Broken window economics misleading Ugandan authorities in the fight against the pandemic

H.E Yoweri. K. Museveni, president of the Republic of Uganda, addressing the nation

Just about three months ago, Uganda’s small economy seemed well on the way to a nice recovery: economic growth projections were rosy, inflation rates were cheery, while trade and political tensions were arguably seen as “not so bad”. Now all bets are off. As COVID-19 continues to spread around the globe, it has already brought our small economy to a derail.

Ever since Uganda announced the first COVID-19 case on 19th March, 2020, Ugandan leaders have been facing a stress test and they will be measured by their ability to deal with COVID-19 threat in an effective fashion. The stress levels among Ugandan leaders seem to be peaking since then. This is particularly true for all countries across the globe.

An economy is not a bulb

President Museveni held his first televised address over COVID-19 on 18th March and talked about the struggle against the disease as a “war”. Given his militarism, perhaps, this is a figure of speech, but he needs to be reminded that those on the frontline against the virus aren’t mercenaries, conscripts or enlisted men; they are our doctors, nurses, pharmacists, utility workers, etc. Interventions/tactics that are war-like may suddenly saddle our “frontliners” to death they never signed up for.

Two days later, Museveni made his second televised address over COVID-19 on the 20th March and issued new measures (16 of them) that were to “freeze” the economy and lead to its sudden shut. I could really see a stressed Museveni who stammered to announce the lockdown measures. Since then, the president has gone to conduct 9 other televised addresses over COVID-19, in addition to countless televised press conferences by ministers and other leaders.

It really didn’t require anyone to be a spy to tell that the president was opposed to such “shut-down” measures much as he seemed unaware that shutting down the economy is not like shutting down a light bulb. It is John Cochrane, my favorite Stanford University economist, who recently pointed out that shutting down an economy is like shutting a nuclear reactor: you need to do it slowly and carefully or it melts down.

Government denies the virus fuel

Nevertheless, COVID-19 has clearly proven the ability of governments to take dramatic measures to mitigate an existential threat, as well as people’s ability, at least in the short run, to adapt to new restricted lifestyles imposed by these measures. It has also taught us that the timing of the enactment of measures is crucial for their effectiveness in saving lives.

It’s on that account that I commend Ugandan government, under the leadership of President Museveni and Dr. Jane Ruth Acheng, the minister of health, for quickly enforcing containment policies that have helped to “flatten the epidemiologic curve” for Uganda.

Flattening the epidemiologic curve is done by slowing the rate of infection by reducing overall person-to-person contact, for example, via work and school closures, travel bans, ‘social distancing’, and by removing infected people from the population either by curing them or quarantining them.

Times of fear, it is said, are times of rumors and misinformation and therefore knowledge is the only antidote. Today, any well-informed economist should have some knowledge on the dynamics of spreading infectious diseases. One doesn’t need to be an epidemiologist to understand the basics of epidemiology.

A flatter curve saves lives directly (fewer get ill and so fewer die) and indirectly since it avoids bottlenecks in the healthcare system that typically result in suboptimal treatment.

Flattening the curve also buys time for drastically raising the capacity of the health sector: more beds, more ventilators, more face masks, more tests, more health-care professionals, more research funding, more testing, more tracking, name it.

The desire to flatten the curve is exactly why governments around the world, Uganda inclusive, are taking what might seem like “extreme measures”. Of course, this is in good faith to save lives. Admittedly, the containment measures taken by government, so far, have successfully gunned down my fears for a health crisis that had vehemently occupied my mind the day Uganda announced the first COVID-19 case.

Well, we have flattened the epidemiologic curve by inevitably steepening the macroeconomic recession curve. And the jury is still out on which of two things — COVID-19 or the lock-down effects — will cost more lives and do more damage to Uganda’s economy. My bet is still on the latter.

The lock-down measures have already attenuated the livelihoods of Ugandans (millions of them) who are ‘locked up’ in their homes. But as Darwin surmised, those who survive downturns “are not the strongest or the most intelligent, but the most adaptable to change.”

‘Broken window’ economics

Authorities in Uganda, for obvious reasons, are too optimistic and continue to underestimate the economic damage these lock-down measures are likely to inflict on the economy. They have been the foremost evangelists of the “Broken window economics” in the COVID-19 era.

For starters, in Frederic Bastiat’s parable of the broken window, a shopkeeper’s son carelessly breaks a window pane. A witty onlooker — perhaps Museveni’s ideological ancestor — considers this “good economics” because it creates business for the glazier who replaces broken windows.

