Growth Lab founder and HKS Professor Ricardo Hausmann is helping developing countries around the globe develop economic and epidemiological responses to COVID-19, but he says the pandemic will almost certainly be a "very, very serious headache" until a vaccine is widely available.
Featuring Ricardo Hausmann
May 11, 2020
33 minutes and 32 seconds
Ricardo Hausmann, the founder and director of Harvard Kennedy School’s Growth Lab, is helping developing countries around the globe create capacity to model the coronavirus pandemic and develop economic and epidemiological responses.
The Growth Lab COVID-19 Task Force explores the macroeconomic and fiscal implications of the pandemic and offers strategic guidance on policy decisions for collaborating nations including Albania, Ethiopia, El Salvador, Honduras, Peru, Namibia, South Africa, and Saudi Arabia.
Hausmann tells PolicyCast host Thoko Moyo that although some countries are having success in controlling the virus and in developing innovative approaches to restoring economic activity, the pandemic will almost certainly be a "very, very serious headache" until a vaccine is widely available.
Under Hausmann’s leadership, the Growth Lab, which is based in the Center for International Development, has grown into one of the world’s most well regarded and influential hubs for research on international development. Hausmann has served as principal investigator for more than 50 research initiatives in nearly 30 countries and is the Rafik Hariri Professor of the Practice of International Political Economy at Harvard Kennedy School.
For more about the Growth Lab COVID-19 Task Force, please visit https://growthlab.cid.harvard.edu/growth-labs-covid-19-task-force-strategy-and-resources.
This episode is available on Apple Podcasts, Spotify, and wherever you get your podcasts.
Thoko Moyo: So Professor Hausmann, through the Growth Lab, you're working with senior officials in a number of developing countries on their COVID response strategies. I know some of the focus is on epidemiology, creating policy space, and making sure that they have the financial muscle to be useful in that policy space. But maybe before we get into that specifically and the sort of differences in context, in countries, and their abilities, maybe let's set the scene by looking at what the combined effect is of the epidemiology and the economic shocks that countries are facing, based on individual behavior and measures taken by governments. Do you want to just talk us through that a little bit?
Ricardo Hausmann: Well, let me then split it up into, if you want, two different kind of shocks to the economy. In he first one, imagine a world in which the people in your country were immune to the disease. So there was no issue of domestic lockdowns and people getting sick or whatever and not going to work. The only impact of the disease is that it hits all the other countries in the world. In most of the countries I'm working with, just that shock would be huge. It would be one of the largest economic shocks since the second World War, if not the largest. Why? Because exports are down. The demand for your export goods is down. The price of your commodity exports is down. I mean, in some cases it's extreme. Oil went from $60-something a barrel to $15.
There are other dramatic collapses and those not as dramatic, but still very, very large. In a bunch of other minerals. A bunch of agricultural products — they have gotten disrupted. For example, Ethiopia exports flour to the Netherlands. That has completely disappeared, because their travel is shut down. Some countries rely on remittances. For example, in El Salvador and Honduras, about 20% of GDP comes from remittances. In Ethiopia, it's probably around 8% or so. And these remittances have been falling like a stone. And travel and tourism, many countries rely on tourism, travel and so on. And that's collapsed by 90%. In any places, they just shut down the airport. So that will be a dramatic shock to the economy, even if there was no domestic disease.
But in addition, you have the fact that in all of these countries they fear that the disease will spread and that they won't have the medical facilities to cope. So they have been, most of them have been very, very prudent. They declared, very early on, lockdowns and other social distancing and measures. They shutdown their country from the rest of the world. Some of them have been much more successful, say, than the US, in terms of keeping the numbers low and having the capacity to test and track and trace and so on. It becomes infeasible when the numbers become too large. So they are acting in that direction.
This is the first time that any of these countries has ever adopted a lockdown for epidemiological reasons. There's no one in government that has experience on how these things are done. So everybody has to be thinking in real time about what to do. The problem is that once you impose the lockdown, you get into this thing that looks like the fog of war, in the sense that there are so many issues that you have to answer about the lockdown. Who gets to go out, who doesn't get to go out? How do you assure that the value chains in food and medicine remain working? Basic services, security, what kind of punishments do you put if people violate the terms of the lockdown? What kind of enforcement can you put? How can you help people stay locked down? Maybe you want to transfer them some money so they can afford to stay at home. How do you do that? Maybe you want firms not to fire their workers. How can you help them?
