Restarting India’s economy efficiently after Coronavirus outbreak

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April 14, 2020 6:30 AM

Universal testing, accompanied by targeted quarantining, is the best way to allow as many people as possible to quickly and safely resume normal activities

In earlier columns, I have argued that the Indian economic policy response to the effects of the lockdown has been inadequate.In earlier columns, I have argued that the Indian economic policy response to the effects of the lockdown has been inadequate.

The novel coronavirus has several key characteristics: it is new to humans (so there is no built-up immunity), it has a long asymptomatic period, it is highly contagious, and there is, as yet, no vaccine or treatment for it. These features have led to a rapid spread, and relatively high death rates. Lack of political courage, as well as uncertainty led to slow policy responses. Because of the prospect of many more cases of the disease than even the best health systems could handle, the ultimate response in country after country has been some version of a lockdown, suspending many types of activities, and halting large swathes of the economy.

There is an obvious, and much-debated trade-off between the severity and length of a lockdown and the lives saved or lost. What has got sidelined in these debates is the importance of another question. Given that we prioritise saving lives, and that economies are already shut down and suffering, what is the most efficient way to re-start the economy? The answer to this question also has implications for the strain on healthcare systems, so there is a dual benefit to thinking through the answer.

From my perspective, Paul Romer has provided the best answer to the question of how to resume economic activity while minimising illness, and deaths. Romer won an economics Nobel prize for work on innovation and economic growth, and is exceptional in his clarity and creativity. He argues that the best use of resources is in a rapid ramp-up of testing for the Coivd-19 virus, which can also be bundled with antibody testing. While many have recommended ramped-up testing, Romer recommends a different scale altogether. Some public health experts are recommending testing 1% of the population. The US is getting there, after many weeks, with a botched beginning to testing and continued missteps, including resistance from the president to making testing a national priority. Many countries are in the US range of cumulative testing, with Iceland being an outlier at 10%. India’s cumulative testing is abysmal—less than 0.02% of the population, even after three weeks of lockdown.

Romer’s proposal is to test 7% of the US population every day, so that the whole population would be covered in just two weeks. He also advocates continual testing, because tests can have false negatives, or can miss the virus in its early stages. He estimates the cost of this program to be in the order of $100 billion, which seems an enormous sum, but is less than a tenth of the loss of trillions of dollars of output due to generalised lockdowns. The logic is clear: Universal testing (accompanied, of course, by targeted quarantining) is the best way to remove uncertainty and permit as many people to return to work and normal activities as quickly and safely as possible. Put another way, the economic rate of return to Romer’s strategy is over 1,000%. And, this is without any costs in terms of lives lost, or greater illness.

What are the barriers to this strategy? Ramping up testing to a universal, continual process will take time, but the alternative is worse. The problem seems to be with some politicians, some health experts, and businesses that focus on profits. How to deal with the third barrier is illustrated by a historical example given to me by my colleague, economic historian Bernard Elbaum. According to him, in World War II, “the US government suspended patent rights and got companies to share proprietary information. The UK also shared key technology secrets with the US, which helped speed development of radar and penicillin.” The current US response has been the opposite of global sharing of research and technology for testing, and yet another example of the Trump administration’s incompetence. But, there are lessons here for India as well.

The second barrier is conventional wisdom: The health experts close to the US administration are giving better advice than the president, but they have failed to stand up for aggressive testing, focusing too much on uncertainties, and complications. Indeed, Romer suggests that his universal testing approach would make contact tracing—which is part of public health conventional wisdom, but can be costly, difficult, and invasive of privacy—almost unnecessary.

The political barrier is the most difficult to overcome. Politicians are not held to account, except in periodic elections. Even there, the counterfactual for their policies is difficult for the average voter to judge. This applies especially to economic costs. Luckily, in the US, one of the top public health officials close to the president is finally admitting that the Trump administration botched its response, leading to more deaths than needed. Paul Romer, as an economist, is saying that the US testing policy is leading to much more economic damage than needed.

There are quibbles about Romer’s recommendations. But, their beauty is that they provide simplicity, focus, and clarity for a policy response that can drastically reduce the economic damage of the pandemic (with its own severe negative impacts on health and welfare, especially of the poor), without any additional costs in terms of illness and death. In earlier columns, I have argued that the Indian economic policy response to the effects of the lockdown has been inadequate. If we apply Romer’s logic to India, then going for rapid universal testing, at least until a vaccine is developed and produced (which will take more time), is a vital piece of economic policy.

Thw author is Professor of Economics, University of California, Santa Cruz. Views are personal

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