Multiple vaccine candidates from various countries have been granted approval and many more are in advanced stages of trials. It will take a considerable amount of time, energy and resources before a large proportion of the population is vaccinated safely, owing to the fact that it is a huge logistical challenge. However, the wheels are in motion, notably with India recently having launched the world’s largest Covid-19 vaccination drive. The progress made in the development and deployment of these vaccines is undoubtedly a huge step in fighting the pandemic. However, a key question that remains is that of the extent of the role played by the potential vaccination of the population in remedying the crippling effect the pandemic has imposed on the world economy. Intuitively, one may think that a vaccinated population would mean fewer infections, easing of restrictions, and hence, things going back to normal. The reversal of the effects on the economy, though, is more nuanced in nature.
Risk vs Uncertainty
The terms ‘risk’ and ‘uncertainty’ are often used interchangeably to describe situations where the final outcome is not known beforehand. However, there is a subtle but important difference between the two. In situations of risk, the possible range of outcomes along with their corresponding probabilities are known. This means there exists an ‘expected outcome’. Therefore, in such situations, much more informed predictions can be made as it is possible to model risk. On the other hand, in situations of uncertainty, it is either impossible to assign probabilities to outcomes or there are some outcomes which are unknown. Hence, it is not possible to work out an expected outcome and is also very difficult to model them and provide reasonable predictions.
The situation we are currently facing is one of much uncertainty due to the unprecedented nature of the crisis. There is uncertainty regarding possible outcomes, given events such as the recent mutation of the virus, and there is no wide consensus over the probabilities with which they could occur. This makes the outlooks of governments as well as agents in the economy extremely shaky. For example, heavily debt-constrained countries may not know how much more they are expected to spend. With unexpected waves of outbreaks, companies do not know how long restrictions are expected to remain or when they may be re-introduced.
Despite the news of multiple vaccines, this uncertainty persists since there are questions about distribution, effectiveness and safety, as well as the threat of new mutations questioning the efficacy of the vaccines.
Consumer and Firm Behaviour
One of the most significant economic impacts of the lockdowns has been on consumer behaviour, which in turn drives how firms behave. In understanding these effects, it is important to differentiate between temporary and permanent effects. Temporary effects may include things that are directly linked to restrictions such as the number of people visiting restaurants. These effects can be reversed easily upon the vaccination of the population. There are other patterns of behaviour that have arguably been altered permanently due to the pandemic. One such example is travel. Airbnb’s CEO has predicted that COVID-19 will permanently change the way people travel — with lesser business travel and more leisure travel, as well as lesser focus on large international destinations and more on smaller regional locations. It is these permanent changes that will determine the effect that the pandemic will leave on various sectors.
Different sectors will be affected differently, based not only on the nature of these changes but also on how firms are able to respond to them across sectors. In sectors such as EdTech and Digital Tools, several firms may enter the market to capitalize on opportunity, thereby increasing competition. In other sectors, such as aviation, harsh conditions imposed due to such changes may result in the survival of only those firms that have the financial capacity to take the most damage, leading to decreased competition and in extreme cases, even an oligopoly or monopoly. To the extent that higher competition pushes equilibrium prices lower, it is reasonable to expect prices across various sectors to vary accordingly.
While the vaccine can reverse certain direct effects on the economy, there are several indirect effects on, and scarring of, the economy that may persist. Furthermore, due to the high interconnectedness of economies globally, the decisions of one country could potentially affect others. Directly related to vaccination, since economies globally are interconnected and depend on supply chains, vaccination of only certain countries while leaving out others leads to costs for the world economy since supply chains can be disrupted by new waves in unvaccinated countries. A study has estimated that in the scenario that developing countries are able to vaccinate only half their populations by the end of the year, the loss to the world economy could be between $1.8 to 3.3 trillion.
Another concern that has been recently highlighted by Raghuram Rajan is a possible ‘taper tantrum’ that may occur when Central Banks such as the Federal Reserve eventually roll back the excess liquidity pumped in to support the recovery, similar to what happened in 2013 when the Fed started putting breaks in its Quantitative Easing program. This means that as interest rates begin to rise again as the Fed scales back its support, there could be huge cash outflows from emerging markets as investors react, leading to detrimental effects on the exchange rate, destabilizing emerging markets such as India.
Hysteresis, as the term is used in economics, is a situation where a shock’s effects persist even after the initial causes have been removed, usually following a large negative shock — such as that posed by the pandemic. The Economic Survey 2021 highlights this in particular, stating that “jobs lost during the lockdown may not get fully retrieved, creating the possibility of Economic Hysteresis that must be avoided at all costs”.
Therefore, to truly reverse the effects imposed on the economy, it would take a globally coordinated response, with economic policy that is aimed at reducing scarring that damages the long term drivers of economic growth.
Arvind Gururaj is a second-year undergraduate student at Ashoka University, majoring in Economics and Finance and minoring in Mathematics.