So there's a thousand questions that you have to be asking yourself. That's just about managing the lockdown. So then you have to think, "Okay, what happens after you lockdown?" You don't really have the mental space because there's so many issues about just managing the lockdown that it's hard to start thinking about what happens after the lockdown, especially given how little we know, how little anybody knows, about which activities are more dangerous and then what are the mechanisms through which people are being infected, et cetera, et cetera. So, we have been working with these 11 governments sort of in real time, helping them think through these issues as we understand them better, as they understand them better, as more information becomes available and as issues appear.
Thoko Moyo: So let me ask this. So you're working with 11 countries. And you're working in Latin America, you're working in 4 countries in Africa, and the Middle East. A question that has come up recently is comparing their experiences, and let me talk about Africa because I think I followed that more closely. The idea of strict lockdowns — people are raising the question whether that's actually appropriate for poorer countries, the argument being that it may work in the US and in Europe, because what you're trying to avoid is overwhelm the healthcare system if the peak is very high. But the counter to that, some people have said as well, is if you've got fragile healthcare systems in those countries anyway, what does the lockdown help? Because you then have the added challenge of you have a lockdown and people are not able, particularly people in the informal sector, to go out and make a living and you don't have those safety nets. So you now have the problem of yes, you are avoiding overwhelming the healthcare system, but on the other hand, people may starve, and the healthcare system would have been overwhelmed anyway. I mean, when you said that countries have been prudent doing this, is that your sense that this is the right direction? Or do you have sympathy for the people that argue that maybe lockdowns are not appropriate?
Ricardo Hausmann: Well, I mean, of the 11 countries where we're working, the only one that hasn't imposed a lockdown is Ethiopia. And the reasons are the ones you’ve mentioned. First of all, it's 80-some percent rural. So people are fairly spread out. It doesn't mean the whole country is infected. The infection came through people that got into the country through the airport, and they were able to track and trace those people. They've kept the number of cases and the number of deaths really, really low. So there's very little virus around. In addition, there are many people who are very, very close to subsistence. So if you lock them down and don't allow them to eat, they'll starve to death. So you cannot. It doesn't become affordable to constrain their ability to earn a living. You cannot really have the resources to compensate them. So you try to explain the fact that in rural areas, people are coming in touch with relatively few people. There's very little disease right now in those areas. So you don't have to lock down those activities. You have to be more careful in urban areas, where densities are larger. So say in Addis Ababa, you need to be more careful. But fortunately, they were extremely aggressive in testing, tracking, tracing. And they have the perception that that situation is more or less under control. The numbers are really low.
In the case of Namibia, another country that we're working with, the numbers are extremely low. I mean they have had zero deaths. They've had a couple of dozen cases. They're on their lockdown and they're now thinking ... and they have announced a plan to start opening up. But the numbers look really good, in part because it's not a coincidence that things got really bad in New York and Lombardy, because these are sort of highly developed places where many, many people come into contact with each other. They have very good transportation systems. People work in great proximity to each other. That's what makes New York and Manhattan so special. That's Milan. Those are the conditions in which this particular disease spreads very quickly. But as you have more dispersed populations, worse transportation systems or people don't move that much, they more or less stay put, the disease has more trouble spreading quickly.
We have seen cases, two cases in particular, Ecuador and Peru. Ecuador had the bad luck that it was traditional for the Ecuadorians who work in Spain to go back home in February to Guayaquil. Apparently the people from Guayaquil go back home in February and the people from Quito go back home in July. So the ones that go back to Quito haven't gone there. But the ones who will go to Guayaquil went there and it produced a really, really nasty spike.
Thoko Moyo: Yes. And it's the epicenter of the pandemic, isn't it?
Ricardo Hausmann: Yes. So in Guayaquil we've seen very, very tough, very, very sad situations. In the case of Peru, it's a country that has done things well in many dimensions. They imposed a lockdown relatively quickly. They have been able to mobilize a massive amount of fiscal resources to help people out and to help firms out, and so on. But the epidemiological numbers look bad. They look bad. They don't have it under control. Cases are still growing, deaths are still growing, in spite of the lockdown. There, we need to think hard about the details of the restrictions that you have put on that some of them might actually have backfired in the sense that you allow people very few hours to be outside. And in those few hours, everybody bunches up around food stores and stuff. And that may have worsened the situation rather than helped it out.
