America, coronavirus and the bailout refuseniks

Many have welcomed state support but others believe it goes against US principles. What next?

Gillian Tett


© Shonagh Rae


When the American government unveiled its so-called Paycheck Protection Program last month, Scott Galloway, a marketing professor based in New York, did some calculations — and realised he could claim about $250,000.

This was because Galloway had recently created a small company, Prof G, which provides online university courses. The PPP offers loans to companies to cover their payroll and other expenses, which are forgiven if staff are retained. But Galloway chose not to apply for the cash.

Why? Because he is a die-hard fan of the free market and believes in “creative destruction”, the concept pioneered by the economist Joseph Schumpeter, which holds that insolvent companies should go bust to enable healthier upstarts to emerge.

Galloway therefore became a bailout refusenik. “It would be so easy for us to rationalise taking the money. If a helicopter drops money, you want to grab it,” he tells me. “But if we can’t make [Prof G] work without a bailout, even in a pandemic, we don’t deserve to be in business.” A maverick view?

Perhaps. Galloway admits that it is easier for him than for most small business owners to take this route, since Prof G has wealthy backers and operates in a sector that will probably thrive in a post-Covid-19 world.

But his gesture points to a bigger question now confronting the US: are government support programmes such as PPP compatible with its claim to be a free-market, capitalist country?

Should such state support be welcomed — or shunned?

Personally, I feel torn — and so, I suspect, do many FT readers. When Covid-19 first struck, the events were so shocking it was easy to think that government intervention made sense. It seemed laudable for the US Federal Reserve (and other central banks) to use unorthodox measures stop a financial market freeze, or for the US or UK Treasury to provide aid to help businesses survive the immediate impact.

Simply letting companies go bust would have risked creating a self-perpetuating spiral of panic, as Jeremy Stein, an economist and former Fed governor told a Princeton symposium last week. It would also have heralded terrible pain for many poor households — particularly in the US, given its weak social safety net.

Two months on, I still feel that much of this logic is correct. But what is also becoming clear is that government support comes with increasingly heavy costs attached. One is an explosion in the national debt burden (which can probably only be solved through future financial repression).

Another is the fact that bailouts support not just the viable companies but also those that probably ought to die because they have spent the past decade drowning in debt, in sectors that do not have a bright future (say, bricks-and-mortar retail). You don’t have to be a full-on Schumpeter acolyte to see that this is bad for future growth.

Then there is another problem: the bailouts risk exacerbating US income inequality. Yes, they feature admirable measures to help small businesses. And, yes, they also include a cheque of up to $1,200 for individuals (which is more than some workers get paid per month) and extra for those with children.

But the Fed’s actions have also rescued bond and equity prices. That means it is not just companies that are being propped up, but capital — which benefits the rich, since they own these assets.

Of course, Treasury secretary Steve Mnuchin might argue that this is an unavoidable, temporary price to pay in a crisis. Perhaps so. As Clark Winter, a former Wall Street strategist, points out, what the government is trying to do with the economy is similar to what somebody trying to fix a computer might do. Namely, shut it down to reboot it and restore its operations without a hardware glitch. If it works, there should be no need for state support beyond midsummer.

In reality, “rebooting” an economy is not the same as rebooting a laptop. Economies always change: trying to preserve the old system risks entrenching its vested interests. And if the Covid-19 crisis lasts longer than Mnuchin and his colleagues initially predicted (to mid-June), the bailout money will run out. That will force the US government to either double down or let companies collapse.

This week, the UK government faced the same choice — and announced it would extend its furlough scheme until October.Is there a better way to do this? In an ideal world, an obvious answer would be for the US to build a stronger social safety net that gave workers access to healthcare even if they lost their jobs.

If that existed, “creative destruction” would be somewhat less brutal for ordinary workers — and easier to accept in a political sense. In the real world, however, many Republicans hate the idea of such a safety net since they consider it socialist. This means it is unlikely to fly — making it harder to impose free-market solutions.

So, for the foreseeable future, Galloway is going to remain a rarity: although few Americans like the idea of a bailout, even fewer will resist it when offered.

Therein lies the irony of US capitalism today — and a reason to expect increasingly bitter fights if the bailout money disappears before Covid-19 finally does.

Can governments afford the debts they are piling up to stabilise economies?

Two experts debate the long-term impact on inflation of the Covid-19 rescue packages

Stephanie Kelton and Edward Chancellor


© Ingram Pinn/Financial Times


Yes — It poses no inherent danger to states that issue their own currency

The Covid-19 pandemic has forced governments around the world to spend large sums in an effort to stabilise their economies, writes Stephanie Kelton.

Gone, for now, are concerns about how to “pay for” it all.

Instead we are seeing wartime levels of spending, driving deficits — and public debt — to new highs.