Good economics is not common sense neither is it a broken window pane. True, common sense can enable anyone to see the cost of replacing the pane but other things require an economics lens. That was money the shopkeeper could have spent on a basket of food stuffs, a new pair of shoes, fine clothes, or on a book he wanted to read.

To cover costs like replacing the window, and get back to his previous condition, the shopkeeper probably raises prices, meaning his customers have to spend more on his products, leaving them less to spend on other things they might like. Even the glazier’s customers get screwed! Broken windows increase demand, which means higher prices. The man building a new house has to pay more, and wait longer, for new window panes.

The matter is a loss, not a gain, for everyone except the glazier in the long run. Ugandan authorities really need a refresher course in basic text book economics, particularly on how sectors of the economy are interlinked

Get atheists out of the papal conclave!

The other week I saw Hon. David Bahati, state minister for finance, when he was hosted on “NBS Frontline” to explain government’s intervention in response to economic impact of the pandemic. I saw a minister who is unfit for the job.

Throughout the show, the minister appeared like an atheist who had lost his way into a papal conclave (a meeting of the College of Cardinals), in Vatican, and was tasked to lead the second sermon meant to suggest qualities necessary for the next Pope.

Hon. Bahati said, “We have awoken to the reality of global economic disturbance. Let us quickly embark on manufacturing, import substitution and export promotion”. Of course, he was paraphrasing president Museveni’s quip from his second address while launching the lockdown measures.

In brief, authorities in Uganda are optimistic that a few select sectors of the economy will thrive. That agriculture will boost (since most people are in homes and thus more labour force to occupy gardens). That production will speed up (since there agricultural inputs), manufacturing will flourish (since there’s electricity), and that the country can embark on import substitution and export promotion.

Well, a refresher course in economics will remind Ugandan authorities that the economy is a complex web of interconnected stakeholders and supply chains: workers, businesses, suppliers, consumers, technology providers, civil society, financial institutions, policymakers, politicians, etc. Lockdown measures have led to a sudden halt of this complex web and arrested the linkages that allow economies to function.

It will also remind them that globally, economies are connected by about six (6) cross-border flows of: goods, services, knowhow, people, financial capital, foreign direct investment, international banking, and exchange rates.

When they cough, Uganda catches a cold

I will not try my hand at predicting the size of the likely economic damage the pandemic and lockdown measures will cascade on the economy. What is apparent now is that manufacturing will feel a triple hit of the pandemic:

First, COVID-19 was born from the world’s manufacturing heartland (China) and jealously spread fast in the other industrial giants – the US, Japan, Britain, Germany, France, and Italy. These G7 economies account for 65% of world manufacturing and 60% of the world supply. As COVID-19 continues to escalate and its effects reverberate in these G7 economies, the direct supply chain disruptions will attenuate production and limit manufacturing elsewhere, Uganda inclusive.

Second, the supply chain contagion will amplify the aforementioned direct supply shocks as manufacturing sectors in less-hit nations will find it difficult or more expensive to acquire imported industrial inputs from hard-hit nations and subsequently from each other. Production will be limited.

Third, there will be demand disruptions due to drops in aggregate demand (i.e. recessions). When other economies are locked, we shall not export our manufactured goods! But economics also teaches us that when a crisis is presented with massive “Knightian” uncertainty (the unknown-unknowns), of the COVID-19 type, consumers and firms tend to embrace a ‘wait-and-see’ attitude leading to delays in consumption and investment respectively.

That said, the prevailing reality should make evangelists of the cohesion message—Ugandan authorities— to quickly rethink of their interventions to the pandemic. I know the government should preach a message of cohesion and responsibility to prevent public fear and panic in this fight against COVID-19. But on the side of interventions to flatten the economic recession curve, government needs to be bolder if it’s to manage this common crisis and rebuild some trust.

Recommendations

The government should consider a worst case scenario for which COVID-19 is endemic if it is to make the “right” policy interventions that can cushion the implications of containment measures and the speed at which the economy can adjust towards more normal conditions.

Right from the onset, government should revisit the recently passed national budget (FY2020/2021) to ensure that more funds are reallocated to the health sector. As a first priority, the health sector should have funds to support all necessary spending on prevention, containment and mitigation of the virus, including higher overtime pay and better working environment conditions for medical workers, as well as research.
“Confirmation bias” has already hardened the position of development economists who have, for long, identified health systems as a priority that public and private donors should focus on. They stand to be proven right, but the proof might be cruel.