So that's the current situation in some countries. So for example, El Salvador is doing very good, well, they've kept numbers extremely low, well under control. They can reasonably start thinking of opening up in the next few weeks. We've been advising to do so very gradually. That is, if you open up a little bit you won't see anything the first week, because it takes say five days on average to go from an infection to symptoms. So the first week, you probably are not going to see anything. You're probably going to see the second week. So maybe wait for the second week, look at the numbers, see if you see a spike or something. Get a lot of detailed information about each one of the cases that you are identifying. Then if you understand the source of the focus, you shut that down. You don't have to shut the whole economy down. But maybe if you feel confident, then maybe make another move and then another two weeks.
So the exit from the lockdown is unfortunately not going to be like a switch, where the economy goes back on. It's going to be a very slow process and it's going to be a very slow process for a very, very important reason that I think people should understand. If we go back to normal and behaviors back to normal, the disease will not stop until something like 80% of the people get sick. We're nowhere, not even in New York and Lombardy and Spain and in none of the most affected areas is there anything like the kind of quote unquote herd immunity that you would need for the disease to have trouble spreading. At most, Governor Cuomo announced a number, I think 21% are so on in New York. With the kinds of ... these are not factors that have been estimated north of three in New York City. It means that you don't get to the peak until 67% of the people are sick. That's three times more people than have been exposed. So there's a lot ... of still danger ahead of us. And because of that …
Thoko Moyo: And that's the paradox, though, isn't it professor? That's the paradox: That the restrictions and the lockdowns are trying to avoid people getting infected. But in the long run, from what I hear you saying, is that to get to a point where we're actually out of the woods, you need 80% of the people to have been infected to develop that herd immunity. So how do I, unless I'm not understanding, how do you achieve that, given that you're also trying to prevent that many people getting infected because obviously you don't want to lose people, but you also don't want to overwhelm the system.
Ricardo Hausmann: So I think that the real dilemma is that we should know that we will have restrictions, significant restrictions, on human activity until 80% of the people become immune. In principle, there are two ways of becoming immune. One is to get sick and the other one is to get vaccinated. So really, I think this is a waiting game until we get the vaccines and we get everybody vaccinated without ... so we don't get immunity without people having to get sick. That's one outcome. Obviously, if the vaccine was ready today, that would be the obvious choice. The problem we have from a policy point of view is that we think there'll be a vaccine in the future. We're not certain. There are very optimistic news coming out of Oxford and there are other places. So, but ...
Thoko Moyo: Where there's testing taking place, testing of a vaccine.
Ricardo Hausmann: So if countries clamped down on this R factor enough so that it doesn't overwhelm their healthcare system, that would put the peak sometime next year. The question is, do you go for a gradual process where everybody gets sick and you'll probably get a death rate that will be perceived as socially disastrous and unacceptable? Or do we really wait it out until the vaccine? And we put a lot more attention into knowing how many vaccines are on clinical trials, how are these things going? Is there any policy decision that might speed up the process of clinical trials? Can countries offer themselves for clinical trials, maybe in exchange for a quicker access to the vaccine? So countries prepare to be ready to vaccinate everybody before they have the vaccine and they only need to fill up the little bottles and so on, that the whole logistics are ready.
So I personally think that this disease is going to be a very, very serious headache on economic activity until we get the vaccine. Until we get the vaccine, you won't see the recovery of travel and tourism and countries opening up their borders, because it will just be too risky that after all the efforts you put in to protect your people, and now you're going to get infections coming again from outside. We will ask people to have a certificate of a vaccination the same way, I mean, I used to have ... they don't ask that much anymore, but I used to have one for yellow fever and the others.
Thoko Moyo: Yeah. Diphtheria.
Ricardo Hausmann: Yellow certificates, I remember they were yellow.
Thoko Moyo: Yeah.
Ricardo Hausmann: So I think the world is not going to go back to something that would seem to us like normal until the vaccine. So I think really there are two worlds. One where there is a vaccine in say a year's time, or hopefully maybe a bit shorter, but say a year's time, and one where there isn't. And those two worlds are really different.
Thoko Moyo: So, maybe let's talk a little more. I mean I want to get into sort of the public policy space issues that are a result of the fact that we have to continue these measures that are affecting things like tourism, exports, et cetera. But let's just talk a little more about this idea of we're going to have to wait it out until we have the vaccine. What are some of the options that you're talking to the developing country officials in terms of how you lift or ease the restrictions during this waiting period until the vaccine? I know you alluded to maybe the idea of sort of alternating the people ... alternating the lockdowns and that sort of thing. Can you talk a little bit more about that? What are some of the options you're exploring and testing?
