Social distancing but economic convergence

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

By Dhananath Fernando

The novel coronavirus (Covid-19) has taken the entire world by surprise. For Sri Lanka, this is the third time in recent history we’ve had to fight a non-terrorist enemy. Firstly, the 2004 Indian Ocean tsunami crashed on our shores, then a dengue outbreak a few years ago, and now this virus. Simultaneously, we had a 30-year-long terrorist war, followed by the Easter Sunday attacks just under a year ago. In summary, there seem to be more national emergencies than ever before.

During crises of this nature, sentiments are expressed that isolation as a country and self-sustenance are the best solutions to avoid such external shocks. It is natural to jump to this conclusion when our survival is threatened by such external factors.

However, a good story to remember at this time is one from the Buddhist Jathaka story “Sammodana Jathaka” – the story of the hunter and the flock of birds. The hunter was a threat to the flock of birds and the birds kept flying in individual directions and getting caught in the hunter’s net. After this happened a few times, the birds strategised; all flew together in the same direction towards the net, dragging it with their beaks towards a tree, and escaped. Although it seems that economic isolation, self-sustainability, and de-globalisation are the solutions, the reality is that in a world more interconnected than ever before, it is the opposite.

Economic hit

The impact of Covid-19 is unique since this is a global challenge. The economic impact of Covid-19 would be severe, both locally and globally. On the demand side, due to the closing down and locking down of cities, there will be a drastic drop in consumption. On the supply side, there will be a steep drop as the world’s factory, China, which contributes to 16% of the world’s GDP, has been severely impacted and supply chains and production network linkages are dysfunctional at the moment.

For Sri Lankans, our apparel trade will be at risk due to lower consumption in international markets (Europe and America), being unable to continue operations for the fear of contagion and facing serious difficulties in maintaining supply chains as a result of disruption within the global production network. The same will be true for most of our food exports and many other items in our export basket.

Our remittances will continue to decline given the impact of the virus in the Middle East, Europe, America, and Canada. This chain reaction continues down to the level of people not being able to pay their vehicle leasing instalments or defaulting on bank loan instalment payments. For the economically marginalised, electricity and water supply will become unattainable.

Unemployment will be higher and non-performing loans will increase. Tourism will be further affected and all supply chains connected to tourism will continue along the same downward trend. Inflation will rise, given the government interventions. The Sri Lankan Government will face serious questions on how to manage our fiscal position and keep the heavy public sector afloat in this crisis. It is estimated that it will take about six to eight months to return to normalcy and we should not forget that economies have not yet fully recovered from the Global Financial Crisis.

Price control no solution

Last Tuesday (17) night, the President announced some relief measures on the economy and precautionary measures on halting the spread of the virus. The Government’s facilitation of the quarantine process is commendable for passengers entering the country from outside. However, imposing price controls on face masks, dhal, and tin fish will not help the poor. This will simply move stocks off the shelf faster.

No seller wants to sell anything at a lower price than its actual cost. The price range of Mysore dhal in the first week of March was in the range of Rs. 124-200 and the price of a tin of fish is around Rs. 220-300 for 425 g . Therefore, it is nearly impossible to sell dhal and tin fish at a controlled price of Rs. 65 and Rs. 100 respectively. The consequences would be that either the sellers will stop selling these to avoid legal repercussions, which will hit the poor and rich both as they will have nothing to buy at the shelf, completely distorting the market, or sellers will continue to sell at a higher price, defeating the Government’s purpose.

A similar situation occurred regarding the controls imposed on face masks, and these are already no longer available at pharmacies. What the Government could have done instead is reduced the import tariff on both tin fish and Mysore dhal, as they have now belatedly done on face masks, leading to price benefits passed on to the consumer and ensuring supply. Can you believe we pay an approximate tariff of 35% on all imported tin fish?

On Thursday CBSL ordered to suspend facilities provided for import of motor vehicles and non-essential goods to defend our currency. This will again impact the poor and the needy the most. In this age vehicles are not only used by the high-income earners but the micro and small entrepreneurs to run their businesses. They will get impacted badly so as will their employees. Those who use SUVs will manage.

Time for global co-operation

Constant and confusing news feeds have combined to make us feel that as countries, we should isolate. However, this is a time we all have to come together as a global community. To overcome this economic impact, we need the rest of the world to recover from this pandemic and co-operate more to avoid future challenges. We need our suppliers based in other parts of the world to recover and to be back on their game for us to kick off our operations. We need the purchasing power for our products to be better, to move faster in European and American markets. Once a vaccine for Covid-19 is finalised by scientists with greater capacity than ours, we should be able to trade and purchase it for our people. This pandemic is a good reminder that in isolation we cannot face all challenges. We are now reminded of the importance of freedom and franchising our freedom with responsibility.

In combating Covid-19, China donated medical equipment to Italy and the US. It was said that a quote by Roman poet Anneo Seneca was included amongst those supplies: “We are waves from the same sea.”

In a similar fashion, Japan donated some medical supplies to China and it was reported that the following Chinese poem was written on the wrapping: “We have different mountains and rivers, but we share the same sun, moon, and sky.”

Let this Covid-19 outbreak remind us that we all are waves from the same sea, and we all share the same sun, moon, and sky.