Secondly, government should channel financial support to public and private institutions that support “vulnerable” citizen groups. Beyond distribution of food relief, the vulnerable households should be provided with temporary direct transfers to tide them over the loss of income from work shutdowns and layoffs.

Government should consider converting some food relief into cash. Why? The cost of distributing food is much higher than its intrinsic value in most areas where the vulnerable citizen groups reside. My argument is based on the fact the country has a poor housing strategy. As a result most of the food relief is ending up in the well-to- households (civil servants) who stay near the road leaving the vulnerable households at the mercy of hunger.

Thirdly, small and medium-sized enterprises (SMEs) should be safeguarded against bankruptcy. As SMEs face a falloff in demand, reducing or even suspending fixed charges (such as rent), deferring taxes and credit forbearance would also help to ease the pressure on SMEs. Such interventions can increase liquidity buffers to these firms in affected sectors and enable them avoid debt default.

Lastly, we need to ratchet up “telecommuting” (working from home instead of traveling to an office) and “distance learning” (taking classes from home instead of traveling to a university campus). Those two trends were already noticeable prior COVID-19, but fear of contagion is boosting them tremendously. And when the fear subsides, the benefits will be remembered.

In the meantime, priority should be to ensure that the work force remains employed even if quarantined or forced to stay home. This may require amending our labour regulations. In the long run, not as many people should be returning to offices and campuses as before. That means lighter traffic, lower energy consumption, and more spare time for many workers and students. This should be the job of all stakeholders.

The future

All said, my biggest fears are if the virus becomes endemic—becoming one of humanity’s constant companions, just like the seasonal flu and common cold, in the absence of a vaccine. Given that contagious diseases of the COVID-19 type are rife with “negative externalities”; will the low-risk category individuals accept to self-isolate or take precautionary measures? What will be the low incentives for such individuals to adhere to the measures?

But also given that these preventive measures provision of services (food, medicine and the alike) to high-risk individuals, will the markets provide these services efficiently? Will these services be provided competitively? Should firms providing these services (COVID-19 profiteers) subsidize those who will suffer most from the incoming recession?

Should we prepare for that period? When the comfort of being in the presence of others is replaced by a greater comfort in isolation? Will nations stay closed? What will become of the deserted airports and hotels? Could COVID-19 become the second nature to recoil from touching hands or touching our faces and renders washing our hands a norm?

These questions are unsettling albeit answering them will save humanity a great deal of social unrest going forward.

Mugabe Darious Teaches Economics at Makerere University Business School.

The forgotten lessons- History of pandemics

Influenza Pandemic
There is a famous saying that “we learn from history”. I have picked my pens to demystify this saying in light of the history of pandemics. We seem to have learnt little (if any) and forgotten much (if not all) from the experience of pandemics. December 2019 is not any different from the March of 1918. The latter marked the first wave of Spanish influenza (avian flu) moving across the United States that lasted throughout the summer of 1918.

It started as a joke and little attention was given to this infectious disease. It started along the axis from Massachusetts to Virginia; leaped the Appalachians; positioned along the inland waterways; it jumped clear across the plains and the Rockies to Los Angeles; San Francisco; and Seattle. Then, with secure bases on both coasts, took its time to seep into every niche and corner of America by the fall of 1918. By the spring of 1919, it had spread to almost every corner of the globe subsequently claiming over 50 million lives!

History has it that the global magnitude and spread of the influenza pandemic was exacerbated by World War I, which itself is estimated to have killed roughly 10 million civilians and 9 million troops. Not only did the mass movement of troops from around the world lead to the spread of the disease, tens of thousands of Allied and Central Power troops died as a result of the influenza pandemic rather than combat itself.

The 1918 influenza was unique. Its mortality rates (those who died of influenza) were the highest for the segment of the population aged 18 to 40, and more so for males than females of this age group. These deaths were not caused by the influenza virus itself, but by the body’s immunological reaction to the virus. And surprisingly individuals with the strongest immune systems were more likely to die than individuals with weaker immune systems. Indeed, out of 272,500 male influenza deaths in 1918, nearly 49 percent were aged20 to 39, whereas only 18 percent were under age 5 and 13 percent were over age 50. The fact that males aged 18 to 40 were the hardest hit by the influenza had serious economic consequences for the families that had lost their primary breadwinner. Also, the significant loss of prime working-age employees had economic consequences for businesses globally.