Ricardo Hausmann: Okay, so let me say what I think is going to happen—say in a country like the US—that they're going to start opening up, like Georgia and so on. It will cause a spike and it will lead to a second lockdown. So it's very important that this opening-up process has a constant eye on this R factor, on this R. Sometimes they call it R nought, R-t. But this reproduction number, how many people are infected by each infected person. Then when that R number goes above one, you get exponential growth. Exponential growth is really very counterintuitive. It's going to overwhelm you. Then that's why countries will be opening up with an eye to this R factor, and won't allow them to get too far from one. Because the moment it goes above one, what you saw in New York is going to be ... the peak that you saw in New York is going to be a bunny slope relative to what the next one will look like.
So because of that, I think countries need to think of ways in which to start generating economic activity, but with an eye on controlling R. And there are two ideas that have been put forth. The one idea came out in science and that idea was very tough. It says you allow people to work for four days, and then we lock them for the subsequent 10 days. So the economy would be working 4 days and then 10 days, 10 days of lockdown. The idea is that in those four days, if people got infected, they wouldn't be infectious. By the time they become infectious, they are locked down. In those 10 days, it's enough time to find out whether they really got infected and do they have symptoms and so on. If they don't have symptoms, they can come out. If they have symptoms, they have to stay home. So that mechanism will get some economic activity, but it would really control the R factor.
One that is less severe, it was proposed by Professor Baruch Barzel from Bar-Ilan University in Israel. The idea is that you have interlocking lockdowns. So you will have sort of like families divided into the evens and the odds. So the events come out this week and they're locked down next week. The odds are locked down this week, they come out the next week. So businesses are open all the time, but with half of their labor force. And the idea again is that if you work from Monday to Friday, if you've got infected, you're still not infectious. By the time you become infectious, you are locked down. So again, you don't spread. So it's playing on the timing of when are people infectious and how to limit that spread. That would get the economy probably with an R factor ... in some simulations it's below one. It depends a little bit on the family structure and the amount of cheating. But you would get at least economic activity moving around, maybe better. In addition, we just don't know. We just don't know how creative we will become at reorganizing work and reorganizing interactions that lower infections. We can't be too optimistic, because even in these very, very tough lockdowns that we've seen in Spain and Italy, it took root. I mean, the R factor barely got below one in the midst of sort of incredibly tough lockdowns. So we should fear that the moment we start opening up, if the R factor goes above one or significantly above one, even if it's just 1.5, the peak that generates is really nasty. Before we get there, there'll be a second lockdown. So that's why I'm not very optimistic on the economy getting ... this is not going to be a V-shaped recovery as they say. It's probably going to be a U-shaped recovery with a time in which the economy is still depressed because of the virus. Some places will get into W-shaped recoveries, in the sense that they think, "Okay, now we go."
Thoko Moyo: So now let's talk about sort of the economic impact on developing countries and what this is doing for the public policy space and how you deal with that. You may want to do some definitional sort of explanations, what do you mean by the public policy space, et cetera. But let's talk about that some more.
Ricardo Hausmann: Sure, absolutely. So if you are the US, you can say, "Guess what, we're going to shut down the country and we're going to send everybody checks. We're going to send checks to families. We are going to send checks to companies. We're going to have the central bank, the Federal Reserve print money as if it was going out of fashion, buy all sorts of bonds, government bonds, municipal bonds, corporate bonds, whatever. We're going to flood the place with money, with liquidity. Interest rates are going to be zero. We're going to give the credit guarantees so that the banks would be protected against the fear that borrowers would not be able to pay back, because they have these guarantees and so on."
So in that process, the US just allocated over two and a half trillion dollars. That's about 12% of GDP. That's for the time being for, for these couple of months. Okay. That gives you an idea of what it takes to kind of make these lockdowns socially tolerable. Well, 12% of GDP is an infinite amount of money for countries in the developing world. Ecuador, for example, right now we've just been downgraded to default status. So they have no access to finance from voluntary markets. Some countries are different. Peru issued bonds at 2.75% interest. That was a great success. But depending on countries, they may or may not have access to finance. That's why it's so important that the international community come together to put some real resources on the table to help countries fund this COVID period. The most important organization right now by far, has the biggest balance sheet by far, it can mobilize the largest resources by far, is the International Monetary Fund. The International Monetary Fund has said that they have essentially a trillion dollars that they can deploy. There hasn't been too much, in my opinion, not enough leadership from the G7, the G20, in terms of having a more forceful response. But the IMF has put some resources on the table in something we call a rapid finance instrument, where they were able to put some money out on the table. Much, much more would be needed to make these ...
