Vjekoslav Domljan, PhD, Rector at Sarajevo School of Science and Technology

Author: Vjekoslav Domljan, PhD

Rector at Sarajevo School of Science and Technology

The emergence and spread of the coronavirus in late 2019 and its impact on the disease, COVID-19, was marked by the World Health Organization (WHO) as a global pandemic. “We are at war with the virus and we are not defeating it,” UN Secretary-General António Guterres said on March 20, 2020, at an urgent virtual meeting of G-20 leaders.

COVID-19 affects all aspects of human life in every corner of the planet. The health crisis caused by the coronavirus pandemic has brought about an economic crisis which will result in a financial one – all against the backdrop of climate crisis.

In 2020, 93% of countries will have suffered recession, the highest percentage ever, while 2020 and 2021 are lost for growth. Global GDP will not reach the level from the first quarter of 2020 until the first quarter of 2022 (World Bank, 2020).

COVID-19 is also a virus of truth that has tragically revealed the weaknesses of the global and national order, manifested in the weaknesses of the health, political, economic, social and financial arrangements. The pandemic has shown that the existing arrangements are too fragile and vulnerable to the challenges of the 21st century.

But tragedy needs not to be the only legacy of a pandemic. It can also be an opportunity to restructure the world – so it becomes healthier, more equitable and more prosperous. This requires better and more responsible institutions and a fairer distribution of the gains of technological progress and globalisation.

Lessons of 2007 to 2009

Existing crises must be addressed in the context of an urgent health response. The lessons from the global crisis of 2007 to 2009 should be borne in mind. At the time, politics had flooded the world with liquidity but without directing money towards the most essential investments. The money just went back to the financial system and remained trapped there.

The current crisis has caught BiH with a overliquid banking system and a liquid public sector (in February 2020, the state-level institution  placed their surplus cash in bank time deposits ) and an insufficiently liquid private sector. The interest rate is higher than the growth rate of the gross domestic product, so the money shifts from economy to the banking sector, and from there through profit to the headquarters of the parent banks.

And while the banking sector is taking action to increase productivity, the public sector is using liquidity to increase employment, salaries and benefits instead of investing in supporting research and development, introduction of software and trainings targeting corruption and other public bads.

Employment and salaries in the public and banking sectors are not decreasing, so the main absorber of shocks is the private sector through lower salaries and employment. For example, more than 100 countries eased the VAT burden and more than 20 countries reduced the VAT rate while BiH did nothing. Therefore, the duality of the economy is growing in BiH even in the time of the pandemic – public employment is expanding at the expense of private sector employment.

Strong state – strong response

In times of crisis, citizens turn to the state to take the lead in overcoming the crisis and achieving united action. Therefore, in times of crisis, state institutions and governance are on the major test.

Credible and legitimate leadership that instils confidence in citizens is of paramount importance. A strong bond between the state and citizens is based on trust in the government and its leaders. This is achieved by creating and disseminating fact-based information, acting transparently, serving citizens in a fair way, with responsibility and humanity, and acting in partnership and cooperation with other stakeholders.

In times of crisis, the government must preserve the unity of the country and prevent its social fractionalisation. The policies pursued by the authorities must be perceived by the citizens of the country as those that are in the service of the citizens and that equally contribute to all members of society and strengthen justice and solidarity.

New normalcy

Even before the outbreak of the COVID-19 pandemic, the future world of work was discussed due to the impact of technology, demographics, globalization, and climate change. But the future arrived earlier, as many countries, companies and workers switched to teleworking. For example, 40 to 70% of workers in Europe and the US worked from home during pandemics.

COVID-19 has accelerated investment in digital technologies and digital transformation of society. The number of digital platforms has increased dramatically, video meetings have become more numerous and efficient than usual, leading to the outline of a different world of work – and from “sleeping” in the office to working from home.

Changes in the world of work are leading to the restructuring of global value chains. Due to telemigration and robotisation, some jobs telemigrate to developing countries and some are robotised (by using artificial intelligence to do jobs).

However, the International Labour Organization (ILO) estimates that 27% of workers in developed countries have the conditions to work from home, which does not mean that such work will be practiced. But in certain cases, the benefits of working from home are obvious – there is no wasting time on transporting workers, employing persons with disabilities is easier as well as employing single parents and those providing care for others, etc.

UN Secretary-General Guterres underlined that recovery from COVID-19 crisis must lead to a different economy (Guterres, 2020):

“Everything we do during and after the crisis must have a strong emphasis on building more equitable, inclusive and sustainable economies and societies more resilient to pandemics, climate change and many other global challenges we face.”