France, Spain, the US, and the UK are all projected to end the year with public debt levels of more than 100 per cent of gross domestic product, while Goldman Sachs predicts that Italy’s debt-to-GDP ratio will soar above 160 per cent.

In Japan, Prime Minister Shinzo Abe has committed to nearly $1tn in new deficit spending to protect a $5tn economy, a move that will push Japan’s debt ratio well above its record of 237 per cent.

With GDP collapsing on a global scale, few countries will escape.

In advanced economies, the IMF expects average debt-to-GDP ratios to be above 120 per cent in 2021.

While most see big deficits as a price worth paying to combat the crisis, many worry about a debt overhang in a post-pandemic world.

Some fear that investors will grow weary of lending to cash-strapped governments, forcing countries to borrow at higher interest rates.

Others worry governments will need to impose painful austerity in the years ahead, requiring the private sector to tighten its belt to pay down public debt.

They should not.

While public debt can create problems in certain circumstances, it poses no inherent danger to currency-issuing governments, such as the US, Japan, or the UK.

This is not, as some argue, because these countries can currently borrow at very low cost, or because a strong recovery will allow them to grow their way out of debt.

There are three real reasons.

First, a currency-issuing government never needs to borrow its own currency.

Second, it can always determine the interest rate on bonds it chooses to sell.

Third, government bonds help to shore up the private sector’s finances.

The first point should be obvious, but it is often obscured by the way governments manage their fiscal operations.

Take Japan, a country with its own sovereign currency.

To spend more, Tokyo simply authorises payments and the Bank of Japan uses the computer to increase the quantity of Yen in the bank account.

Being the issuer of a sovereign currency means never having to worry about how you are going to pay your bills.

The Japanese government can afford to buy whatever is available for sale in its own currency.

True, it can spend too much, fuelling inflationary pressure, but it never needs to borrow Yen.

If that is true, why do governments sell bonds whenever they run deficits?

Why not just spend without adding to the national debt?

It is an important question.

Part of the reason is habit.

Under a gold standard, governments sold bonds so deficits would not leave too much currency in people’s hands.

Borrowing replaced currency (which was convertible into gold) with government bonds which were not.

In other words, countries sold bonds to reduce pressure on their gold reserves.

But that’s not why they borrow in the modern era.

Today, borrowing is voluntary, at least for countries with sovereign currencies.

Sovereign bonds are just an interest-bearing form of government money.

The UK, for example, is under no obligation to offer an interest-bearing alternative to its zero-interest currency, nor must it pay market rates when it borrows.

As Japan has demonstrated with yield curve control, the interest rate on government bonds is a policy choice.

So today, governments sell bonds to protect something more valuable than gold: a well-guarded secret about the true nature of their fiscal capacities, which, if widely understood, might lead to calls for “overt monetary financing” to pay for public goods.

By selling bonds, they maintain the illusion of being financially constrained.

In truth, currency-issuing governments can safely spend without borrowing.

The debt overhang that many are worried about can be avoided.

That is not to say that there is anything wrong with offering people an interest-bearing alternative to government currency.

Bonds are a gift to investors, not a sign of dependency on them.

The question we should be debating, then, is how much “interest income” should governments be paying out, and to whom?

The writer is a professor of economics and public policy at Stony Brook University and author of the forthcoming book “The Deficit Myth”


No — This dangerous monetary practice ensures inflation is around the corner

How to pay for the fathomless costs of fighting a pandemic?

All the state’s expenses, whether a Green New Deal, jobs-for-all or the economic lockdowns, can be met simply by printing money.

That is what modern monetary theory claims, writes Edward Chancellor.

Adherents of this unorthodox school of economics would have us believe, like Alice in Wonderland, six impossible things before breakfast.

Governments can never go bust.

They don’t need to raise taxes or issue bonds to finance themselves.

Borrowing creates savings.

Fiscal deficits are not the problem, they are the cure.

We could even pay off the national debt tomorrow.

As theory, MMT has been rejected by mainstream economists.

But as a matter of practical policy, it is already being deployed.

Ever since Ben Bernanke, as governor of the US Federal Reserve, delivered his “helicopter money” speech in November 2002, the world has been moving in this direction.

As president of the European Central Bank, Mario Draghi proved that even the most indebted countries need not default.

Last year, the US federal deficit exceeded $1tn at a time when the Fed was acquiring Treasuries with newly printed dollars — that’s pure MMT.

This crisis has accelerated the process.

Fiscal and monetary policy are now being openly co-ordinated, just as MMT recommends.

The US budget deficit is set to reach nearly $4tn this year.

But tax rises are not on the agenda.

Instead, the Fed will write the cheques.

Across the Atlantic, the Bank of England is directly financing the largest peacetime deficit in its history.