It is reasonable to say that the influenza of 1918 has ‘almost’ been forgotten as a tragic event in world history, despite its economic severity. This is not good, as learning from past pandemics may be the only way to reasonably prepare for any future pandemics. My little intelligence informs me that the 1918 influenza pandemic has not received a notable place in world history for three reasons.

First, the pandemic occurred at the same time as World War I. Thus, the pandemic and World War I were mistaken to be one event rather than two separate events. Second, .Influenza swept into communities, killed members of the population, and was gone in contrast to diseases of the day like polio, smallpox and syphilis which were a permanent part of society. Finally, unlike polio and smallpox, no famous people of the era died from the influenza; thus there was no public perception that even the politically powerful, rich and famous were not immune from the virus. It was unofficially perceived to be the “disease of the poor”.

Mistaken by the above myths, the world did not learn from the influenza experience. We did not plan for future pandemics. We are paying a huge price again.

Covid19 Pandemic
The 31st of December 2020 got us on the flip side of the coin, forgetful of the pandemics’ history. A pneumonia of unknown cause was detected in Wuhan China and reported to Word Health Organization (WHO) country officer. We, again, thought it was a joke and literally thought it was mere pneumonia. Even when WHO announced the corona virus disease 19 (Covid19) as a pandemic on 11th March 2020, we still thought it was a joke. Indeed, jokingly quite many on the African continent branded it a “Whites’ disease” and we were not much bothered, neither did we plan for it.

The evolution of the disease and its economic impact is highly uncertain, which makes it difficult for policymakers to formulate an appropriate macroeconomic policy response. In a strongly connected and integrated world, the impacts of Covid19 beyond mortality (those who die) and morbidity (those who are incapacitated and unable to work for a period) has become apparent since the outbreak. Economists are predicting a global economic recession, much bigger than the one experienced after the 2008 financial crisis.

Economies, worldwide are feeling the heat of a recession. GDP growth rates are on the decline, with China projected to record -2% in the second quarter of 2020—her lowest rate in the past two decades or so; the stock markets are already in intensive care unit (ICU)—with FTSE MIB (Italy), FTSE (UK), and S & P500 (USA) nearing their deaths; Airlines are in “comma”—with over 4.6 million seats on scheduled seats between EU and non-EU countries banned in the past 30 days; large decline in the restaurant industry—with completely no restaurant reservations and walk-ins on open table; tourism is in amnesia; literally all sectors are affected. The dystopian reality of deserted airports, empty trucks and thinly occupied restaurants is already badly hurting economic activity in developing economies.

Uncertainty, panic and lock-down policies are driving a large drop in demand. The drop in demand will thus force many investment firms to close, especially small and young firms which large depend on cash flows. Covid19 is the worst crisis of our time! Unfortunately, in Uganda the spread of this contagious disease has begun to sprint. A lot of questions are already making the brain bells of serious Ugandans to ring. With the ailing heath system on which the country sits, the questions relate to “Thy blood or my Livelihood” contrary to what famous economist, Lionel Robins, coined as “Thy blood or mine” when he was attacking interpersonal comparisons.

Interpersonal comparisons permit us to judge whether prospective additional losses of life of some may be viewed as outweighing the economic or social harms experienced by others. This thinking overrides humane morals in this situation. For starters, Uganda had more ministers than intensive care unit (ICU) beds in hospitals as of February 2020—to justify the extreme end of Uganda’s ailing health system. Tthe country had 12 functional ICUs (80% of them in Kampala), with a total of 55 functional ICU beds and the nurse patient ratio of 1:8 (1 nurse for every 8 patients, for the worst ICU).  But the country has 80 (cabinet 39, state 41) ministers! Since the announcement of the first Covid-19 case, Uganda has fixed her dysfunctional ICUs and consequently raising the ICU beds to over 400. How long shall we make such quick responses with more projected cases?  Not so long!

Public leadership must be at a center stage! Identifying the necessary interventions that take into account of the interdependence between health and economic stability is in the nature of a “wicked problem” which demands extraordinary leadership, at such a time when trust in government is unprecendently low. With the disruptions in the supply chains, how’s Uganda prepared to contain Covid19? How will it affect Uganda’s economy? What are the economic effects of Covid19? Precisely, what’s the economics of Covid19? The Economist Patrol has been allowed, by authorities, to monitor economic situation in Uganda during the “lock-down”. The pens will be pointed to these very pages to report the findings, shortly.

Mugabe Darious teaches economics at Makerere University Business School