Leadership Strategy

How Countries Use Financial Policy To Fight COVID-19

by Rachel Layne

The fiscal and monetary response to the coronavirus pandemic has been emergent, global, and deep.

Some countries have more sophisticated fiscal and monetary tools—and the ability to use them swiftly—than others. The ability to compare policy actions fairly may be key to learning how officials around the world could improve responses to the next global financial catastrophe.

Work done recently by dozens of Harvard Business School students under Alberto Cavallo, the Edgerley Family Associate Professor of Business Administration at Harvard Business School, may provide the most detailed guide yet.

Cavallo, in searching for a way to explore a once-in-a-lifetime global event like the worldwide economic response to COVID-19, decided to enlist a sophisticated workforce already at his fingertips: Harvard MBA students. Over the course of three months, they created the Global Policy Tracker, an interactive site that compares government policies and financial maneuvers for dozens of countries and regions around the world.

Students meticulously compiled policy announcements and actions from around the globe. They then adjusted those actions for each country or region to make them comparable in categories such as the total percent of gross domestic product, a common measure of an economy’s size.

By the end of May, an army of 45 students had developed and maintained a live, interactive database tracking 16 categories of policies announced in each country, from rate cuts and lending to quantitative easing, the large-scale asset purchases and balance sheet expansion by central banks. The database also includes whether a country implemented a total lockdown for its population or a partial one.

Developing countries have a different pandemic

One notable difference among nations seemed intuitive: Developing countries have far fewer tools—they are less able to stave off a deep recession or even depression—than more mature economies like the United States. The tracker confirmed this notion using the detailed database, updated in real time until the end of May.

There is a “stark difference between the announcements as a share of GDP in the developed countries relative to the developing countries,” says Cavallo, who also developed a case study around the question of policy changes during the pandemic. With the tracker, he says, “We were able to confirm and quantify this idea that was already floating around—that it was much harder for developing countries to make these announcements and eventually implement some of these policies.”

The average policy announcement in developed nations accounted for 5.43 percent of GDP, whereas in developing nations the total was far less at 3.30 percent. South Korea came in at 15.05 percent of GDP, the United States at 12.42 percent, and Canada 8.81 percent. Ethiopia, by contrast, came in at 1.98 percent, Egypt 2.25 percent, and Kazakhstan at 3.62 percent.

Beyond monetary or fiscal policy changes themselves, students were struck by where the actual dollars were spent and how that differed from nation to nation, says Tannya Cai, who coauthored a working paper on the tracker with Cavallo.

Cai, who helped lead design and maintenance of the tracker during the semester, uses Canada as an example of how deeply the tracker can help trace policy implications.

The public typically sees actions like wage reimbursements for laid off workers. But the tracker brings to light the less obvious, for instance how much aid went into areas like mental health care, dairy farmer subsidies, and the fishing industry, Cai says.

“Things that maybe we’re not as familiar with. Seeing the breadth of different policies and the different stakeholders that they touch was surprising. It was something unexpected; not something you necessarily realize as a typical citizen as you’re going about your daily life.”

A resource for COVID researchers

Even though the tracker is no longer updated live, the detailed database could serve as a great resource for a growing number of economists looking to help and study the response, Cavallo says. Policy actions like direct financial transfers compared with tax benefits and their implications for consequences like inflation or growth could be valuable, he says.

“There’s a huge number of papers in economics about COVID coming out, and these papers need that detail and differences in policies to be able to gain insights,” Cavallo says. Researchers want to learn the most valuable actions from small business loans to expansion of government programs.

“For policymakers at this stage, it’s, ‘Let’s try to do everything.’ But then, it gets to the point where they have to make decisions to allocate these dollars to a particular policy, and even though they want to do everything, they have to make tough choices,” Cavallo says.

In the end, Cavallo hopes, “The insights obtained with these tracker-type datasets are going to be useful to make better policy decisions going forward.”

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