RSS
Leonardo Badea : The effect of crises to amplify inequalities is manifested not only at the level of individuals but also between countries
(This interview with Leonardo Badea, the Deputy Governor of the National Bank of Romania, does not reflect the position of the BNR)
If we refer to the current pandemic crisis, paraphrasing, can we say that “this time is different”? Would it have helped us to pay more attention to what the previous crises have shown us?
Associating this famous quote to the current situation is indeed tempting, especially since it resonates very well for the experienced economists who have watched and participated in the debates of the last decades on the causes, manifestations and solutions of economic and financial crises. In fact, in a very recent interview Kenneth Rogoff admitted that we are facing an extraordinary situation for which “it is really hard to think of a historical parallel”.
Even though the majority of probably us agree that “this time is different”, I think we should be careful not to put such a simple label over a very complicated situation. It is in our best interest of finding the most appropriate solutions to exit the crisis to look at its details and characteristics on all sides. They are indeed different from those of other crises that we often remember regarding the cause that generated it and its early manifestations, by the fulminating closure of activities, the sudden collapse of supply and demand for broad categories of products and services, the complexity of the implications of the health crisis on the functioning of the modern economy and society, our inability to understand and reasonably anticipate its future developments and the irreversible transformations that it could cause.
But, beyond these many differences, I think there are also elements common to most other crises of the past, which if we can strive to understand better and that would help us to build solutions and defend ourselves from the effects that will come.
For example, we are facing a crisis of trust from both business and consumer side (so simultaneously on the supply and demand), but this in itself is not new, because both the latest and the most remote economic and financial crises we have experienced have had this component and as such we could lean more towards understanding it. Some tools for restoring trust are indeed specific to a health crisis, but others are generally valid and relate to human nature, to the reaction of an individual placed in a borderline situation that threatens his well-being and personal future, also for his family and community, and these are things that we should and could have learned better from many previous crises, especially how to counteract them.
Also, as with other crises that have had an economic manifestation in the past, we know that this time too, it is quite likely that at some point the financial sector will be affected in one form or another. It won’t happen immediately, but it will happen later in the course of the crisis, I’m inclined to think it’s almost inevitable. This gives us time to prepare, to understand by studying previous crises where and how the effects from the economy to the financial sector will spread and how to continue to have the necessary measures available (as we are already doing – see the recent recommendations of the European Systemic Risk Committee, the measures of the European Central Bank and national authorities, etc.), especially since this time the financial sector is entering into the crisis in a much consolidated position.
That is why, however, I believe that in a certain way, a subtle but significant way, some of what Carmen Reinhart and Kenneth Rogoff wrote in 2009 remains true. I mean not in the title of their book, but in the essence of its message, for those who had the patience read it in detail. We have a different crisis, but one which, in its development that we will see in the coming months and quarters, will also have manifestations and mechanisms common to other long-term and far-reaching crises of the past.
Is there a chance we could come out stronger, as a society and as an economy? How can such a crisis be successfully managed?
I join the voices that advocate for finding the most constructive way out of this crisis, which not only aims to restore normality of the previous periods (although if we look sincerely towards the last 10 years, we do not find true periods of peace and economic growth but only islands of positive evolution, located in certain geographical or rather geo-political areas, always threatened by risks and vulnerabilities and often interrupted by episodes of acute volatility), and have the courage to imagine and build a future economy and society more resistant to shocks (or at least to those that we have experienced so far). I believe that this desire is achievable and the debate of ideas has already begun. We need these ideas to circulate as much as possible and for state institutions and the private environment to work together to test and gradually implement the most valuable and useful conclusions that will result.
Several proposals have already been circulated, both at the general level, but also specifically for Romania. In general, they are about improving the approach to supply chains, strengthening public health systems, and facilitate remote working where possible. In Romania’s case, the aim should be to stimulate especially of those areas where we as an economy have competitive advantages (including natural ones) but also of the areas that we see as having potential in the future (green, digitalized, perhaps autonomous) global economy. In addition, we need to channel our scarce (financial) resources towards modernization (often this means digitalization and implementation of the latest technologies, but not only) in all areas of activity: agriculture, trade, services, industry, education, health, public administration, etc.
And I would like us not to forget an important economic lesson for Romania from the experience of the last few quarters: it matters how you enter a crisis, how balanced you are in terms of international position and internal balances. Therefore, as we think of new solutions to develop, streamline and strengthen the economy, at the same time we must have the consistency and determination to implement the old solutions, the ones we know but we did not always had enough strength to implement them: to have an adequate fiscal space and a budgetary structure as flexible as possible.
Indeed, being a crisis that first manifests itself in the economy, solutions must first stimulate the economy. I personally resonate with ideas that are circumscribed to the School of Neo-Keynesian Macroeconomic Thinking (“New Keynesian economics”) and I am a supporter of the beneficial role that moderate and carefully calibrated government programs can play in regulating inefficiencies and positively transform the economy, to alleviate the inequalities generated by (all types of) crises on the society. I believe in the relevance and impact of macroeconomic policies in overcoming crises, restoring balances and developing the economy. From this perspective I believe that fiscal policy plays a very important role in both the short and the long term, and monetary policy can contribute and support the improvement, in the short term, of acute imbalances generated by crises. The triangle is complemented by macroprudential policies, which, although they have only recently been developed, have already proved their usefulness, because today we have a financial system in Europe more apt to withstand shocks and support economic reconstruction, even if it will, probably inevitably, be affected to some extent.
However, to implement tax incentives requires fiscal space, the capacity to finance them, or unfortunately here we are not standing very well. Of course, stimulus measures are also financed by debt issuance, but this increases the long-term burden and can introduce new vulnerabilities. That is why the efficiency of programmes and the use of resources is very important during this period.
(The full interview can be read on Monday, August 17, in our Financial Bulletin)