We’re all in this together. That’s what makes the coronavirus pandemic so unusual.
Just about the entire planet is grappling with what may well be the biggest disruption in trade and commerce since the Great Depression. Policy makers have fought back with trillions of dollars of spending and lending, and they’ve fired off a volley of programs to aid industry and employment. The result is the largest experiment in economic policy outside of a world war.
Officials are looking across national boundaries to learn from their peers. Many countries have adopted some form of Kurzarbeit, the short-time working system used in Germany. France raced to support its tech startup sector, inspiring Brits to do the same. The Swiss figured out how to unlock rapid funding for small businesses, while in some instances leaving big corporations to fend for themselves.
Some programs are better than others, and mistakes are inevitable when coming up with programs at the legislative speed of sound. This State of Play outlines the most promising ideas—a dream team of relief policies from around the world that can help us get through this together.
Table of contents
Keep workers working | How to save small businesses | How to bail out big businesses | Supporting the self-employed | The Marshall Plan for developing countries | Venture capital and startups | China’s way | Conclusion
🇩🇪 Keep workers working
Kurzarbeit, which means “short-time work” in German, is the best-known system for keeping workers on the payroll when times get tough. In Germany’s scheme, companies are paid by the government to keep workers on the payroll at reduced hours during a recession instead of letting them go. Other nations replicated it before and during the financial crisis a decade ago and even more are adopting some of these principles now. The program gets triggered when a percentage of employees have reduced hours.
The system doesn’t necessarily fit with the German cultural stereotype for ingenuity and efficiency. It’s the result of Germany’s very rigid labor system, in which firing and laying off workers is expensive and lengthy. In that sense, Kurzarbeit protects companies as well as workers, offsetting the disincentive for businesses in an inflexible labor market to hire people in the first place.
Officials in Europe have responded to the pandemic with short-time working plans as well as furloughs subsidized by the government, in which employees aren’t allowed to work at all (Denmark has both). While Kurzarbeit makes sense especially in European economies where it’s difficult to fire workers, it may come into its own during the present crisis.
“If you allow all those jobs to disappear temporarily and then everyone has to start looking again for new jobs, that’s very costly,” Alexander Hijzen, a senior economist at the Organisation for Economic Co-Operation and Development (OECD), said in a phone interview. “This is the No. 1 policy instrument to help companies and workers through the crisis.”
Short-term work plans and furloughs aren’t perfect. If a company isn’t viable, keeping its workers on the government-paid-for payroll may just delay the inevitable. That can make the total duration of a worker’s unemployment longer than it would have otherwise been, adding to the expense for taxpayers while making the labor market less efficient, according to a joint EU directorate paper (pdf).
🇨🇭 How to save small businesses
Little operators, from independent opticians to dry cleaners, are the quiet heroes of the global economy. These small- and medium-size enterprises make up about 90% of the planet’s businesses and roughly half of employment. They tend to have little cash on hand to cover disruption, and they’re less likely to have access to institutional financing. If they have any emergency funding at all, it might have to come from friends and family.
These companies need cash and they need it yesterday. Most rich countries have whipped together plans to support these firms, but many of the programs were put together on the fly. While we won’t know for months or longer which ones have gotten it right, right now the Swiss model is getting attention from policy makers and business leaders.
Switzerland’s “bridging credits” appear to get two important things right: They’re simple to apply for (it only requires a one-page form), and lending decisions are lightning quick—Credit Suisse holds the record, having dispersed a loan in 18 minutes, according to an email from the Swiss Federal Department of Finance.
The other key to the program’s success is a 100% government guarantee for these loans. A British program only provided 80% backing, and as a result the banks appeared reluctant to dish out funds. The UK eventually upped its support for these loans to 100% for the smallest enterprises.
“In Switzerland this has been quite successful,” said Thorsten Beck, a finance professor at Cass Business School in London. Banks will shovel out money quickly when they’re not on the hook for any credit risk, but then of course they don’t have an incentive to avoid making bad loans. “The downside is that you let the banks completely off the hook,” he said.
There’s also a risk that thousands of companies will take on loans they can’t repay, even at interest rates of 1% or less. While it may spread out the pain over months, it risks burning through taxpayer money by propping up companies that aren’t viable. “You get mis-targeting,” Beck said.
Unfortunately, government-backed small business loans won’t work everywhere. Even if they can afford it, countries that have less relationship banking (such as community banks), and in which people and businesses don’t have access to bank accounts, aren’t as likely to benefit from them.
🇨🇭 How to bailout big businesses
Air carriers alone are expected to lose more than $300 billion of revenue this year. In Germany, Lufthansa has contemplated court protection if the terms of a state bailout are too onerous. Air France KLM got an €10 billion ($11 billion) package from the French and Dutch governments, while airlines in the US are getting around $60 billion that comes with strings attached, like restrictions on executive compensation and stock dividends.
The airline industry is just one of several industries dominated by large companies that are seeking relief from governments. But propping up big companies strikes many as being unfair, since they have access to other sources of capital. Using taxpayer money to protect investors means people with low incomes can end up shielding the rich from losses. A group of more than 200 leading academics published a letter earlier this year as the US Congress was constructing its coronavirus bailout package arguing that big companies shouldn’t be propped up at all.
“The beneficiaries of the bailouts have effectively equated: no bailout, no jobs, and no service,” Jonathan Berk, finance professor at Stanford University, said in a phone call. “And that’s just not true. There’s no connection, in fact. Who runs the company doesn’t determine whether the services [are] provided.”
Academics argue that larger companies differ from smaller ones in that, among other things, they tend to survive bankruptcy. “I would emphasize the difference between the small firms and the big firms,” Jonathan Parker, a finance professor at MIT, said during a press conference in late March. He said it’s important to support these smaller firms, particularly the ones that are most likely to be solvent in the long run.
Unlike the mega banks that were bailed out a decade ago to prevent a cascade of financial failures, airlines and cruise liners aren’t seen as a systemic risk to the financial system. That said, a series of simultaneous, pan-industry defaults would put immense strain on the banking system and credit markets. Central banks have been working overtime to keep the gears in financial markets turning.
Many politicians have blinked and are supporting their national champions. But Switzerland has only few programs for large enterprises, according to a spokesperson for the Federal Department of Finance. “Large Swiss companies are expected to maneuver their own way out of the crisis—a reasonable feature given the strength of Swiss pharmaceutical and medical equipment producers,” Paul Gregory, a professor of economics at the University of Houston, wrote in The Hill.
By contrast, Berk and other academics argue that the $2 trillion CARES Act in the US does too much to protect investors and not enough to protect workers. The idea that the airline or hotel industries would disappear without government support, Berk says, is inaccurate. Passenger jets, hotels, and valuable brands would still exist after a bankruptcy reorganization, and those assets will be put to work again if there’s consumer demand for them.
“The airline bailouts are insane,” Berk said. “Capitalism doesn’t work if you tell the people who take on risk that they don’t have to bear the downside.”
🇩🇰 Supporting the self-employed
Denmark appears to have gotten two factors right when it comes to supporting the self-employed: the country moved relatively quickly in March to introduce aid, and the aid is generous. That said, moving fast could be easier for countries like Germany and Denmark where a smaller share of the workforce is self-employed.
While it’s easy to imagine this group as made up of middle-class writers and programmers, it’s also comprised of cleaners and hairdressers who were eking out a living even before the pandemic hit, said Julia Rouse, a professor at Manchester Metropolitan University. The self-employed segment of workers can be especially difficult to define in some countries, making it likely that some are going to slip through holes in the safety net.
Rouse suggested some factors to be mindful of when designing emergency support for these workers:
- Programs that help entrepreneurs pivot to a new business line can boost their chances of staying afloat (support for offering services online, connections to peers, introductions to officials and business leaders who can offer opportunities).
- Aid should be flexible—plans that require furloughs (such that employees have to stop working) can prevent entrepreneurs from pivoting to a business line that provides a new opportunity.
- Emergency funding that only covers an entrepreneur’s profits can leave them without a way to pay for facilities and other costs.
- Programs should make sure the poorest segment of society benefits, even if that inclusion means wealthier parts of society get overcompensated.
- Consider aid specifically for women and minorities, as these groups are more likely to be vulnerable and to have fewer financial resources. Having a diverse committee of officials building out these policies may result in fewer people being left behind.
- The self-employed may have higher savings because they lack corporate-sponsored retirement. Forcing them to rely on these savings could have long-term ramifications.
🇷🇼 The Marshall Plan for developing countries
The pandemic is blowing a hole in rich countries’ budgets and will leave them deeper in debt than they’ve been in generations. The health crisis is just as serious for developing nations, but these governments lack the resources to fully shore up their industries and workers.
Among nations with a fiscal plan in place and GDP-per-capita of $10,000 or more, 45 out of 55 have fiscal spending plans of 1% of GDP or more including grants and loans, according to IMF data compiled by Quartz. (For context, GDP-per-capita in the US is more than $62,000.) For countries that have GDP-per-capita of $10,000 or less, only 29 out of 69 have ambitions for fiscal stimulus of 1% of more.
Some leaders are proposing a so-called Marshall Plan—referring to the American foreign aid that helped rebuild Western Europe after World War II—for developing countries. The Overseas Development Institute has called for $100 billion worth of financial stimulus for sub-Saharan Africa, the equivalent of about 5% of the region’s GDP, a level of support closer to that of richer countries.
“The G20 should coordinate a major financial stimulus, and part of this should support Africa,” wrote Dirk Willem te Velde, principal research fellow at ODI.
Countries like South Africa however, wary of the extensive conditions attached to loans historically, have had to balance the terms of agreements with internal politics.
For now, there are signs that Rwanda has been among the most proactive in responding to the crisis. The country’s economy was booming before the crisis, and the IMF credited it with a “swift” reaction to the virus breakout. Earlier this month, the nation became the first in Africa to secure aid from the IMF and is among those granted debt relief. Budget support is also expected from the World Bank.
🇩🇪 Venture capital and startups
Do venture capital-funded startups need a helping hand? These fast-growing companies, particularly the ones in tech, have the promise of becoming some of the most valuable enterprises in the world. Just about every country wants its own Silicon Valley, with the prestige, money, and highly skilled jobs that come with it. Government officials have sought to nurture the sector in recent years with funding and policies to help an entrepreneurial ecosystem take root. Some worry that the coronavirus pandemic will unravel years of work.
At the same time, as LocalGlobe investor Robin Klein pointed out in Sifted, most of these high-risk, money-burning companies fail even in the best of times. He argues that the most promising startups will be able to tap venture funds that are loaded up with capital. Private equity firms, including venture capital investors, are sitting on a record $1.5 trillion of dry powder (capital that hasn’t been invested), according to Preqin data.
But if you look a little below the surface, it’s not that simple, said Leo Ringer, a founder at Form Ventures. Not every fund is sitting on dry capital and therefore can’t provide additional aid for its portfolio, he said. Smaller funds and angel investors don’t necessarily have reserves to deploy. French, German, and British officials have recognized that dry powder isn’t going to support the entire startup sector, said Ringer, a former economic advisor to the UK secretary of state for business, innovation and skills. (US startups may qualify for PPP, a small business program, but there’s debate about whether a tech startup’s use of that money would be in the spirit of the program, which is meant for operators without institutional support.)
In Germany’s scheme, the government will match investments made by the private sector. Multiple investors told Quartz that this model supports the sector without some of the downsides of government intervention: The government isn’t picking winners and losers, and it has a stake in the upside if these investments pan out. Britain’s Future Fund, which came after the German and French initiatives, will also provide matched investments.
“The key principle that has been essentially applied or adopted across the board is co-investment with private investors,” Mish Mashkautsan, a partner at LocalGlobe in London, said in a phone interview. The approach keeps the government out of discretionary decision making as much as possible, and it’s quick and scalable.
The idea is to make sure a country doesn’t “lose a whole cohort of potential category-defining companies,” Mashkautsan said.
🇨🇳 China’s way
Compared with other countries, China’s emergency support of around 3% of GDP looks modest. For many big economies that ratio is in the double digits.
Beijing may have less room to maneuver than it did during the 2008 financial crisis, when its relief package equalled around 16% (paywall) of its GDP at the time. Heavy infrastructure investment has resulted in a worrisome level of indebtedness, with officials trying to contain troublesome debts in recent years.
At the same time, emergency measures are less necessary than they are in Europe or North America. Chinese leaders don’t have to come up with loan guarantees or coax banks into to lending. These types of things are built into the system, since the country’s state-owned banks already operate according to the desires of the Communist Party. Its leaders may also be waiting to stoke the economy with greater stimulus measures until supply chains are functioning better and the commercial revival is more firmly underway.
Even as life has started going back to normal in most of the country, the road ahead for its economy still looks challenging. China reported a 6.8% drop in GDP for the first quarter, compared with the same period last year, its first economic contraction since at least 1992, when Beijing started releasing quarterly GDP figures.
There are signs that businesses and consumers are recovering as anti-virus measures are wound down, according to researchers at China Renaissance Securities, but that’s being offset by a darkening economic picture abroad. “Unless there is a second wave of COVID-19 outbreak, we believe China’s economy has sailed through the worst impact,” the analysts wrote in a research note last month. “Yet, with the global economy tanking amid the pandemic, a swift recovery to pre-crisis levels is less likely.”
In the coming months, Germany, Northern European countries, and Switzerland appear to be among the best placed to ride out the economic havoc from the pandemic. These nations started out with an advantage—they tend to have lower ratios of debt to GDP, suggesting they can afford a robust response. The likes of Denmark and Germany are making use of that strength with what experts tend to think are well-thought-out efforts to respond to the upheaval. (Their smaller size probably also helps them move quickly.)
We still don’t know which of these policies work best, and all of them involve tradeoffs. Powerful government support can avoid near-term pain, but it’s costly and threatens to reduce flexibility within the labor market. The success of any response will depend on the ingenuity of the workers and managers who find ways to innovate and stay afloat during the turmoil.
Much also, of course, depends on implementation—just as a flawed rescue plan is better than no plan, so too will botched implementation undermine a brilliant one.
Transparency is vital. Many world leaders are asking few questions about where the torrent of money is flowing, which could set them up for yet another crisis later if taxpayer funds are wasted and funneled away by fraud.
One thing is certain: These policies will leave a mark on society that reverberates for generations, far outlasting the coronavirus pandemic.