Economic intervention does not promote development

By Philbert Carbone.
An italic-europe article

The OECD published its global economic outlook a few days ago, which was slightly more favorable than the forecast for mid-June. At the time, the Organization for Economic Cooperation and Development expected a 6% drop in global GDP in 2020.

Today the forecast is -4.5%. Similarly, for the euro area: GDP should fall to 7.9% at the end of this year, while in June the OECD forecast a decline of 9.1%.

France among the most affected countries

If we take a closer look at these forecasts, three pieces of information stand out. The first is that only China will not experience a recession in 2020. The second is that European countries are among those where the impact of the Kovid-19 crisis will be greatest.

Italy (-10.5%) and United Kingdom (-10.1%) come ahead of France (-9.5%). The June forecast, which was more comprehensive, also topped Spain, Portugal and Belgium.

On the other hand, it should be noted that Germany is clearly out of its neighbors with a decline of only 5.4%.

The third and final observation, the countries most confirmed for their management of the epidemic, namely Trump of the United States and Bolsonro of Brazil, do not fare so badly compared to Europe, respectively, with a decline of -3.8%. GDP and -6.5%.

It may be interesting to cross-check these figures with the management of the epidemic by various governments.

Economic responses to the epidemic vary from country to country

Simon Potcher, a professor at the Institute of Business Administration (IAE) in Paris, has developed a database listing government measures taken worldwide to combat coronoviruses. With this data, Porch produced two indicators.

The first is the Stiffness Index of Public Health Measures which takes into account twelve measures: ban on mass celebrations, ban on sports and entertainment events, restaurant and bar closures, imprisonment, international travel ban, travel ban. National legislation, curfew, declaration of a state of emergency, public testing, increased surveillance, school closures and postpone elections.

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The second is an economic intervention indicator that takes into account seven measures: salary support, cash transfers, credit system, tax cuts and defaults, support for importers and exporters, reduction in tax rates. Interest.

Each country thus scores two between 0 and 1. Indicators are available on three dates, 15 March, 15 April and 15 May. We can thus, very accurately, realize both the speed and intensity of governments’ response.

Let us examine the indicators of economic intervention and its development over time. Several groups of countries can be traced.

The first is of those countries who responded quickly to the crisis by taking measures in early March. It is made up of low level interventions from China, Australia, Germany and the United States and the United Kingdom.

The second is from countries that had no response in March. France belongs to this group.

The third group, largely composed of countries in the second group, brings together countries that had taken several key measures by April 15, 2020 and who have maintained this level until May 15.

A fourth group is of countries that have semi-intervened in the economy, not just France, but Germany, India and Italy.

Finally, the two countries had a very different attitude from the others: Australia, which took very strong interventionist measures from the onset of the crisis and which sustained them over time; And South Korea took no steps. China may also join them in the sense that it has maintained the same level of response during the epidemic.

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There is no correlation between the level of interference and the extent of recession

If we now mix the two indicators, can we draw any conclusions about the effectiveness of economic measures?

We first note that the countries that have reacted as soon as possible are also, for the most part, less likely to suffer from the recession. This is the case for Germany, Australia, the United States, and China.

But this observation is not true everywhere. Mexico and the United Kingdom, which took economic measures in March, are among those who will shrink their GDP the most in 2020. In contrast, South Korea, which has not taken any step. This year GDP will come down by only 1%.

Since April, many countries have reacted by taking very strong measures to support their economy. This was the case in South Africa for example, yet would be the country that would experience the strongest recession (-11.50%).

Another example is Argentina, which has gradually implemented support measures and which is on the heels of South Africa with a very pessimistic growth forecast (-11.20%). Russia, which intervened most strongly in the month of April (with a maximum of 1 point), will however experience a 7.20% drop in its GDP.

In short, it seems that the level of economic intervention during a crisis has no effect on the growth (or decline) of GDP.

Reintroducing growth forecasts for 2020 with GDP growth in 2019 does not provide us with much information. Certainly China, which saw a 6.1% increase in its GDP in 2019, will not face a recession this year. But India, whose GDP grew by 4.2% in 2019, will experience a steep decline in 2020 (-10.2%).

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And 2019’s weak German growth (+ 0.6%) will turn into a moderate recession (-5.4%) in 2020, while Mexico, which had already seen its GDP decline in 2019 (-0.3%), this year (-10.2%) ) Will experience a serious improvement.

More serious avenues for economic freedom

If we compare this time with the Economic Freedom Index published every year by the Heritage Foundation, the growth forecast for 2020 seems to have more correlations.

Interventionism

The countries that will be least affected by the crisis in 2020 are those with the highest index of economic freedom. Two exceptions to this rule: China first with an index which makes it among the least economically free countries (Mostly unfit) Which inevitably raises questions about the honesty of Chinese figures; Then the United Kingdom, which, despite a good index of economic freedom, will experience a severe recession in 2020, will probably be blamed on Brexit.

Remember that indices of economic freedom rank countries with ten criteria in mind: freedom of enterprise, freedom of trade, weight of taxes and duties, public expenditure, monetary stability, freedom of investment, financial control, security, private property, Fight against corruption and freedom to work.

Undoubtedly, therefore, they are the most economically free country (free And Mostly free In the ranking) who would best survive the crisis, whether they have made economic intervention during the epidemic. To conclude from there that support measures are largely unnecessary is just one step we will let you takeā€¦ or not.

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About the Author: Forrest Morton

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