New welfare state

There has been an increasing role of the state in pace and scope unprecedented in modern history. Many also demand that the state also has greater regulatory power, for example that it can collect private information and force citizens to testing and quarantine (Acemoglu, 2020).

When the economy is hit by an unprecedented shock (not all sectors are affected with, say, 50% as in a normal shock, but 50% of the sector is affected by 100%), the supply shock turns into a demand shock. Therefore, the recovery requires simultaneous growth of specific sectors and growth of consumption.

“Act fast and do whatever it takes” requires funds to assist hospitals, households and businesses. But the growth of public expenditures followed by a decline in public revenues leads to budget deficits. Previously, even minor shocks led to threefold troubles: money, debt, and crisis — and recovery took not a year but a decade (Hausmann, 2020). Recovery funds of the programme Europe: the Next Generation will need to return to the budget – not earlier than 2028 and no later than 2058.

All developed countries  will find themselves in budget deficits. However, developing countries such as BiH, which cannot finance budget deficits from domestic sources, will find themselves in a particularly difficult situation. Nor can they be financed from foreign private sources since they do not have a rating. They have nothing but to wait for the money of multilateral bodies, whereby the International Monetary Fund is limited to only USD 1 trllion.

Therefore, the establishment of a new welfare state will be a difficult task in general and in developing countries in particular. The increase in the activities of the state must be accompanied by the strengthening of democratic institutions and mechanisms of political participation. But achieving a balance between these is difficult even in the best of times, let alone in times of crisis (Acemoglu, 2020).

New social contract

The pandemic highlighted that economic insecurity and inequality are structural problems of society. Uncertainty could be reduced by introducing a basic income, in which case companies could end up competing for workers, instead of workers only competing for jobs. Therefore, a new social contract is needed (Rodrik and Stantcheva, 2020).

States need to end the practice of pursuing separate development and social policies. Faster economic growth requires availability of new technologies and the spread of production opportunities among companies and workers. Creating these opportunities reduces inequality and economic uncertainty more effectively than fiscal policy. Therefore, economic growth and the social agenda should be two sides of the same coin (Rodrik and Stantcheva, 2020).

Development of companies requires a skilled workforce, good infrastructure, availability of suppliers and subcontractors, easy access to technology, and protection of property and contracts. Most of this is provided by public bodies, which should form one side of the new social contract. These external effects created by public bodies need to be internalised by companies through innovation, investment and employment. They need to respect their part of the contract – not as part of conventional socially responsible behaviour – but as an explicit provision of the new social contract (Rodrik and Stantcheva, 2020).

The new social contract should be implemented through broader and deeper partnerships within the smart specialisation of regions/cantons. Policies centred on tax initiatives and subsidising industries should be replaced by policies to provide services tailored to the specific needs of companies (Rodrik and Stantcheva, 2020; Domljan, 2014).

From vital national to vital rational interest

The basic characteristics of the “let things go as they go” policy are: (i) failure to undertake public sector reforms, (ii) non-involvement of experts and scientists in the preparation of policy decisions, hence they are opinion-based and not evidence-based, and (iii) acceptance of the existing polarisation and collapse of public confidence in the institutions of the system (Acemoglu, 2020).

The policy of “let things go as they are” will continue if political leaders underestimate the gravity of the problem and do not learn from the experience of other countries in overcoming the crisis. Especially since COVID-19 will not be the last public threat.

With the unequal distribution of income globally and nationally, this will lead to a deepening of the socioeconomic fragmentation of society in BiH, which can ultimately lead to something much worse than populist nationalism (Acemoglu, 2020).

Economy in BiH suffers from a dual institutional structure (hypertrophied public sector versus hypotrophied private sector) and an orientation towards income redistribution instead of its production. Oversized consumption and imports compared to production and exports creates a resource gap of BAM 5 to 6 billion per year (by the way, the total savings of the population accumulated over decades are BAM 5 to 6 billion). If there were no foreign currency remittances from abroad, the country would already be in “debt slavery” or, far poorer than today by being forced to reduce consumption and/or investment (Domljan, 2019).

Table 1: Resource gap; BiH, 2008-2022                                                        (in mln BAM)

 

2008

2009

2010

2020p

2021p

2022p

Real income growth rate (%)

5.4

-3.0

0.9

-5.0

1.9

3.3

Exports of goods and services and primary income

8507

7466

8413

11700

12400

13100

Imports of goods and services and primary income

15850

12396

13473

15500

17500

17700

Resource gap (resource import)

-7342

-4929

-5060

-3800

-5100

-4600

Net secondary income

3827

3341

3529

3300

3500

3700

“Import of savings” (current account deficit)

-3515

-1588

-1531

-500

-1600

-900

Budget deficit (% GDP)

-2.1

-4.3

-2.4

-4.5

-3.0

-2.0

p - projection

Source: own calculation based on the World Bank, IMF and the Central Bank of BiH data

It is by no means easy to return society to a stable social balance (Banerjee and Duflo, 2020) in an age of sharp political and ethno-national polarisations, breaking democratic norms and collapsing institutional capacity by making important political decisions outside the institutions of the system (Acemoglu, 2020).

Therefore, in BiH as well as in the EU, the health and economic crisis can easily and quickly turn into a political and constitutional crisis. This explosive mixture can undermine the legitimacy of the state and other institutions. The problem is that the EU as well as BiH have their mechanisms for introducing reforms blocked. The last time the EU attempted constitutional reforms was in 2005, and in BiH it was in 2006.

Multilateral crisis response

Countries and societies are connected more than ever. Due to the transport connection, it is easy to transfer a pathogen from one end of the world to the other. Pandemics and other disasters know no borders, so collective action is necessary to prevent and combat the aftermath.

Low probability and high impact events (pandemics, developed bioweapons, intentional or accidental use of artificial intelligence, giant volcanic eruptions, geomagnetic storms, etc.) are all facts of life as the COVID-19 pandemic has shown.

For decades, virologists, epidemiologists, environmentalists and secret intelligence services have warned of the danger that a flu-like illness can be transmitted from animals to humans. But politicians, focused on their survival in elections rather than the wellbeing of society, are reluctant to invest time, money and political capital in considering the foggy phenomena of some future crisis. Therefore, the COVID-19 pandemic showed that one third of countries had no preparedness  and response plans even after it became clear that the pandemic would hit them. Half of the countries did not have national prevention and control programmes. Developed countries at the time of the pandemic outbreak did not have even one-seventh of the hospital beds necessary for critical situations (Brown, Berglöf and Farrar, 2020). “Most governments have proved dangerously unprepared for the crisis that has revealed deep-rooted weaknesses in the health system and social security in both rich and poor countries” Acemoglu (2020). It is therefore no coincidence that those who best responded to COVID-19 are countries that had been most severely affected by SARS: Vietnam, Taiwan and Hong Kong, with 0.0 and 0.3 and 0.9 COVID-19 deaths, respectively, per million inhabitants.

In times of severe crises, multilateral actions are necessary for a coordinated response and securing the necessary resources through organising donor conferences and the like. It is clear that the state of global economic and social danger from the COVID-19 pandemic cannot end until the state of global health threat is over. And it cannot end in any country if it does not end in all countries (Okonjo-Iweala, Berglöf, Clark and Brown, 2020).

 

References

Acemoglu, D. 2020. The Post-COVID State.  June 5. Available at https://www.project-syndicate.org/onpoint/four-possible-trajectories-after-COVID19-daron-acemoglu-2020-06

Banerjee, A. and Esther Duflo, E.2020. The world after COVID-19. The Economist, London. May 26.

Brown, G., Berglöf , E. and Farrar, J. 2020.  Now or Never for Global Leadership on COVID-19, April 7. Available at https://www.project-syndicate.org/commentary/global-leadership-COVID19-funding-for-developing-countries-by-erik-berglof-et-al-2020-04

Domljan, V. 2018.Potezanje vitalnog racionalnog interesa. Tuzla: Lijepa riječ.

Domljan, V. 2014. Put u zaposlenost. Sarajevo: Ekonomski institut.

Guterres, A. 2020. The recovery from the COVID-19 crisis must lead to a different economy. March 31. Available at https://www.un.org/en/un-coronavirus-communications-team/launch-report-socio-economic-impacts-COVID-19

Hausmann, R. 2020. What Should We Be Preparing For? May 27.  Available at https://www.project-syndicate.org/commentary/COVID19-response-needs-financing-for-developing-countries-by-ricardo-hausmann-2020-05

Okonjo-Iweala, N., Berglöf, E,  Clark, E. and Brown, G. 2020. What the G20 Should Do Now. June 1. Available at https://www.project-syndicate.org/commentary/g20-must-agree-on-stronger-global-COVID19-response-by-gordon-brown-2020-06

Rodrik, D. and Stantcheva, 2020. S. The Post-Pandemic Social Contract. Jun 11. Available at https://www.project-syndicate.org/commentary/new-social-contract-must-target-good-job-creation-by-dani-rodrik-and-stefanie-stantcheva-2020-06

Sen A. 2020. A better society can emerge from the lockdowns. Financial Times, 15 April.

World Bank. 2020. Global Economic Prospects. June 2020.Washington, DC: World Bank.

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Views and opinions presented in the blogpost are views and opinions of the author and do not necessarily represent views and opinions of the United Nations Development Programme.

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