Abstract
Across the globe, the unprecedented coronavirus-19 (Covid-19) pandemic has triggered immediate response by national authorities to soften adverse economic impacts. Considering the situation’s novelty, this study incorporates an empirical approach to determinants of choice of extraordinary government and central bank response, controlling for macroeconomic, health, geographic, and institutional variables, and an analytical approach to the resulting emergence of varieties of state capitalism. Empirical findings using ordered and binary probit for a sample of advanced and emerging economies from the second to fourth quarters of 2020 suggest that government effectiveness, as a proxy for state capacity, is an important institutional determinant for extraordinary fiscal and unconventional monetary responses related to Covid-19. Different state interventions across countries suggest that varieties of state capitalism will continue to evolve and expand post-pandemic. Thus, a re-evaluation of macroeconomic and social policies, and their implications and a simultaneous focus on opportunities for international cooperation are recommended.
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Notes
- 1.
Taking the equal epidemiological and biological nature of the Covid-19 virus across countries into account, country-specific social realms may include lifestyle and diet-related co-morbidities, levels of social interactions, environmental factors, and state capacity (Capano et al., 2020).
- 2.
See Hanson and Sigman (2020) for an overview of how state capacity is measured and defined in comparative political research.
- 3.
They add that these are broader in scope than previous management literature on state ownership and state-controlled capital while also encompassing tariffs, subsidies, and formal and informal networks as in other social sciences.
- 4.
We refer to suspension of policy rules in the general sense of unwritten rules and fiscal and monetary policy stances as measures that have been taken in response to the pandemic have been unexpected and in some cases, unprecedented, or, in other words, extraordinary. In the European Union fiscal rules are suspended; however, in the United Kingdom fiscal rules change regularly and in the United States there are no fiscal rules. For monetary policy, the policies of even lower interest rates and revival of quantitative easing were very similar to those adopted after the GFC, which could also be viewed as a suspension of rules.
- 5.
This, taking into account how appropriate such measures are in light of the nature of the virus and its interaction with the countrywide social realm of the disease.
- 6.
We refer to prudent use of policy as the sustainability of big expansionary measures taken, given the enormous increase in public debt that comes with greater expenditure. While there may be exceptions, in some countries, especially in emerging and developing ones, financial markets may start to consider the new large debt growth to be unsustainable, provoking a rise in sovereign risk premia and trap countries in a “bad equilibrium” of growing debt.
- 7.
While the use of quantitative easing is not extraordinary post-GFC, it is the extent to which central banks have used it as an instrument in response to the pandemic that is unprecedented. For the first time in a broader and synchronised manner, central banks conducted asset purchase programmes, targeting government or private sector bonds in local currency. For some central banks such as in Ghana, Guatemala, Indonesia, and the Philippines, the temporary easing of government financing pressure during the pandemic was specified as an objective (Drakopoulos et al., 2021). This study considers only the purchase of government bonds when referring to quantitative easing, but in some countries, it also involved the purchase of private financial assets.
- 8.
While the origin of this shock is supply side with production initially constrained in various ways, lockdowns on industries and sectors led to both aggregate demand and aggregate supply shocks with little to no consumption and production taking place in this short time period across countries.
- 9.
One of the features of the pandemic was the quarter-to-quarter variation in GDP growth; at least in some countries, such as the United Kingdom, recession in the sense of two quarters of negative growth was actually avoided.
- 10.
According to Apeti et al. (2021), there are no reverse-causality or endogeneity issues associated with using fiscal space, or more specifically pre-crisis levels of public debt, as a determinant of fiscal response when the dependent variable used pertains exclusively to surprise public spending related to an exogenous shock like Covid-19, or extraordinary fiscal response.
- 11.
Central bank independence, however, is considered for monetary response, as a control item, and to account for the relevant assumption.
- 12.
Central banks, for instance the United Kingdom, New Zealand, Canada, Japan, Turkey, India, the Philippines, or Thailand, do follow an explicit inflation targeting strategy and others as the Federal Reserve or the European Central Bank that have recently modified their inflation targets (see, however, Jahan, 2012).
- 13.
Alternatively, lower inflation rates should lead to greater policy rate cuts. This is because lower interest rates, being the main transmission channel of monetary policy, can lead to greater borrowing and spending, speeding up the economy and thereby raising inflation. Under normal conditions, the Taylor Rule is the reaction function of central banks regarding policy rates and the benchmark for monetary policy. It is used to evaluate whether or not monetary policy stance is in line with the prediction that monetary policy is tightened either as inflation rises relative to the central bank’s target or as actual output increases compared to its potential. Consistent with the objectives of this study, GDP growth is used for output gap and inflation rates for inflation gap, both accounted for as determinants of monetary response.
- 14.
A negative relationship between zero lower bounds and policy rate cuts may be expected as policy rates being at the zero lower bound can cause a liquidity trap that limits the central bank’s capacity to act effectively.
- 15.
More stringent measures can lead to more job losses but also have effects on unemployment, which are addressed through adopting supportive fiscal policies in the form of a rise in unemployment benefits as in many countries; for instance, the furlough scheme in the United Kingdom and temporary lay-off plan (ERTE) in Spain.
- 16.
The countries included in the sample are ASEAN-5 countries: Indonesia, Malaysia, the Philippines, Singapore, Thailand, and OECD countries: Australia, Austria, Belgium, Chile, Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, South Korea, Spain, Sweden, Switzerland, Turkey, the United States, and the United Kingdom.
- 17.
This is done as data for the first quarter of 2020 also includes the first two months prior to the declaration of the Covid-19 outbreak as a pandemic in March 2020 and therefore do not account for the widespread implementation of restrictions affecting output across economies.
- 18.
We also conduct robustness checks using pooled OLS, which are available upon request.
- 19.
We also conduct regressions using fiscal response debt/contract relief for households and policy rate cuts assumed as a monetary tool with the same vectors of determinants and find no significant results. However, regressions using conventional policy rate cuts as the dependent variable show a consistently positive and highly significant effect by zero lower bounds. These regression results are available from the authors upon request.
- 20.
Existing literatures on welfare states tend to focus on readjustments following the GFC, while the term “sustainability” is used to pertain to fiscal, economic, and social aspects more than environmental concerns (Hirivilami & Koch, 2020). In this regard, ecological economics offers various perspectives with distinct normative ideals. Postgrowth or degrowth do not see a reconciliation between continued global economic growth and environmental sustainability, and instead advocate for democratic transitions towards post-capitalist societies bound by ecological limits (Koch & Buch-Hansen, 2021). Green growth maintains the importance of decoupling, technological and market innovations for more efficient production (Sandberg et al., 2019).
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Halili, B.L., Gonzalez, C.R. (2023). State Capitalism, Government, and Central Bank Responses to Covid-19. In: Arestis, P., Sawyer, M. (eds) Prospects and Policies for Global Sustainable Recovery. International Papers in Political Economy. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-19256-2_2
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