Covid-19: Rikshaw-pullers rest at a market in Lucknow, amid the nationwide lockdown to contain the spread of coronavirus. (Express Photo by Vishal Srivastav)
Sir Norman Angell in his 1909 pamphlet, Europe’s Optical Illusion, argued that integration of the economies of Europe had grown to such a degree that war between them would be entirely futile. His argument was that wealth in the economically advanced world is founded upon credit and commercial contract, which if tampered, would lead to the undermining of credit-dependent wealth and its collapse involves that of the conqueror.
The present wave of globalisation had infused a similar sense of optimism that nothing could tamper its momentum. This ‘great illusion’ has been busted by the spread of the novel coronavirus and the debate now is whether the pandemic itself is a creation of globalisation. While immediate short-run measures are the need of the hour, it is also a time to contemplate of some long term policy responses to mitigate the lingering after effects of the shock.
What the present crisis point to is the need for universal basic income (UBI). The idea behind universal basic income is simple, provision of a minimum living wage to everyone whether they are employed or otherwise. In its traditional version UBI is framed around three different goals: (1) countering possible job losses; (2) strengthening social contracts and trust in government; and (3) acting as a deliberate poverty-reduction instrument.
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In the present context, there are two challenges to envision an approach to UBI. First is the issue of design, as the model and its design has to reflect its objective, which at the moment is poverty reduction. The possibilities of a large section of the population being pushed into poverty-traps looms large at this juncture. If the government considers reviving its trust among citizens as the priority, then a scheme designed for this will not be able to make dent into poverty as small token payments are not adequate, which might just suffice to cultivate trust in the government. Second, is the issue of communicating to the public. This is important, as the citizens would have to be aware of the design of the UBI, which in turn influences the perception and societal support. The success rests on how the trade-offs and expectations are managed.
COVID-19 is presenting policymakers an opportunity to consider a new approach to UBI—a two tier approach. As a first step, a one-off cash transfer to stimulate demand, which could be implemented as monetary levers of central bank, or as part of fiscal package. In the second phase we could have an unconditional cash grant given to every citizen, regardless of their employment status or wealth. This idea is controversial and has received criticism from many quarters in the past. The two-tier strategy has many potential advantages. The one-off cash transfer does not have inflation risks. The second step minimizes strains on delivery systems and could provide synchronisation with other safety nets.
The importance of adequate provisioning of public goods is an issue that has surfaced with this crisis. An over-reliance on market mechanism has resulted in the creation and supply of private goods, undermining the importance of public goods. The two defining features of public goods, non-exclusion and non-rivalry, has been eroded in many cases re-drawing the boundaries, culminating in the conversion of many erstwhile public goods into private goods.
Provision of health care presents a curious case in the present context. While multiple providers scramble for market share in tertiary care, primary health, which is the core of preventive health still largely remains under state provision, with features of a public good. Epidemics such as Covid-19 blur the roles of state and market in provisioning. It also exposes the limits of markets as supply expansion is not elastic to increased demand, a condition under which the only way out is government provisioning. Covid-19 reminds us of the lost spaces in public goods, which governments over the years exited and invited private providers to occupy by creating non-existent markets.
In 1997, Dani Rodrik in a persuasive book raised an important question ‘Has Globalization Gone Too Far?’ In those heydays of the globalisation consensus, few economists openly questioned its merits and Rodrik’s book was an unusual alarm.
Developing economies since late 1980s and early 1990s embraced policies lowering barriers to international trade by slashing tariffs and easing regulations. In a race to make economies more conducive destinations to run competitive businesses, labour had to be made cheaper, implying that trade unions, which bargained for higher wages and made it harder to fire workers, had to be crushed. In Rodrik’s dissenting view, the social cost of such policies were high and are grossly underestimated by economists. While the dissenters produced plethora of evidences on the fall out of high levels of trade integration, the mainstream policy advocates invoked the principle of comparative advantage to argue that countries will trade with each other in order to gain what each lacks culminating in the benefit of both.
It is time again to bring back the discussions on the social costs of trade policies as trade integration has reached new dimensions recently. Developing economies are eager to get into global value chains, albeit at a lower position and are constantly searching for spill-over effects of foreign investments. At this juncture value chains have ruptured and are fractured and spill-overs are liabilities, necessitating a fresh look at the way in which developing economies encounter globalization.
Crises tend to shed light on the gaps in the economic and social systems. A huge crack in social protection has surfaced with the pandemic and the subsequent shut down. New institutional arrangements have to be developed to fight the after effects and cross-country learnings could be exploited. Robust strategies to develop and strengthen inter-sectoral linkages within the economy could act as shock absorbers as neither increasing nor reducing the pace of globalisation is unlikely to produce the same kind of growth effects it once did.
– M Suresh Babu teaches economics at IIT Madras. The views are personal.