by Anirudhh Shankar
The Coronavirus has been dominating the news for quite some time. Its impact is felt in every corner of the world and it has been multidimensional. The economic effect is undoubtedly one of the most significant impacts of the pandemic. Almost all countries, in various stages of development have been facing an economic slowdown. There are many perspectives and opinions as to why countries are facing an economic malaise. In fact, the notion and meaning of development has changed. The validity of the homo economicus (rational consumer) is being questioned which has also brought about a change in the socioeconomic perspectives of the common man. This article speaks about the effect the pandemic has had on the economy and economic behaviour.
One of the most prominent impacts of the pandemic could be seen in the informal sector and blue-collar jobs. This has impacted many developing economies like India, Indonesia and AU nations, which rely heavily on its informal workforce. In India for example - 90% of its workforce is in the informal sector. After the pandemic the poor were affected adversely; they have no social security benefits, job security and the market is highly volatile, i.e. totally based on consumer demand with no price ceiling or MSP(s).
Another issue is that most of the economic hotspots (Maharashtra, Delhi and Tamil Nadu) are highly populated regions and have also become COVID hotspots, thus slowing any kind of economic activity. The IMF has estimated a 4.5% slump in the overall economic growth and a rise in the poverty level. This has had an impact on the demand and supply sides of the market. On the supply side, the workers and the proprietors of the informal sector businesses are going through the direst phase of unemployment. The impact in the demand side is slightly different. Homo Economicus is in question; normal consumers have become 'Satisficers' (seeking for the minimum level rather than the optimum level). Since scarcity has increased, consumers are recklessly reducing their purchases. In fact, the same impact is being felt in bigger capital markets. There has been an increase in the level of heuristic behavior; especially the “Affect Heuristic” (rule of thumb decisions made on the basis of situational emotions and state of mind) and the “Availability Heuristic” (rule of thumb decisions made on the basis of given or available information - i.e. News Feed, Social Media and Rumors). This mix of Satisficing with the Affect Heuristic and the Availability Heuristic has hampered with the behaviour of the consumers, affecting the demand side.
The pandemic’s effects have been observed in the hard hit stock markets. We are witnessing the effects of market volatility for the second time in the 21st Century (exactly after a decade). This volatility has shown the relation between the the efficient functioning of capital markets vis-a-vis faith in the political system. The worst affected capital market currently is the United States which was the case in 2008 too. This brings us to the question - Is the U.S's shift towards a protectionist system an actual step to mitigate the after effects of economic shocks or has it succumbed to the lobby of oligarchs. The answer is pretty clear. The unemployment rates among the blue-collar workers has surged to deleterious levels. The ever changing political system adds fuel to the fire. There is enough data to prove that by the end of a Republican's presidency, the economy would be facing a serious issue. Lack of government intervention coupled with economic evils like crony capitalism and corruption has made the market too volatile. This is an important lesson from the COVID situation - we must have faith in the political system of the country. For example, China has been able to make its investors and stakeholders (all citizens) have faith in its system. This reduces the irrational behaviour of the investors and all stakeholders. In turn, this has reduced the shock of the economic tremors - China has a growth rate of 1% (only positive growth rate among industrial nations). The Western world, especially the United States has to change its system to cover all the aspects of the economy; from investors to shop-level workers. COVID has highlighted the need for a model with a proper mix of welfare economics and libertarian paternalism.
After observing all these effects, it’s necessary to try charting a better way forward towards a future in the form of a sustainable model for the economy. This is a viable solution for mitigating or optimising the problem of scarcity. Scarcity is and will be the central problem of economics but we can reduce its adverse effects. After being in the realm of abundance, a sudden change in the economic environment has had huge psychological impacts on the consumer. We've seen many news articles and reports on hoarding of groceries, reckless purchase of hygiene products, fake news about drug usage (HCQ), etc. There is also a study by Harvard which analysed the effect of the virus in a region known as the Cancer Alley. Cancer Alley is known to be one of the most polluted regions in the United States. There has been a huge increase in the number of cases in places like Cancer Alley and other polluted places like New York, NCT and Mumbai. The reason being that high pollution increases the risk of asthmatic conditions and lung infections. This makes the average resident of such a region to be susceptible to the pre-existing conditions which might make COVID fatal. So, this is an indicator that we have to think of and redefine the notion of development and growth. A sustainable future is inevitable and it is absolutely essential for the perpetuation of human kind.
Finally, we have learnt that nudges are effective social tools and are better than hard-rules. Of course, many of the nudges which are being used now are for political gains. But the underlying fact is, it works and it is highly cost effective. An example will be the 'Boycott Chinese products' nudge. Many are following this, though it is not based on any tangible facts. I fervently believe that this can be used for positive reinforcements like a shift to a sustainable system, filling the gap between absolute need vs absolute greed and the implementation of a mental economy (an economic system based on human behaviour and not based on rational expectations). COVID - though it has adversely impacted our lives, it has definitely opened up a gate having a plethora of opportunities.
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