MMT claims that money is a creature of the state.

The Fed’s share of an expanding US money supply is close to 40 per cent and rising.

Again, we are seeing MMT in practice.

The lockdown is a propitious moment to implement MMT.

During crises, the public has an abnormally high demand to hold cash; debt monetisation appears less of a problem.

But governments can print money to cover their costs for only as long as the public retains confidence in a currency.

When the crisis passes, the excess money must be mopped up.

Proponents of MMT claim this shouldn’t be a problem.

But then they admit that nobody has a good inflation model.

We cannot accurately measure the economy’s spare capacity, either.

This means that politicians are unlikely to raise taxes in time to nip inflation in the bud.

Bonds can always be issued to withdraw money from circulation.

But once inflation is under way, bondholders demand higher coupons.

From a fiscal perspective, it makes more sense to issue government debt when rates are low — as they are today — than to print money now and pay higher rates later.

Great historic inflations have been caused not by monetary excesses but by supply shocks, say MMT exponents.

It’s likely that coronavirus will turn out to be one of those shocks.

Besides, history casts doubt on attempts to explain inflation by non-monetary factors.

The closest example of MMT in implementation comes from France’s experiment with paper money.

In 1720, the Scottish adventurer John Law served as French finance minister and head of the central bank.

The bank printed lots of paper money, the national debt was repaid and France enjoyed brief prosperity.

But inflation soon took off and crisis ensued.

The truth is that governments have an inherent bias towards inflation, especially under adverse conditions such as wars and revolutions.

The Covid-19 lockdown is another such condition.

Tomorrow’s inflation will alleviate some of today’s financial problems: debt levels will come down and inequalities of wealth will be mitigated.

Once excessive debt has been inflated away, interest rates can return to normal.

When that happens, homes should be more affordable and returns on savings will rise.

But the evils of inflation should not be overlooked.

Economies do not function well when everyone is scrambling to keep pace with soaring prices.

Inflations produce their own distributional pain.

Workers whose incomes rise with inflation do better than retirees.

Debtors will thrive at the expense of creditors. Profiteers arise, along with populists who feed on social discontents.

Modern monetary practices ensure another inflation is around the corner.

MMT provides the intellectual gloss.

It promises a free lunch.

Even Alice shouldn’t believe that.


The writer, a financial historian, is author of a forthcoming history of interest

The Covid-19 Riddle: Why Does the Virus Wallop Some Places and Spare Others?

Experts are trying to figure out why the coronavirus is so capricious. The answers could determine how to best protect ourselves and how long we have to.

By Hannah Beech, Alissa J. Rubin, Anatoly Kurmanaev and Ruth Maclean


Iraqi border agents at the Zurbatiya border crossing with Iran. On the other side lies the largest epicenter of the virus in the Middle East. On the Iraqi side, there are relatively few cases.Credit...Ivor Prickett for The New York Times



The coronavirus has killed so many people in Iran that the country has resorted to mass burials, but in neighboring Iraq, the body count is fewer than 100.

The Dominican Republic has reported nearly 7,600 cases of the virus. Just across the border, Haiti has recorded about 85.

In Indonesia, thousands are believed to have died of the coronavirus. In nearby Malaysia, a strict lockdown has kept fatalities to about 100.

The coronavirus has touched almost every country on earth, but its impact has seemed capricious. Global metropolises like New York, Paris and London have been devastated, while teeming cities like Bangkok, Baghdad, New Delhi and Lagos have, so far, largely been spared.

The question of why the virus has overwhelmed some places and left others relatively untouched is a puzzle that has spawned numerous theories and speculations but no definitive answers. That knowledge could have profound implications for how countries respond to the virus, for determining who is at risk and for knowing when it’s safe to go out again.

There are already hundreds of studies underway around the world looking into how demographics, pre-existing conditions and genetics might affect the wide variation in impact.

Doctors in Saudi Arabia are studying whether genetic differences may help explain varying levels of severity in Covid-19 cases among Saudi Arabs, while scientists in Brazil are looking into the relationship between genetics and Covid-19 complications. Teams in multiple countries are studying if common hypertension medications might worsen the disease’s severity and whether a particular tuberculosis vaccine might do the opposite.

Many developing nations with hot climates and young populations have escaped the worst, suggesting that temperature and demographics could be factors.

But countries like Peru, Indonesia and Brazil, tropical countries in the throes of growing epidemics, throw cold water on that idea.

Draconian social-distancing and early lockdown measures have clearly been effective, but Myanmar and Cambodia did neither and have reported few cases.

One theory that is unproven but impossible to refute: maybe the virus just hasn’t gotten to those countries yet. Russia and Turkey appeared to be fine until, suddenly, they were not.

