforms in the economy that follows the war (if the country can avoid total destruction).

In general cases, wartime economics changes the economic scenario of a country afterward. The most astounding case is the USA being the world leader after World War II. War boosted the US economy and helped it to get out of the great depression. The tremendous investment in innovation and technological advancements during wartime made USA the undisputed global flag bearer of the technological revolution that came in later days. This fact, along with the military spending boosted reinforced economy helped the US to establish itself as the global superpower after WWII. Notably, the Soviet Union, despite following a completely different economic model of communism and hiding behind the iron curtain, also managed to get benefitted by the economics of war. It’s the wartime technological advancements and rise of communist hardliners that sustained the Soviet Union during the days of the cold war as the most eligible competitor of its ideological nemesis, the capitalist USA.

Part 2: Wartime Economics and Structural Reforms

Notably, the war-torn countries could reap the dividends of wartime economics because they’ve gone through significant structural reforms during wartime. In a general sense, structural reforms are wide-scale/macro-level reformative measures that update the economic, institutional and regulatory framework of a country while making the economy sustainable and much more efficient with balanced growth. Examples of wartime structural reforms include remarkable wartime spending and fiscal stimulus that kept the economy running. At the same time, hefty investments on research and innovation ensured the competitive edge over the war-rivals. Ingenious ideas about war financing (i.e. UK National War Bond and US Liberty Bond that financed WWI) and the initiation and institutionalization of different components of a welfare state (i.e. the inception of National Health Service in the UK after WWII) also changed the economic landscape of the respective countries in post-war days. The wartime taxation system that imposed an extravagant tax on ultra-rich (i.e. US maximum individual tax rate reached a staggering 94% during WWII) is yet another example of structural reform that eventually curbed the tremendous wealth gap in the social system during that time.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

It’s evident from the above examples of war-time reforms that structural reforms are easier to implement at the time of great peril. One of the key reasons behind this is that reform is basically a political decision and in peacetime, it’s really challenging to rally the whole nation to take groundbreaking reformative measures the result of which is yet unknown. Another issue is, during a national crisis, citizens tend to get united on a common cause and for that, they tend to sacrifice things that they won’t do in normal times. Finally, there’s this old saying “necessity is the mother of invention” and what could be more essential than structural reforms that help the country to sustain in the grave days of war? So, reforms take place during and after the war and with careful and ingenious policymaking, these reforms help to flourish in post-war days.

Part 3: COVID-19 and the Scopes of Structural Reforms

Let’s fast forward to the present COVID-19 scenario. In some cases, this crisis is even worse than those war-laden days. Firstly, the whole world is being affected – so, there’s no safe haven. Secondly, war devastates humanity as a whole but this pandemic is threatening the human being itself. There’s nothing more fearful than being afraid of our very existence, especially when there’s nowhere to hide and we can’t see the enemy either. But most importantly, unlike wartime economics, when it was all about the complete mobilization of resources, the present scenario is forcing the society to be isolated and segmented.

We’ve discussed earlier why structural reforms make better sense during great peril and COVID-19 has definitely proved itself to be another global-scale disaster. So, it’s high time to think about the structural reforms which would not only help the economy to revive in the short-run but also ensure a greater level of sustainability in the long run with the utilization of optimum growth capacity. Let’s find out the reformative measure that policymakers can put in their list:

• Creation of a universal health service where each and every citizen would be taken care of – regardless of their financial and societal status. Some of the developed countries already have it (i.e. NHS of the UK), and the rest of the world should definitely adopt it. COVID-19 has shown us that one of the biggest responsibilities of a welfare state is to ensure optimum healthcare for the residents.
• Enhancement of the social safety net and the initiation of Universal Basic Income which essentially curb down acute poverty. The social safety net is a mandatory component of a welfare state but Universal Basic Income is a slightly disputed idea as the ultimate success of this system is yet to be proved. However, the simpler form of universal basic income has already been practiced by lots of countries to mitigate the financial burn of COVID – 19 (i.e. US is paying coronavirus stimulus check to a vast majority of the citizens). COVID-19 shows that the existing social safety net is not capable enough to protect the most vulnerable citizens and there might be a long-run solution in the institutionalized, formal launch of Universal Basic Income.

 

• Focusing on the informal segment(s) of the economy should get a supreme priority. COVID-19 has pointed out that the people depending on informal economic activities (i.e. mechanics, hawkers, day laborers) suffer the most. They don’t have savings, nor they have access to the existing social safety net programs. There should be drastic policies and reforms to address this problem. For instance, there could be a nation-wide labor pool with a detailed database that could be utilized on different types of public projects (infrastructure/service). Structural reforms in this segment would directly benefit the stakeholders of the informal economy while continuing to stimulate economic endeavors.
• Reforms in Agriculture sector is of utmost importance. Just like in wartime, COVID-19 shows the world that the very existence of human being relies on food safety. And according to the noble winning work of renowned economist Amartya Sen, food safety depends on not on ample production but on the efficient and effective distribution system. The world grows more than enough food than it requires but due to the inefficient distribution system and severe wastage, food is yet to reach the tables of a huge number of hungry people all over the world. The nations fighting with COVID-19 with food relief could take drastic steps like a nationwide, perpetual food vault along with an efficient distribution system by using fintech could easily implement a more institutionalized reformative measure which would benefit both the farmers and the poor in dire need.
• There should be innovative yet easier/less burdensome taxation measures to ensure that the government has enough to run efficiently while the taxpayers are getting what they deserve. One reformative step can be the segmented fiscal implementation where an administrative division (i.e. a province) will be able to utilize its tax revenue within its own jurisdiction. Many countries follow this system along with a centralized/federal taxation system. The boon of this system is, the taxpayers can directly observe/enjoy the facilities their hard-earned tax money is providing them. This essentially encourages them to provide tax. This type of taxation system has also enabled the local administration to react much more quickly to take necessary steps during emergencies like COVID-19 (i.e. building new ICU units, providing emergency relief etc.).
• Finally, all of the above discussed reformative measures would never be materialized if there is no efficient administrative system to implement the desired policies. So, the administration needs to be talented, free of red tape and must work like a fine-tuned machine. And this is the first and foremost structural reform a country should take. COVID-19 shows the capacity of the existing administration and its weaknesses. It’s high time to pinpoint the flaws and immediately take swift reformative measures to solve those issues.

All of the above mentioned structural reforms need a much wider level of analysis and detailed planning before going to actual implementation. As that’s not the scope of this article, we better hope that the policymakers would pay a bit attention there and would utilize this pandemic fueled scope of reform for the betterment of the country.