AS ECONOMIES move along the trajectory of the Covid-19 pandemic, the objective shifts from preventing an absolute economic collapse to also preserving capabilities and allowing for growth, said Monetary Authority of Singapore chairman and Senior Minister Tharman Shanmugaratnam on Thursday morning.
And while central banks have to do what it takes in a crisis, a prolonged ultra-low interest rate environment may not be ideal, he added. More international leadership and cooperation will be needed on this front and others, not least in preventing the emerging world from "submerging", he said.
Mr Tharman, who is also Coordinating Minister for Social Policies, was speaking in the keynote conversation of the DBS Asian Insights Conference 2020: Navigating A Post-Pandemic World, on the topic of the economics of a pandemic.
Across the world, the objective in the first phase of dealing with the pandemic has been to prevent an absolute collapse of jobs or firms, or indeed the unravelling of society, he said. But as economies move along, two other objectives emerge: to preserve capabilities where possible, including skills, assets, critical industries, and social capital; and to "enable a re-allocation of jobs and other resources towards growing sectors".
In preserving capabilities, an important aspect is helping people stay in jobs or get back into work quickly, said Mr Tharman, who chairs the new National Jobs Council. This includes providing attachments and traineeships, as Singapore is seeking to do.
Governments should help firms bring forward hiring rather than taking a wait-and-see approach, to reduce the amount of time that people spend out of work, he added. All this requires trust in the system, "where everyone knows that it pays for us all to do our part".
As for enabling growth, this is harder than it sounds, given the profound uncertainty surrounding the pandemic, he said. Governments will find it hard to tell which firms or sectors may remain viable in the future.
Transitioning out of the first phase of massive government support will come with its own problems, said fellow keynote speaker and University of Chicago professor Raghuram Rajan, who noted that the second or third quarter of 2021 will probably be the earliest that economies may return to full operation.
"When the economy opens up more fully, there will be more damage that will be uncovered," said Prof Rajan, former International Monetary Fund chief economist and former governor of the Reserve Bank of India. Many firms will simply not reopen, contracts may fall through, and debts will have to be reckoned with.
As the corporate impact unwinds, the "last shoe, which hopefully will not drop", is the effect on the financial sector. Governments must keep in mind the burden that financial companies will end up bearing, and work to avert a financial sector crisis as well, he said.
With part of the crisis response having been aggressive moves by central banks, the ultra-low interest rate environment looks set to endure. But this may have unintended consequences, said the speakers.
Mr Tharman noted two issues. First, even before the Covid-19 crisis, the world had seen an extended period of low interest rates and substantial liquidity, contributing to much higher levels of corporate leverage. "We entered this crisis with a lot of risk in the system already," he said. Yet, economic analyses suggest that this has not had a significant payoff in terms of corporate investment.
Second, if the world remains in a very long period of low or negative interest rates, this will hurt pension funds, insurance funds, and any long-term money management. Returns will come down, people will be less prepared for retirement, and may thus save more and consume less, dampening growth as a result. "So we need to be a little sceptical about this strategy as a means of promoting growth," he said.
Prof Rajan pointed out the risk that below a certain level of interest rates, there may instead be a reverse effect as banks themselves find it harder to lend.
And while so-called modern monetary theory posits that a low-rate environment wthout inflation would allow the public sector to run much larger deficits, a free lunch is not possible, he added. "It's really the consolidated balance sheet of government and the central bank that you're looking at. And it's not free."
Agreeing, Mr Tharman noted that a high level of government debt is not just a stock, but needs constant rollover. Any reason for nervousness by investors, when bonds are re-issued, will cause rates to spike. Furthermore, if governments have to spend more on servicing debts, this means less money for the "fundamental purposes" of fiscal spending, such as funding education, health, and so on.
Modern monetary theory may be tested in a "natural experiment" as some central banks in emerging markets today expand their balance sheets. But if this fails, the consequences will be global.
Most of the world's growth today comes from the emerging world, and the future of the world economy depends on whether it will "continue to emerge", noted Mr Tharman. Yet, there is a very real risk of a "submerging world" instead, if low growth and rising unemployment erase the gains made in the last two to three decades.
There needs to be a strong multilateral response, he added, noting that during the global financial crisis, the world collectively agreed on an issuing of special drawing rights to provide liquidity. This time around, such a proposal has not been fully supported. Governments must realise that their own interests depend on the interests of the rest of the world, he said. "That basic thinking has to gain ascendance in all forms of international cooperation."
This includes trade and investment. Even as the world retracts somewhat from the hyper-specialised global supply chains that it had relied upon prior to Covid-19, it would be a grave error to retract altogether, said Mr Tharman. Diversification of supply chains must be the answer, rather than trying to bring everything onshore, and emerging countries must be encouraged to stay plugged in to the rest of the world.