Time may still prove the greatest equalizer: The Spanish flu that broke out in the United States in 1918 seemed to die down during the summer only to come roaring back with a deadlier strain in the fall, and a third wave the following year. It eventually reached far-flung places like islands in Alaska and the South Pacific and infected a third of the world’s population.

“We are really early in this disease,” said Dr. Ashish Jha, the director of the Harvard Global Health Research Institute. “If this were a baseball game, it would be the second inning and there’s no reason to think that by the ninth inning the rest of the world that looks now like it hasn’t been affected won’t become like other places.”

Doctors who study infectious diseases around the world say they do not have enough data yet to get a full epidemiological picture, and that gaps in information in many countries make it dangerous to draw conclusions. Testing is woeful in many places, leading to vast underestimates of the virus’s progress, and deaths are almost certainly undercounted.

Still, the broad patterns are clear. Even in places with abysmal record-keeping and broken health systems, mass burials or hospitals turning away sick people by the thousands would be hard to miss, and a number of places are just not seeing them — at least not yet.

Interviews with more than two dozen infectious disease experts, health officials, epidemiologists and academics around the globe suggest four main factors that could help explain where the virus thrives and where it doesn’t: demographics, culture, environment and the speed of government responses.

Each possible explanation comes with considerable caveats and confounding counter-evidence. If an aging population is the most vulnerable, for instance, Japan should be at the top of the list. It is far from it.

Nonetheless these are the factors that experts find the most persuasive.


The Power of Youth

Many countries that have escaped mass epidemics have relatively younger populations.

Young people are more likely to contract mild or asymptomatic cases that are less transmissible to others, said Robert Bollinger, a professor of infectious diseases at the Johns Hopkins School of Medicine.

And they are less likely to have certain health problems that can make Covid-19, the disease caused by the coronavirus, particularly deadly, according to the World Health Organization.
 
Africa — with about 45,000 reported cases, a tiny fraction of its 1.3 billion people — is the world’s youngest continent, with more than 60 percent of its population under age 25. In Thailand and Najaf, Iraq, local health officials found that the 20-to-29 age group had the highest rate of infection but often showed few symptoms.

By contrast, the national median age in Italy, one of the hardest hit countries, is more than 45.

The average age of those who died of Covid-19 there was around 80.

Younger people tend to have stronger immune systems, which can result in milder symptoms, said Josip Car, an expert in population and global health at Nanyang Technological University in Singapore.

In Singapore and Saudi Arabia, for instance, most of the infections are among foreign migrant workers, many of them living in cramped dormitories. However, many of those workers are young and fit, and have not required hospitalization.

Along with youth, relative good health can lessen the impact of the virus among those who are infected, while certain pre-existing conditions — notably hypertension, diabetes and obesity — can worsen the severity, researchers in the United States say.

There are notable exceptions to the demographic theory. Japan, with the world’s oldest average population, has recorded fewer than 520 deaths, although its caseload has risen with increased testing.

The Guayas region of Ecuador, the epicenter of an outbreak that may have claimed up to 7,000 lives, is one of the youngest in the country, with only 11 percent of its residents over 60 years old.

And Dr. Jha of Harvard warns that some young people who are not showing symptoms are also highly contagious for reasons that are not well understood.

Cultural Distance

Cultural factors, like the social distancing that is built into certain societies, may give some countries more protection, epidemiologists said.

In Thailand and India, where virus numbers are relatively low, people greet each other at a distance, with palms joined together as in prayer. In Japan and South Korea, people bow, and long before the coronavirus arrived, they tended to wear face masks when feeling unwell.

In much of the developing world, the custom of caring for the elderly at home leads to fewer nursing homes, which have been tinder for tragic outbreaks in the West.

However, there are notable exceptions to the cultural distancing theory. In many parts of the Middle East, such as Iraq and the Persian Gulf countries, men often embrace or shake hands on meeting, yet most are not getting sick.

What might be called “national distancing” has also proven advantageous. Countries that are relatively isolated have reaped health benefits from their seclusion.

Far-flung nations, such as some in the South Pacific and parts of sub-Saharan Africa, have not been as inundated with visitors bringing the virus with them. Health experts in Africa cite limited travel from abroad as perhaps the main reason for the continent’s relatively low infection rate.

Countries that are less accesible for political reasons, like Venezuela, or because of conflict, like Syria and Libya, have also been somewhat shielded by the lack of travelers, as have countries like Lebanon and Iraq, which have endured widespread protests in recent months.

The lack of public transportation in developing countries may have also reduced the spread of the virus there.

Heat and Light

The geography of the outbreak — which spread rapidly during the winter in temperate zone countries like Italy and the United States and was virtually unseen in warmer countries such as Chad or Guyana — seemed to suggest that the virus did not take well to heat. Other coronaviruses, such as ones that cause the common cold, are less contagious in warmer, moist climates.

