THE HIGH COST OF NOT UNDERSTANDING THE ECONOMY
Written by Carmelo Ferlito, CEO of Center for Market Education
First published in Free Malaysia Today on 14 January 2021
With the enforcement of the second movement control order (MCO 2.0), the debate about saving lives or saving the economy has returned. It seems we are forced to choose between a lockdown which can help save lives while harming the economy and keeping the economy open but with the possibility of increasing the number of Covid-19 cases and deaths.
However, after one year of dealing with the pandemic, we can conclude that such debate is unnecessary.
First of all, there is growing scientific evidence showing there is no correlation between lockdowns and Covid-19 deaths. Second, the economy is not an abstract entity but rather it is made of human lives too. The choice is, at best, lives vs lives.
The implementation of effective and non-harmful policies needs to be based on a sound analysis of the trade-offs, with a serious look into the unintended consequences produced by such policies.
The way in which the government reacted to the rise in Covid-19 cases shows exactly the opposite: An instinctive reaction not based on evidence and rooted in a distorted view about the economic system, seen as something that can be switched on and off according to the needs of the moment.
Out of 144,518 confirmed Covid-19 cases in Malaysia, there were 563 fatalities, or 0.389%. Most probably that’s not the actual number because surely there are undetected cases and some of the deaths recorded as Covid-19 deaths were actually due to different reasons but by chance the patients were also Covid-19 positive.
But, even if the said percentage was valid, it means that 99.611% of the Covid-19 patients in Malaysia did not die.
However, based on this data, a lockdown that will affect the lives of many was decided upon.
While it has to be recognised that the international trade and industry ministry and the Malaysian Investment Development Authority worked hard to keep the economy alive, in particular to keep on the recovery pace, this decision by the government was poor under many perspectives.
It has now come back to the distinction between essential and non-essential sectors, where such distinction is faulty too.
It has to be noted that every kind of job or business is essential. It is essential in the sense that it puts food on the table for workers and their families.
While the government can eventually decide that we can do without cutting our hair – and this is a dangerous ethical decision, not a technical one – and even if we agree that we can avoid cutting hair for two weeks or a month, what is not understood is that hair salons will not be earning money during that time period, while at the same time they are requested to keep on paying wages and rents.
For those small businesses which survived the first round of lockdowns, this time around they might not be able to do so.
If a hair salon ceases operations, all the connected businesses and people will suffer.
That is why the economy has to be considered as an organic and interconnected whole, not just a sum of pieces.
If a restaurant, forced to carry out takeaways only, sells fewer chicken meals, this will gradually fall back on the entire chicken supply chain. And if that restaurant closes down and people lose jobs, the consumption related to it is lost.
The longer the MCO, the bigger the domino effect. And the domino effect will also involve sectors that are labelled as essential. The supply side works to fulfil a certain demand, and if you cut down demand, then supply will rescale too.
Health director-general Dr Noor Hisham Abdullah recently said that any MCO would not last more than four weeks. But such a statement, although it might have been made with good intentions, is just proof of a very poor understanding on how the economy works. You cannot switch it on and off.
Those businesses and jobs that are destroyed during the MCO are lost. They will not reappear after the lockdown and they are lost in a moment where new opportunities are difficult to come by.
What will happen to these affected individuals? They will become easy prey for depression, starvation and loan sharks. Is the government ready to take responsibility for this?
My personal view is that the lockdown is being implemented not because the government believes in its effectiveness – since evidence says otherwise – but likely because they need to show they are doing something at least.
Above all, our leaders seem to not understand what the economy is and how it works.
Unfortunately, decisions that ignore the nature and essence of the economic process will produce not only poor results, but painful ones too.