"The onus is on all of us to try to do the best"

April 7, 2020

By John Donnelly

Daron Acemoğlu, a native of Turkey, is a Professor of Economics at the Massachusetts Institute of Technology (MIT) and co-author with James A. Robinson of Why Nations Fail: The Origins of Power, Prosperity and Poverty and The Narrow Corridor: States, Societies, and the Fate of Liberty. In this edited interview with IFC Insights, he talks about the wide impact from COVID-19, saving lives, and finding ways to support the private sector.

Q: What do you see as the economic impact on developed and developing countries from COVID-19, as it has unfolded to date?

We are living through uncertain times. I don't think anybody, including the epidemiologists, know exactly how and when we are going to come out of the current pandemic conditions. The first priority, of course, is to save lives. At the same time, we also have to understand and respond to the economic fallout because the impact is quite major. It would not be a complete exaggeration to say that what we are living through is a combination of the 1918 Spanish Flu pandemic, elements of the Great Depression, and elements of the Great Recession of 2007-08.

I think the priority is to stem the tide to the extent possible so that when the pandemic is over, the economy can start returning back to normal. In the process, we must try to protect the most vulnerable people in society. I think most developed economies have the tools for doing that. Many of them, but not all of them, also have the public infrastructure and health systems to deal with the pandemic, at least if the uncontrolled spread of the virus can be prevented.

I think the situation is much more dangerous in the developing world because of both the health infrastructure and the budgetary situation. The tools are much weaker and that's going to create special challenges.

For the developed world, there are [several] areas which need urgent action and should be bolstered. First is the health infrastructure. It's urgent that we throw all the resources we have in order to provide testing, protective equipment, ventilators, and ICU [intensive care unit] bed capacity, including perhaps field hospitals and other measures.

The second is that we have many people in every advanced nation, tens of millions of people, who are really very close to poverty or below the poverty line and now they are facing job loss, severe income loss, and all sorts of other stresses. So public resources have to be used in order to help this most vulnerable group.

The final one I think is perhaps more difficult because we don't know the extent of the problem, but we also have to make sure that the entire supply chain of the economy doesn't collapse. What that means is that we have to make sure that critical companies do not go bankrupt because they don't have access to liquidity or they are facing acute drops in their demand. We have to make sure that that doesn't then bring other companies down because once your suppliers, or your customers, are bankrupt, that's going to create lots of problems for you. A collapse in the supply chain could also spillover into financial problems and that would make the whole crisis even more critical.

The tools we have to use are obvious ones. And I think that's the only silver lining here is that policymakers have experience with these tools: monetary policy, fiscal policy transfers, unemployment insurance, cash help to needy families, and other targeted transfers. The hardest part is to determine which companies need to be bolstered and what sort of creative measures to use. But I think the urgency with which policy makers around the world are responding to the pandemic gives a little bit of hope.

Q: What about the situation in the developing world?

A: The tools and the resources are lacking and that's going to be an important issue. This suggests that more international coordination is necessary. We're actually seeing the value of international coordination in dealing with the pandemic on the healthcare front. Countries are learning from each other, although I am disappointed that that came too late.

Q: What is your general outlook for the economies in the developing world?

A: Being prepared is the best remedy we have at the moment. But I think there are three related problems that make it very difficult for many developing nations to respond to the crisis.

The first is that they don't have the public infrastructure. If you look at Sub-Saharan Africa, the whole continent has been characterized by weak state institutions. The state is unable to regulate economic activity, reach its citizens or often keep basic law and order. That's going to create a major problem in dealing with the pandemic.

Second, and again Sub-Saharan Africa is the extreme case here, there is a lack of resources. If you look at the ability of many developing nations to raise tax revenues, that's very low. It's very difficult to respond to the current pandemic if you don't have the resources to provide the transfers to the needy, to spend on healthcare, to transfer funds to companies to temporarily shield them against the liquidity shocks.

And then all of these feed into the final problem, which I think is common between some developing nations and some developed nations. It is that you really need trust in state institutions to see that the best policies are being implemented. Take the example of shelter in place, orders or social distancing in many parts of the world, trust in state institutions is so low that these are not being followed by the people who are suspicious of the guidance and policies coming from the government.

"The urgency with which policy makers around the world are responding to the pandemic gives a little bit of hope."

Q: Each country is obviously paying intensive attention to COVID-19 in their borders, but is there enough attention to stopping the spread elsewhere?

A: I think one of the fault lines that the crisis reveals is how we have neglected bolstering international institutions. International coordination and cooperation are key in many areas. Many governments, even those in Europe, claim that healthcare was a national policy. But we have realized that in the age of pandemics, healthcare is not just about national policies. It’s an international problem. It is very, very clear, although not sufficiently emphasized in the case of COVID-19, imagine that we bring the pandemic under control in the U.S., and the French authorities do the same in France, and the British do the same in Britain, over the next three, four months. But then what happens when there are recurrences in Sub- Saharan Africa? Are we going to close borders completely across nations so that those do not come back to the West? I think that's impractical. The only way to deal with this pandemic is with a global effort. So that means international cooperation is key.

Q: What role can organizations like IFC and other development finance institutions play during this crisis?

A: I think much has to be judged on a case by case basis. … One area that I think IFC can be more directly helpful is identifying where the global supply chain is most in trouble and help bolster the supply chain so that the failure of a few critical corporations does not spread throughout the economy.

"The only way to deal with this pandemic is with a global effort. So that means international cooperation is key."

Q: Governments are obviously leading the response in each country, but they need the private sector as a partner. You need jobs. You need to need to keep the economy going. What are your thoughts about how to support the private sector now in developing countries?

A: This is not the time when you're going to see new enterprises springing up in the developing world. So I think the priority has to be to work with what we have. I do think that even though productivity is low in many developing countries, in almost all developing countries, there is a vibrant private sector. In many cases, countries need more technology, they need more resources, they need more human capital, but all of that is much harder if existing companies go bankrupt and many people end up jobless. So I think our priority has to be to protect that private sector and protect the employment opportunities and income opportunities of the vast majority of the people.

That does require collaboration between state and society. It requires that the state adopt policies in order to bolster the social safety nets, but also at the same time support the private sector so that you don't create widespread failures. But how are you going to deal with the huge populations of self-employed in many less developed economies? How are you going to distinguish between companies that are completely non-viable versus those that have liquidity needs? In rolling out these new government programs and responsibilities, how are you going to prevent corruption that is already in massive scale in some of these countries? I'm definitely not ignoring these problems, but I think we have to try.

Q: Could this crisis around COVID-19 become a critical juncture for nations, as you describe in Why Nations Fail?

A: Oh, yes. It is absolutely a critical juncture. If we do not urgently deal with the dire situation we are in, it will cause huge loss of life and turn into a deep depression. And how well can we deal with the situation? It depends on leadership, it depends on the existing strength of our institutions, on trust, and communication between state and society. And it depends on the actions of civil society, media, and other societal organizations making demands, coming up with ideas, trying to make up for the lack of resources or lack of leadership from the state. I think the onus is on all of us that we have to try to do the best we can in these tumultuous times.

Published in April 2020