But researchers say the idea that hot weather alone can repel the virus is wishful thinking.

Some of the worst outbreaks in the developing world have been in places like the Amazonas region of Brazil, as tropical a place as any.

“The best guess is that summer conditions will help but are unlikely by themselves to lead to significant slowing of growth or to a decline in cases,” said Marc Lipsitch, the director of the Center for Communicable Disease Dynamics at Harvard University.

The virus that causes Covid-19 appears to be so contagious as to mitigate any beneficial effect of heat and humidity, said Dr. Raul Rabadan, a computational biologist at Columbia University.

But other aspects of warm climates, like people spending more time outside, could help.

“People living indoors within enclosed environments may promote virus recirculation, increasing the chance of contracting the disease,” said Mr. Car of Nanyang Technological University.

The ultraviolet rays of direct sunlight inhibit this coronavirus, according to a study by ecological modelers at the University of Connecticut. So surfaces in sunny places may be less likely to remain contaminated, but transmission usually occurs through contact with an infected person, not by touching a surface.

No scientist has proposed that beaming light inside an infected person, as President Trump has suggested, would be an effective cure. And tropical conditions may have even lulled some people into a false sense of security.

“People were saying ‘It’s hot here, nothing will happen to me,’” said Dr. Doménica Cevallos, a medical investigator in Ecuador. “Some were even going out on purpose to sunbathe, thinking it would protect them from infection.”

Early and Strict Lockdowns

Countries that locked down early, like Vietnam and Greece, have been able to avoid out-of-control contagions, evidence of the power of strict social distancing and quarantines to contain the virus.

In Africa, countries with bitter experience with killers like H.I.V., drug-resistant tuberculosis and Ebola knew the drill and reacted quickly.

Airport staff from Sierra Leone to Uganda were taking temperatures (since found to be a less effective measure) and contact details and wearing masks long before their counterparts in the United States and Europe took such precautions.

Senegal and Rwanda closed their borders and announced curfews when they still had very few cases. Health ministries began contact tracing early.

All this happened in a region where health ministries had come to rely on money, personnel and supplies from foreign donors, many of which had to turn their attention to outbreaks in their own countries, said Catherine Kyobutungi, executive director of the African Population and Health Research Center.

“Countries wake up one day and they’re like, ‘OK, the weight of the country rests on our shoulders, so we need to step up,’” she said. “And they have. Some of the responses have been beautiful to behold, honestly.”

Sierra Leone repurposed disease-tracking protocols that had been established in the wake of the Ebola outbreak in 2014, in which almost 4,000 people died there. The government set up emergency operations centers in every district and recruited 14,000 community health workers, 1,500 of whom are being trained as contact tracers, even though Sierra Leone has only about 155 confirmed cases.

It is not clear, however, who will pay for their salaries or for expenses like motorcycles and raincoats to keep them operating during the coming wet season.

Uganda, which also suffered during the Ebola contagion, quickly quarantined travelers from Dubai after the first case of coronavirus arrived from there. Authorities also tracked down about 800 others who had traveled from Dubai in previous weeks.

The Ugandan health authorities are also testing around 1,000 truck drivers a day. But many of those who test positive have come from Tanzania and Kenya, countries that are not monitoring as aggressively, leading to worries that the virus will keep penetrating porous borders.

Lockdowns, with bans on religious conclaves and spectator sporting events, clearly work, the World Health Organization says. More than a month after closing national borders, schools and most businesses, countries from Thailand to Jordan have seen new infections drop.

In the Middle East, the widespread shuttering of mosques, shrines and churches happened relatively early and probably helped stem the spread in many countries.

A notable exception was Iran, which did not close some of its largest shrines until March 18, a full month after it registered its first case in the pilgrimage city of Qum. The epidemic spread quickly from there, killing thousands in the country and spreading the virus across borders as pilgrims returned home.

As effective as lockdowns are, in countries lacking a strong social safety net and those where most people work in the informal economy, orders closing businesses and requiring people to shelter in place will be difficult to maintain for long. When people are forced to choose between social distancing and feeding their families, they are choosing the latter.

Counter-intuitively, some countries where authorities reacted late and with spotty enforcement of lockdowns appear to have been spared. Cambodia and Laos both had brief spates of infections when few social distancing measures were in place but neither has recorded a new case in about three weeks.

Lebanon, whose Muslim and Christian citizens often go on pilgrimages respectively to Iran and Italy, places rife with the virus, should have had high numbers of infections. It has not.

“We just didn’t see what we were expecting,” said Dr. Roy Nasnas, an infectious disease consultant at the University Hospital Geitaoui in Beirut. “We don’t know why.”

