Professor Ligang Song is the Director of the China Economy Program, Crawford School of Public Policy.
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By Professor Ligang Song
A crisis can create a window for making reforms and can set in motion institutional and policy changes that would have been hard to push through in normal circumstances. The COVID-19 pandemic crisis may be an opportunity to gather society-wide support, political will, and courage to overcome political obstacles and address those structural problems to drive long-term growth.
First, those structural reforms that aim at boosting economic dynamism and business environment is fundamentally important. Fiscal and monetary measures have already been deployed to combat the economic downturn even before the pandemic hit; however, with the heavy debt burden and the inability of unconventional monetary policies in boosting investment, structural reforms are required to sustain economic growth in the long run. For countries that have excessive regulations, subsidies, licensing regimes, trade protection or other obstacles, it is important to implement structural reforms to help shorten the time to recovery and create confidence that the recovery can be strong and sustained. The structural reforms across economies share one common theme, that is to boost economic dynamism, and to unleash the force of “creative destruction” as an economic and job creation engine.
Another major reason why structural reforms are essential is that the huge fiscal rescue packages may cause the emergence of more zombie firms if governments failed to retract from the economic support in time. For the fiscal rescue policy to be able to orderly exit and to minimize the moral hazard risk that inefficient firms rely on government subsidy to survive and to prevent large firms from thwarting competition, structural reforms that lower entry and exit barriers and level the playing field for competition are crucial. That is, it is important to improve the mix of taxes and spending along with other market structures in a way that enhances competition and/or productivity. These initiatives will shore up private capital expenditure and help the economy rebound and recover with vigor.
Second, continued investment in research and development (R&D) activities for new technologies will be crucial for raising productivity growth and better meeting future public health or climate change challenges. Innovation and technological breakthrough have the potential to significantly boost productivity through creative destruction and resource reallocation towards more efficient industries and firms. The subsequent productivity growth is the key to sustain long term global growth and rise in living standards for the humankind.
Third, global economic cooperation and integration are fundamentally important for fighting the virus and reviving the global economy from this crisis despite the recent setback in globalization. This requires foremost that the world community finds the way of enhancing “trust” which is not just built on good will but on the recognition that we are facing the common threats such as the virus and diseases, and the common challenges such as the environment and climate change, poverty reduction and equality.
The answer to the increasing tensions among different countries does not lie in curbing globalized economic activities such as economic and technological ‘decoupling’ or adaptation of more inward-looking strategies such as import substitutions, or rejecting more advanced technological innovation, because these are the sources of long-term growth which ultimately determines the health of the global economy and ultimately people’s living standards. Instead, what is needed is an adaptation of key institutions including the multilateral trading regime to the new challenges.
The tripartite of new technology, structural reform and re-globalisation (integration) as salvation of the global economic recovering from this pandemic crisis needs to be supported by strong public polices at all levels especially at national levels. This is so not just at the recovering phase from this crisis, but to be persistent throughout the post-pandemic era. The rising income inequality and nationalism in many parts of the world recently reflect the fact that despite rapid global economic growth which brought prosperity to many countries in recent decades, public policies especially in areas of addressing income inequality, workers’ rights and health care are unquestionably inadequate.
Different from other economic and financial crisis, this time requires that the spread of the virus be contained first as much of the world is still struggling to deal with the health effects of the pandemic. No country can stand alone in fighting the virus and the world community needs much cooperation to be successful. These include health cooperation including the provision of health equipment and information, the development and use of the vaccines as public goods, and cooperation in other areas such as a gradual resumption of both international and domestic travels and the upholding of the global supply chains as they are vital for the economic recovery from the pandemic.
*For more detailed discussions, please refer to the full article published in China & World Economy (Vol. 28, No. 4, pp. 1-25, 2020) through the link at: