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A Study on How Countries Previously Responded to An Economic Crisis: Failures, Success and The Road Ahead

This article illustrates reforms and policies in the light of previous economic crises and juxtaposes them with the current fight against the one caused by the pandemic Covid-19, focusing on what should be done, what has been done and what lies ahead.

Within the span of a decade, the world got to see two recessions – one brought by human miscalculations transpiring into the “subprime mortgage crisis” in 2008 and the other caused by a global pandemic, the COVID-19 in 2020. We are yet to estimate the total economic loss caused by the contagion as we are still unaware of the future career of the virus. However, in the present scenario, if we only talk about workers who have lost their jobs in the informal sector, worldwide, we are staring at a staggering number of 2 billion.

With the continuation of the worldwide lockdown, small firms would strain to keep themselves afloat and many would be forced to lay off employees even after the lockdown is lifted. In the meantime, premiers of the world are already contemplating resumption sooner or later to save livelihoods, and thereby, lives.

The gross disruption of economy that has been caused by the pandemic is very different from the global recession which took place in 2008, in that coronavirus has extended beyond the liquidity and capital problems and affected the real economy, which constitutes the flow of goods and services (barring essential goods) as well as urban consumption. However, the fact remains that the labour force is facing the biggest blow currently, like it did during the 2008 recession. And, by following the trajectory of reforms in a country like Germany, we can tap into some potent measures in relation to the protection of the workforce, a collective strength, that reflects the national economy.

Reforms and policies, especially those that strengthens an economy’s supply side, made at a national level work to hasten the combined recovery of businesses and their workforce even after a crisis.

  • Post reunification, Germany began implementing such measures as early as the 2000s, like lowering income tax to encourage growth. It brought to force critical labour market reforms such as Kurzarbeit – which is a federal subsidy that pays labourers a portion of their salary when there is a reduction in the demand for work.
  • Post reunification, Germany began implementing such measures as early as the 2000s, like lowering income tax to encourage growth. It brought to force critical labour market reforms such as Kurzarbeit – which is a federal subsidy that pays labourers a portion of their salary when there is a reduction in the demand for work.
  • Indian policymakers have had a tendency of reforming its economy during times of crises. In 2014, it rescued the national share market and currency value post the Taper Tantrum by

  • Cutting government spending by 10 percent.
  • Increasing the gold import price from 4 to 10 percent.
  • Introducing an 80:20 rule in terms of gold import, which demanded a re-export of 20 percent of the gold that has been imported.
  • These measures led to a drop in the trade deficit and the improvement of the current accounts’ deficit, after which some of these measures that were deemed controversial were removed.

    Coming back to the Covid-19 crisis, the inevitability of a disruption in the capital formation, labour participation and productivity growth call for some immediate, even if, aggressive measures.

    According to a review by Harvard Business School, apart from doling out fiscal packages, there needs to be innovation in policies. For example, central banks may consider fulfilling liquidity needs not just to commercial banks through lending but also to applicable households and firms. Other acceptable policies include moratorium on loan payments and EMIs, zero-interest loans to applicable businesses and households and relaxation on repayment duration.

    In India so far, the Reserve Bank of India has cut repo rate to 4.4 percent, its lowest in 15 years. Apart from that in order to allow INR 1.37 lakh crore across the banking system, Cash Reserve Ratio for all banks has been reduced by 100 basis points. These are some of the measures that have been implemented along with the INR 1.7 lakh crore fiscal package announced by the government.

    Stay tuned for more information on policies and measures announced by the government and the financial bodies of India to help fight Covid-19 and its economic impact, our primary focus being businesses. Moving forward we will try to delineate the approaches that Business might adopt to keep themselves afloat in these tough times.

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