Roll of the Dice

Finally, most experts agree that there may be no single reason for some countries to be hit and others missed. The answer is likely to be some combination of the above factors, as well as one other mentioned by researchers: sheer luck.

Countries with the same culture and climate could have vastly different outcomes if one infected person attends a crowded social occasion, turning it into what researchers call a super-spreader event.

That happened when a passenger infected 634 people on the Diamond Princess cruise ship off the coast of Japan, when an infected guest attended a large funeral in Albany, Ga., and when a 61-year-old woman went to church in Daegu, South Korea, spreading the disease to hundreds of congregants and then to thousands of other Koreans.

Because an infected person may not experience symptoms for a week or more, if at all, the disease spreads under the radar, exponentially and seemingly at random. Had the woman in Daegu stayed home that Sunday in February, the outbreak in South Korea might have been less than half of what it is.

Some countries that should have been inundated are not, leaving researchers scratching their heads.

Thailand reported the first confirmed case of coronavirus outside of China in mid-January, from a traveler from Wuhan, the Chinese city where the pandemic is thought to have begun. In those critical weeks, Thailand continued to welcome an influx of Chinese visitors. For some reason, these tourists did not set off exponential local transmission.

And when countries do all the wrong things and still end up seemingly not as battered by the virus as one would expect, go figure.

“In Indonesia, we have a health minister who believes you can pray away Covid, and we have too little testing,” said Dr. Pandu Riono, an infectious disease specialist at the University of Indonesia

“But we are lucky we have so many islands in our country that limit travel and maybe infection.”

“There’s nothing else we’re doing right,” he added.

The Populists’ Pandemic

Because populist leaders of both the right and left have topped the ranks of incompetence during the pandemic, it has become common to claim that they will soon become its political victims. Alas, this may be wishful thinking.

Andrés Velasco

velasco104_Luis GutierrezGetty Images_amlomexico


LONDON – US President Donald Trump suggested that injecting them with household disinfectant might cure people of the coronavirus. Filipino President Rodrigo Duterte ordered police and military to shoot dead anyone “who creates trouble” during the stay-at-home period.

And in Mexico, President Andrés Manuel López Obrador denied for weeks that the virus was a threat and continued to hug and shake hands with supporters, only to flip suddenly and impose a severe lockdown without warning.

Because populist leaders of both the right and left have topped the ranks of incompetence during the pandemic, it has become common to claim that they could soon become its political victims. Alas, this may be wishful thinking.

The virus is lethal and ruthless, but alone it will not flatten the populist contagion curve.

The crisis has had one healthy byproduct: restoring a modicum of respect toward expertise. After making disparagement of experts a trademark of their political careers, both Trump and UK Prime Minister Boris Johnson have been forced to hold press conferences with their scientific advisers, who have openly contradicted their bosses when needed.

Even worse, Trump has had to endure the indignity of a poll showing that Anthony Fauci, the government’s top infectious disease expert, enjoys an approval rating nearly twice as high as his own.

This is one strike against the anti-elitism that has propelled populists to power. But other factors still operate in their favor. Wild-eyed populists are certainly not the only ones making a hash of things. Spanish Prime Minister Pedro Sánchez and Italian Prime Minister Giuseppe Conte – not populists themselves, though they have populist junior partners in their coalition governments – have the unenviable record of leading countries that are world leaders in per capita coronavirus deaths.

And who ever said that facts drive political preferences, anyway? The weight of fake news and identity-driven politics may be rising, not falling, in the era of COVID-19. Trump blamed China for the virus and closed off the US to migrants, and his base cheered.

Brazil’s President Jair Bolsonaro followed the same script, claiming that the coronavirus crisis is a media trick. As an epidemiologist from the University of São Paulo put it: “It’s as if everybody’s on the same train heading towards a cliff-edge and someone says: ‘Look out!
There’s a cliff!’ And the passengers shout: ‘Oh no there isn’t!’ And the train driver says: ‘Yeah, there’s nothing there!’”

Because establishing causal relationships is hard (Are lockdowns effective in slowing the rate of contagion? Are fiscal expansions effective in pulling the economy out of recession?), most people do not expect to arrive at answers on their own.

Instead, they look to others who claim to know, and then they follow a simple rule of thumb: Believe people with whom I can identify, who talk and act like I do, and who are likely to share my values and make the decisions I would have made if I had enough information.

That is why voters trust populist politicians and distrust the political establishment, leaders of traditional institutions and, until recently, experts and technocrats. Whether populists gain or lose politically from the pandemic thus depends on whether the crisis strengthens or further weakens trust in democratic institutions.

I can imagine two very different replies to this second question. The first is the 2010 answer: As many voters saw it, after the global financial crisis Wall Street got a bailout, while Main Street got only unemployment and home foreclosures. (Forget that in the US the bailout averted another Great Depression and also made the government money.)

