COVID-19 and macroeconomic stability

The body of knowledge on macroeconomic instability in the times of present crises is limited, hence showing diverse results
Representational image
Representational image

The world economy in COVID-19 altogether changed from a modest economic and social structure to a complex set of intertwined economic and social systems. We have witnessed a dip in economic and social systems. With such a dip the international orders too have experienced deep changes. The national and international financial markets also have observed great changes. The graph of economic and social growth parameters has been disproportionate. In financial markets we have seen too much variability especially in exchange rates. Moreover, there are sequences of economic and financial market crises post pandemic. The debate on the impact of COVID-19 on the macroeconomic instability at national and global level in general and financial instability in particular is open. It is beyond what is seen and observed. The existing body of knowledge on macroeconomic instability in times of crises is limited, and also shows diverse results. Many empirical research studies have confirmed that macroeconomic instability negatively influences economic growth because it is a stumbling block against the real growth and development parameters of the economy. It disturbs the economy and develops shocks and disturbances. The United Nations Organization (UNO) declared COVID-19 a pandemic which is worse than many global financial jolts such as the Global Financial Crisis of 2008. It aggravated the macroeconomic shocks and asymmetries and negatively impacted the various essential macroeconomic aggregates such as national income, employment, aggregate demand, exchange rate, FDI, exports, etc.

The industrial policy of 1991 and the onset of Liberalization, Privatization, and Globalization brought banking sector and financial sector reforms in India. Indian economy after 1991 economic reforms developed many policies that helped in correcting many macroeconomic instabilities and disabilities. It opened the vistas of the service sector and widened it, that was facilitated greatly by private and liberalized investment alongside new trade systems. Consumer preferences have got special attention which is why they increased and the level of poverty reduced. Broadly speaking the economic literature of the post economic reform era in India shows that the conditions to the take-off phase of economic development in India started much earlier than the rest of developing South Asian economies of the world. In view of this perspective, the problem of the contemporary pandemic seems little less worrisome. But, that is not the case and hence many economists are trying to look into the economic aspects of coronavirus and its impact on the macroeconomic stability of the economy.

The consistent exposure of COVID-19 in the whole world, especially developing economies, reflects that a high level of economic impetus is required for the reason that the developing and emerging economies are acknowledged as main drivers of macroeconomic instabilities compared to developed economies. Their characteristics are inconsistent and underdeveloped. After the onset of economic reforms, in developing and emerging economies with the rise in national income, aggregate output, and employment, there has also been an upward trend in economic volatility. This behavior seems to worsen the already distressing pandemic. Hence, there is excess need for the expansion of economic resources (health resources in particular) and branching out of the health sector to improve the efficiency in allocating economic and health resources for reducing coronavirus cases. There must be a complementarity (relationship between two things in such a way that improves each other) between health and other important sectors of the economy so that they will get better by the passage of time.

As far as income, output, and employment sides are concerned, import substitution or inward looking trade strategy must be adopted in this hard time. The government should safeguard the indigenous or domestically produced goods from rest of the world, or foreign competition. It has a dual safety net for imports in the form of quota and tariffs that are levied on imported goods so as to make them costly thereby diminishing their consumption. Many economists and trade experts argue that such policies in present times won't work since these are not sustainable in the long run. There is a lack of domestic demand for COVID tests and other basic health tests which is why they may find it unrealistic and unsustainable nowadays. Therefore, domestic resources may remain underutilized and economic growth might retard. Keeping the implication of domestic resources in view, the reference point or model of inward looking trade strategy must be considered for improving shocks and pandemics.

Binish Qadri is ICSSR Doctoral Fellow in the department of economics, Central University of Kashmir; Quarterly Franklin Member, London Journals Press.

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