False dilemma – public health or economic crisis
Autumn-like weather, unfortunately, is not the only change October has brought to Latvia. The past few weeks have also witnessed a surge in the number of people affected by COVID-19. From a few daily cases, it has reached new record highs, even several times exceeding the peak observed in the spring. In this regard, we are not at all unique since almost each Member State of the European Union is facing a similar situation.
However, in most cases the rapid spread of the virus has not prompted governments to revert back to the stringent precautionary measures seen in the spring. The current restrictions are milder and more targeted, largely owing to a better understanding of the virus and its spread, lower mortality rates, as well as the reluctance to heavily limit economic activity.
It is, however, of little consolation to the businesses and households affected by these restrictions. Therefore, it is understandable that the public opinion is divided over the necessity of restrictions and the discussion on whether the economic consequences are an appropriate price to pay for containing the spread of the virus. Moreover, with the number of cases growing further, these issues will become increasingly relevant.
However, in a way it is a false dilemma – the containment of the spread of the virus is not at all the worst scenario for the economy. On the contrary, successful containment of the pandemic is also critical from the economic viewpoint.
We would hardly avoid the contraction in economic activity if no restrictions implied an uncontrolled outbreak of the virus and a substantial rise in the number of deaths. In such circumstances, people would probably not continue their usual activities, i.e. they would stop attending restaurants and cultural events or sending their children to sports activities. As a result, the demand for goods and services produced and provided by businesses would decrease anyway, but the price, as measured by the number of human lives, would be significantly higher.
Moreover, these are just short-term problems. The national economy suffers from the scars caused by the economic crisis also in the long run – businesses become more cautious in their investment decisions, liquidity problems trigger solvency problems and bankruptcies of businesses and the unemployed have less opportunities to find a job (the same is true of the opportunities of graduates to start their careers), etc.
It should be also taken into account that an uncontrolled spread of the virus exerts pressure on the government to introduce general lockdown-type restrictions. We do not have to look far for examples – several Member States of the European Union have already imposed curfews, and the economic activities of a large number of services sectors have been suspended. Such broad-based restrictions undeniably hamper the economic activity to a greater extent than local restrictions on some activities. This is also illustrated by the experience gained in the spring when the steepest declines in economic activity were recorded in countries with high numbers of cases and subsequent broad-based restrictions. In view of the above, targeted restrictions helping to prevent the spread of the virus are desirable also from the economic viewpoint.
At the same time, we should not delude ourselves into thinking that restrictions do not have any economic consequences. This also concerns the current situation in Latvia as the limiting of certain sports activities, cultural events and private gatherings directly reduces the income of sports coaches and judges, event leaders, organisers and artists. Moreover, the economic consequences do not stop here since lower income also reduces the consumption of these people and, consequently, the demand for goods and services produced and provided by other businesses.
This, however, does not imply that the validity and effectiveness of certain epidemiological restrictions should be questioned – this should be left to the experts. This means that any restrictions should be accompanied by support to distressed businesses and households.
Moreover, we do not have to look far for notable examples illustrating the role of the economic support instruments – we just need to compare the amount of support provided by the governments of the Baltic States to support economic activity. Although the range of the instruments used in Latvia was similar to that introduced in Lithuania and Estonia, the amount of support and the economic impact were comparatively small against the background of the other Baltic countries. Moreover, the largest gap was found for the instruments intended to preserve household income – furlough benefits and other social payments (the amount of financing for other instruments, for example, the ones aimed at supporting businesses, compares to or even exceeds the amount of financing provided by our neighbours). This was also reflected in a steeper drop in private consumption, which is one of the reasons why Lithuania's and Estonia's GDP have decreased less than that of Latvia over the first half of the year.
Therefore, it is of crucial importance that a focused government support is available to make the restrictions less painful from the economic viewpoint. Moreover, the resistance to restrictions would be probably lower if businesses and households had assurance that a safety net in the form of the government support was available to them.
And, most importantly, we should not forget to comply with precautionary measures, to maintain social distancing, to wash our hands and to follow other recommendations by epidemiologists.