In some countries, the economic recovery was slow; in others, like Greece, the crisis dragged on for nearly a decade. Add a spoonful of corruption, a pinch of ineptitude, and a dash of juicy scandal, ranging from FIFA to the Catholic Church, and voilà: a perfect casserole of distrust. We are not in this together, many concluded. Elites look out only for themselves. Let’s drain the swamp.

The alternative answer dates back to 1945. From the rubble and devastation of war, durable social trust emerged. In the UK and the US, the rich kid from Oxford or Yale had fought shoulder-to-shoulder with the coal miner’s son from North Yorkshire or Hazard, Kentucky. Private businesses, large and small, had mobilized for a public purpose: the war effort. And politicians had delivered on the ultimate common good: victory.

The suffering and loss of life during World War II had been horrific. But in many countries, citizens could plausibly conclude that we are in this together, and together we will build a better tomorrow.

So, which one will it be, 2010 or 1945?

While it is too soon to tell, the ritualistic applause for front-line health workers, whether in New York, Madrid, Paris, or Istanbul, is reminiscent of the spirit of 1945. In my corner of London, neighbors emerge every Thursday punctually at 8:00 p.m. not only to celebrate the National Health Service, but also to trade stories and offer one another help with shopping or with a child who needs looking after.

Trust in a public institution and in your neighbors is bad for populism, and populist politicians know it. That is why Santiago Abascal, the leader of Spain’s far-right Vox movement, is demanding an end to the applause and to the enthusiastic singing that accompanies it. Instead, he wants Spaniards to bang pots and pans in protest against the government.

But before liberal democrats get their hopes up, they should remember that the crisis will also sow plenty of divisions: between professionals who can work from home and factory workers who cannot; between the elderly who cannot go outside and the young who are being kept inside by government decree; and between formal workers who receive wage subsidies and the self-employed who have lost all income.

The virus contagion curve may be flattening, but the unemployment and business bankruptcy curves remain on the rise. If the public-health shock is followed by a protracted economic crisis that leaves many people behind, trust in government and institutions will suffer and national identities will fracture even more.

It will be 2010 all over again – or worse. United we stand, divided we fall.

If we fall, it won’t be liberal democrats who pick up the pieces.


Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities.

The Coronavirus Has Pushed North Korea’s Economy to the Edge

Despite the crisis, there’s no signs of reform from Pyongyang.

By Thomas Byrne

Customers look at makeup products in a store attached to a cosmetics factory in Pyongyang on July 28, 2018.
Customers look at makeup products in a store attached to a cosmetics factory in Pyongyang on July 28, 2018. Ed Jones/AFP via Getty Images


As in much of the world, the coronavirus pandemic has shut down North Korea’s economy. The country’s fiscal resources are overwhelmed, forcing Pyongyang to issue domestic bonds for the first time in 17 years. The crisis highlights the country’s financial weakness, which stems from its decades-long self-imposed isolation and more recent international sanctions.

Before turning to debt, North Korea attempted to wring money from state factories and the country’s budding donju entrepreneur class of merchants—and, increasingly, financiers—who best exemplify North Korea’s “reform from below” dynamic.

They rose from the collapse of the central plan and have a symbiotic relationship with a state officially hostile to capitalism, existing in a limbo with little political or legal protections, as contract law and property rights remain rudimentary.

The Minju Chosun, a powerful government-run newspaper in North Korea, called on factories and businesses to fulfill their tax obligations so that the state could meet its plans to grow the budget 4.2 percent this year. That seems an impossibility at this point.

But recognizing the limits of squeezing revenue from a failing economy, the government now plans to issue domestic bonds for the first time since the small issuance of “People’s Livelihood” bonds in 2003. (North Korea has never issued international bonds.)

The debt issuance is notable because the governments of Kim Jong Un and his father, Kim Jong Il, ran tight fiscal ships, spending within their means and not resorting to inflationary financing. For all its failings, North Korea did not fall into the hyperinflation trap as other isolated and badly run states like Zimbabwe and Venezuela did.

The aim of the debt issuance is to collect as much foreign currency circulating in the country as possible. The issuance will be massive, reportedly covering 60 percent of the budget. (In comparison, South Korea’s deficit financing will rise to only 16 percent of its expenditure in 2020.)

The majority of the bonds will be issued to state-run firms, but 40 percent will be sold to the donju. The latter will be required to purchase the bonds to obtain business permits.

Without the coercion of withholding business licenses, the donju would be unwilling to swap hard-earned savings for government debt, knowing that the government has a very poor record of honoring its liabilities. The donju hold bad memories of the currency redenomination in 2009, which wiped out personal savings.

