The politics of Coronavirus
David Skilling
28 February 2020
Coronavirus (Covid-19) is rapidly becoming a global issue, with infections spreading beyond Asia into countries around the world from the Middle East to Europe and the US. We are moving from epidemic to pandemic. This will reinforce the generalised negative impact on the global economy. In addition to the direct costs associated with the virus, there are substantial costs associated with the policy and social response to the spread: the restrictions on people movements within and between countries, the disruption of supply chains, as well as risk aversion exhibited by individuals and firms (cancelling conferences and public events, not going out to restaurants and movies).
While there is uncertainty about the extent of spread and the properties of Coronavirus, and there is no vaccine, this can be expected to continue. The currently low reported mortality rates (~3.5% in China, lower outside) mean that this is unlikely to be a catastrophic global event, but the policy and social response will generate an ongoing, substantial economic cost (a V-shaped recovery is unlikely, as I argued last week).
At this early stage of the global spread, some countries are more exposed to Coronavirus infections, such as those that are more proximate to China (Japan, South Korea). There is also an element of bad luck; for example, that Italy has the highest number of cases in Europe rather than Germany or France. And high reported infection rates in some countries can be a function of testing: the thorough testing in Singapore led to more reported infections than in countries with weaker testing.
But over time, it is likely that Coronavirus will spread to many parts of the world; some estimates are that Coronavirus will eventually infect a majority of the world’s population. And we should expect significant variation across countries in the extent and speed of spread, as well as the domestic costs that are imposed. This national variation will largely be a function of institutional strength and capability.
Institutional strength is partly about the quality of the public health system (including ease of access) as well as the effectiveness of government institutions more broadly to implement appropriate measures to respond to the spread. Social institutions (social capital, trust in institutions) is also important in reducing costly behaviours such as excessive risk aversion or tensions between different groups as Coronavirus spreads.
For example, China’s institutional strengths and weaknesses have been on display over the past several weeks. The censorship and weak information flows in the context of a highly centralised political system created the conditions for the virus to spread initially; but the ability to impose mass restrictions on people movement contributed to the virus being reasonably well contained so far to Hubei Province (at least according to the available data).
In Singapore, the government has been very effective at identifying infected and at-risk people, and has implemented a series of effective safety measures that have stabilised the number of cases. The government is also seen by the public to be doing a good job. Despite Singapore’s obvious exposure, it is likely to be one of the safest places in the world now (albeit at an ongoing economic cost). This experience contrasts with Hong Kong where there is less trust and confidence in the government’s response; and where the costs are likely to be higher. Note this week’s announcement that all Hong Kong’s schools will be closed until mid-April. A Bloomberg Opinion piece went so far as to say that Hong Kong was showing some properties of a ‘failed state’.
This institutional perspective provides insight into how different countries will be impacted as the virus spreads internationally. In assessing the risk profile of countries, the key factor is less the current infection rates (because these are likely to broaden anyway) as much as the extent of effective political governance, high quality public health systems, social cohesion, and institutional trust.
There is significant variation in these measures of institutional strength and capability: emerging markets like Iran tend to score worse than advanced economies, and there is significant variation across advanced economies (Italy tends to have weaker scores than the Nordics, for example). Small countries dominate the composite measure of institutional strength that I prepare on the basis of relevant international metrics, and so are better placed. And the task of managing Coronavirus is relatively easier in smaller countries than larger, more complex countries.
One country that I am concerned about is the US. The size of the US economy and the extent of cross-border people flows, which creates an exposure to Coronavirus infection, will interact with weak governance, low trust in political institutions, and a weak public health system outside the CDC (the US health insurance model means that many are unlikely to get tested if sick because of the private costs that they will incur). The US federal government is not geared up for it, with budget cuts to relevant agencies and a deeply polarised political system (exacerbated by election year). This is when a dysfunctional Trump Administration could cause real harm; President Trump’s speech on Wednesday did not provide much confidence.
There is also a risk of complacency in the US. The rankings the President referred to in which the US is the best prepared country in the world in response to a pandemic should not be taken at face value: the methodology and country rankings are not as plausible as those generated by referring to more general measures of government effectiveness, in which the US performs much less well.
A marked slowdown in the US economy would have a systemic impact on the global economy. And although the USD has been a safe haven currency through the early days of the Coronavirus, with the euro and EM currencies selling off, this could be weakened if Covid-19 arrives in the US at scale and political and social institutions struggle to respond.
Across the EU, there are also institutional risks. Although ‘taking back control’ through Brexit will not keep Coronavirus out of the UK, it is likely that Coronavirus will weaken European integration – at least for a time. The refugee crisis in Europe from 2015 put great strain on the political systems of many European countries (with a rise in populist sentiment, opposed to open borders) as well as on the EU and key institutions (such as Schengen). As Coronavirus infection rates become more widespread across Europe, similar social and political stresses could be generated within and between countries.
Overall, institutions matter deeply for the exposure of countries to the economic and social costs of Coronavirus. Countries with stronger political and social institutions will likely manage the situation better. That is why I remain confident in the underlying strength and resilience of small advanced economies. Of course, small economies cannot avoid the global costs of Coronavirus; but it is better to be a small economy with strong institutions, than to be a larger economy with weaker institutions.
A selection of supporting charts are available on twitter here.
To subscribe/unsubscribe to these notes, email contact@landfallstrategy.com
Dr David Skilling
Director, Landfall Strategy Group