Thoko Moyo: But you have the World Bank and you have ...
Ricardo Hausmann: I know you can count institutions. That's not the same thing as counting dollars. The IMF can deploy a trillion dollars. The World Bank said they could maybe mobilize an extra $14 billion. That's one 70th of what the IMF can deploy. The Inter-American Development Bank announced they could put $3 billion. So we're talking about balance sheets that have radically different sizes. So right now, I mean, in the future I would hope that the World Bank would be a bigger institution and the African Development Bank and the other regional development banks will be a bigger institution. They are not today. So it will take a long time to recapitalize them. So right now the game in town is the International Monetary Fund. That's unfortunately, or fortunately, however you want to look at it, it's where the money is.
Now countries will have to find ways in which they can reallocate their budgets. Other countries have found ways in which they can borrow domestically or which they can borrow from voluntary markets. But the name of the game is you need to have enough money on the table so that you can assist households to help them survive this period, that you can assist firms so that they don't shut down and they can survive this period, and that you can assist banks so that they continue lending to the economy, so that the economy more or less continuous operating. That requires a lot of money. You saw the numbers for the US. Those resources are much scarcer in most countries. So they have to think that maybe they cannot do as much lockdown. Maybe they cannot do as much compensation. So maybe they need to really rely much more on testing, finding people with symptoms, quarantining them, quarantining their contacts, and making sure that we can prevent the spread.
Thoko Moyo: So when you're working with the countries that you're working with, the issues that they are putting on the table, do they match how you're looking at it from your perspective as a scholar and the research that you're doing? Is there an alignment in their thinking and the approach? Or what are some of the other things that they're putting on the table that are unexpected or will seem periphery to what it is that you're focused on or thinking is the right direction?
Ricardo Hausmann: Well because we have an ongoing conversation, their ways of thinking are influencing the way we think, and the frameworks we developed to think about the problem, to analyze the problem, to estimate some of both the epidemiological numbers as well as the economic numbers. We are in the process of influencing each other because we were thinking collectively. But we learn. We learn, for example, South Africa came with the idea that maybe one way to reduce infections is not to have people go to the market to buy goods, but to have those goods delivered at home with Uber Eats or those kinds of apps that can get a lot of people working in distribution. That may keep the transport system less congested, fewer people interacting in the market. But people still supply, the business is still making money, because they're distributing stuff at home. That's, I think, one interesting initiative.
El Salvador came up with the idea of saying, "Okay, if I'm telling people they cannot go to work, so I'm taking labor. If you want, you cannot work." But does capital get to collect? So do people have to pay rent? Do they have to pay their loans on their motorcycles or their cars? Do they have to pay their electricity bills or water bills, their taxes, and so on? So what essentially they did is they transformed the payments that were due in this three month period. They transformed them into a longer term loan, so that at least in this period, you help the cashflow of families so that they don't need to come up with as much money just to keep on going. So these are initiatives that different countries have had. For example, some countries have put lockdowns where people have very few hours where they can leave home, and everybody at the same time. While other countries, for example, Panama has decided that depending on the last number of your ID and your gender, you can come out at different moments of the day and different days of the week. So you spread them out. So people can do their chores that they need to do, but they do so in a city that is not as congested. I think there's a lot of lessons of how one country did it that we can help spread to other countries.
Thoko Moyo: I think I want to end by coming back to where you started, where you pretty much said that there's a choice of extending the emergency until there's a vaccine or herd immunity. But this isn't a short-term thing that we're facing. I mean, you talked of a fog of war, it sounds like quite a long one. It's not a short war.
Ricardo Hausmann: Well, I think that let's hope for the best. But I would prepare for a marathon and not a sprint. We have to understand that life doesn't go back to normal after the lockdown. It is going to be a very special period and that very special period is going to last until 80% of the people are immune. That can happen in just two ways. So let's try to see that we ... it would be useless to develop a vaccine after everybody got sick, because then what's the point? So let's try to pay a lot of attention to the vaccine efforts. Let's be very knowledgeable about what's happening there. Let's think whether it makes sense to wait for it or not. But I think that those are two very different worlds, one where people got vaccinated and the other one people got sick. And they will look very different.
Thoko Moyo: Wonderful. I think this was fantastic. Very informative.