International efforts are probably not in the cards, although there is a prior example. North Korea is no stranger to economic stress and has shunned engagement with the international community. But in 1997, in the midst of a devastating famine, it approached the International Monetary Fund (IMF) in search of external financing. At the time, the economy had still not recovered from the 1991 collapse of the Soviet Union, and there were no domestic savings to tap.

IMF staff conducted a fact-finding mission to Pyongyang led by the senior advisor of its Asia and Pacific Department in September of that year. They concluded that “a fundamental change in policies, along with large amounts of investment to restructure the economy,” was necessary.

The finance ministry balked at the level of transparency required to engage with the IMF and cut off discussions.

But now, after North Korea’s nuclear tests beginning in 2006 and the sanctions that followed, the country’s membership in the IMF is blocked by more than its unwillingness to open its books for inspection. Membership will essentially require a diplomatic opening from Pyongyang to Washington, which has effective veto power in the IMF.

This could be done, and the Russian case is instructive. Soviet leader Mikhail Gorbachev sought entry to the IMF in the late 1980s as part of his perestroika (restructuring) and glasnost (opening) policy, although he faced skepticism from the West as well as intense internal opposition.

However, Soviet nonintervention in the fall of the Berlin Wall on Nov. 9, 1989, provided the diplomatic opening to the United States. Subsequently, then-U.S. President George H.W. Bush unilaterally announced that the IMF should establish a “special association” for the USSR as a preliminary step toward membership, recognizing Western European doubts on whether the Soviet Union was ready to accept the responsibilities of international financial community membership.

The IMF’s Executive Board approved a provisional special association in September 1991 and immediately staffed up to provide technical assistance. In June 1992, six months after the collapse of the Soviet Union, the new president, Boris Yeltsin, took the Russian Federation into the IMF.

There was a faint glimmer of possibility that North Korea would embark on a similar path when Kim Jong Un pivoted away from missile-rattling in early 2018 to sports diplomacy at the February Pyeongchang Olympics and to summit diplomacy with South Korean President Moon Jae-in and U.S. President Donald Trump later that year and into 2019. However, the failure of the U.S.-North Korea summit in Hanoi in February 2019 dashed hope that Kim was ready to provide a diplomatic opening to the United States.

Moreover, North Korea has demonstrated no previous intention toward systemic reform, even during the Sunshine Policy era of South Korean Presidents Kim Dae-jung and Roh Moo-hyun in the early 2000s, when South Korea invested significantly in the Kaesong Industrial Zone and Mount Kumgang tourist zone on the northern side of the 38th parallel border. North Korea had sealed off both enclaves from its domestic economy, other than for manual labor.

Nuclear tests since 2006 have brought international sanctions that further isolate the country, banning 90 percent of North Korea’s exports in value terms by 2018. North Korea evaded sanctions with some effect but did not fully offset the loss. But when North Korea closed its border with China early this year to stop the spread of the coronavirus, it effectively shut down all external trade and tourism.

So now North Korea is left to its own devices, facing the coronavirus pandemic without access to credit or emergency financing from the IMF, World Bank, Asian Development Bank, or other governments—let alone access to global capital markets. Nevertheless, there are no indications from Pyongyang that it is ready to throw in the towel on Juche, its policy of self-reliance, and embark on reform and opening.

The same obstacles that prevented progress in 1997 prevail today, and nothing has changed institutionally in more than two decades—except the addition of international sanctions. North Korea admitted to its economic hardship in another recent Minju Chosun article, saying that Western imperialists are seeking to “subjugate” countries through aid. North Korea does not want any scrutiny of or limits on its conduct, let alone the policy conditions that come with IMF or World Bank financial assistance.

Both communist China in 1978 and communist Vietnam in 1986 recognized that opening and reform were essential to lift their economies out of destitution and to improve prospects for political stability. China tried to open the mind of Kim Jong Il, taking him on a tour to Shenzhen and Guangzhou in January 2006 that was reminiscent of Deng Xiaoping’s galvanizing 1992 tour of southern China, yet reform in North Korea did not follow.

If there is a silver lining in this cloud, it is that perhaps the pandemic will force Pyongyang to realize its untenable position, accept opening and reform, and reconsider engaging the international community.

International financial institutions are stepping up to provide substantial concessional financing for coronavirus pandemic relief for countries with urgent needs. The IMF has its Rapid Credit Facility with limited policy conditionality.

And the World Bank is setting up a new health emergency multidonor fund that will complement $160 billion of existing financing to help countries respond to the pandemic and bolster economic recovery.

But it is too late for North Korea this time.

In its international isolation, such aid is beyond Pyongyang’s reach.



Thomas Byrne is the president of the Korea Society in New York City and was Moody's Asia-Pacific and Middle-East Sovereign Risk Group manager.