There are good indications that South Africa is on the right track and is following best practice in addressing the pandemic head-on, says Dr Thulasizwe Mkhabela the Group Executive: Impact & Partnerships at the Agricultural Research Council.
There are good indications that South Africa is on the right track and is following best practice in addressing the pandemic head-on, says Dr Thulasizwe Mkhabela the Group Executive: Impact & Partnerships at the Agricultural Research Council.

OPINION: Policy mitigating against the macroeconomic impact of the Covid-19 pandemic

By Thulasizwe Mkhabela Time of article published Apr 16, 2020

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JOHANNESBURG - The coronavirus pandemic is first and foremost a health crisis.

South Africa has moved swiftly to curb the spread of the virus by declaring a national lockdown, thereby, minimising wholesale infections and consequent massive loss of life. 

Thus, it is a commendable humane gesture that the South African government is prioritising arresting the spread of the pandemic by limiting infections - the so-called flattening of the curve - and saving lives. However, one cannot deny the havoc that this will wreck on the world economy. 

The Covid-19 pandemic has both aggregate demand and supply effects on the economy. 

The supply effect is a result of the pandemic exposing people who are working to the virus. Consequently, people react to the risk by reducing their labour supply. The demand effect arises because the pandemic exposes people who are purchasing consumption goods and services to the virus. 

Then, consumers react to the risk by curtailing their consumption as they minimise exposure to the virus by shunning shopping. The supply and demand effects work together to generate a large and persistent recession. 

Therefore, a competitive equilibrium between the health and economic imperatives. This competitive equilibrium is not Pareto optimal in the sense that infected people do not fully comprehend the impact that their consumption and work decisions have on the spread of the virus. Simply put, each person takes the economy-wide infection rates as a given externality. 

Policy makers are mindful of the interaction between economic decisions and rates of infection. Thus, the question becomes, “what policies should the government pursue to deal with the infection externality while keeping the inevitable disruption to the economy in mind?” 

It is important to reiterate that South Africa implemented the national lockdown as a containment policy to deal with the Covid-19 pandemic.

In economic terms, the lockdown policy is a set of simple containment measures that reduce consumption and hours worked. By limiting interactions among people, these measures on the one hand exacerbate the economic turndown thus precipitating a recession and increase societal welfare by reducing death toll on the other hand. 

So far, the South African experience is showing that it is optimal to introduce large-scale containment measures that result in a sharp and sustained drop in aggregate output. 

Even if a vaccine and better treatments do not become available before the pandemic is over and the healthcare capacity continues to be constrained, the current containment policy will save many lives in the country. 

Ironically, other things being equal, a larger recession would mitigate against the spread of infections thereby curbing the pandemic. 

The gallant steps taken by the South African government notwithstanding, the gist of the matter remains: there is an inevitable trade-off between the severity of the recession and the health consequences of the pandemic.

While the approach by the South African government is commendable, there are unintended consequences of the containment measures. Firstly, more long-term containment measures will create a persistent economic depression. 

Secondly, the population never reaches “herd immunity”. Therefore, infections would occur if the containment was ever relaxed prematurely, hence negating the gains thus far. Herd immunity refers to the situation where a substantive portion of the population is exposed to the virus thereby allowed to develop immunity to cope with the virus. These concerns should not take anything away from the fact that the country is resolute in dealing with the pandemic.

There are good indications that South Africa is on the right track and is following best practice in addressing the pandemic head-on. The best policy in the world is to build up a fraction of the population that is immune to the virus, cutting back on consumption when externalities are large, that is when the number of infected people is high. 

This policy entails gradually ramping up containment measures as infections rise and slowly relaxing such measures as new infections wane and the population approaches the critical level of immunity (herd immunity).

The containment measures in South Africa have now been in place for 21 days and have been extended by a further 14 days. 

This has not been an easy decision and dissenting voices are emerging. Policy makers in South Africa are now facing increasing pressure to ease up on restrictions thereby prematurely ending the lockdown because of its impact on economic activity. 

There may appear to be some merit in calls to end the containment. Granted, prematurely abandoning containment would bring about temporary increase in consumption but no long-lasting economic benefits. Tragically, ending the lockdown prematurely would lead to a substantial rise in the total number of deaths caused by the pandemic. Thus, it is imperative that policy-makers remain steadfast and resist, with all their wherewithal, the temptation to pursue transient economic gains associated with abandoning containment measures.

Dr Thulasizwe Mkhabela is an agricultural economist and is currently the Group Executive: Impact & Partnerships at the Agricultural Research Council; [email protected]

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