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Insights 12: 9 April 2020
New Research Note: Quantifying the wellbeing costs of Covid-19
 
In this week’s podcast, Leonard Hong discusses Singapore's Covid-19 containment model.
 
New Policy Point: Relief measures: comparing Covid-19 wage subsidy schemes

A flight to safety
Dr Eric Crampton | Chief Economist | eric.crampton@nzinitiative.org.nz
All going well, the Alert 4 lockdown will end in two weeks.

But life will not return to normal.

Covid-19 will rather likely still be with us, albeit hopefully with much-reduced prevalence. “Stamping it out” really means getting things down to levels where it is possible to effectively run the kinds of track-and-trace systems in East Asian countries like Singapore, Taiwan and Hong Kong. Every contact of every case must be rigorously chased-down and quarantined.

Capital and Coast District Health Board Deputy Chair and infectious disease specialist Ayesha Verrall warned earlier this week that while “our contact tracing capacity is a fire extinguisher, we need a fire engine.” So, we are likely to operate under restrictions for a while.

Being able to run businesses safely, maintaining social distancing among workers and following effective sanitary procedures will matter for protecting both workers and customers. The threat of further lockdowns – hopefully restricted to outbreaks locations – will continue to loom.

As the lockdown progresses, more companies will become essential than might have been considered at first glance. The suppliers of those firms supplying essential services will quickly be found essential too, and then their critical suppliers in turn, and so on through the chain of production. This may only be revealed as supply chain issues are discovered and it would be impossible to proactively identify them all. But those firms must be allowed to open for essential businesses to operate.

It gets even more complicated when considering that supply chains are international. A non-essential company here may be critical to an essential business abroad, and vice-versa. Ignoring other countries’ needs would be a mistake.

The longer lockdown lasts, the more an essential-firm standard will resemble a safety standard. More firms will be discovered that must be allowed to open and each must develop safety protocols consistent with Alert 4 risks.

And if a company can be certified to run safely during alert periods, should it matter whether MBIE has figured out to whom its products are essential?

Avoiding the need for any future Alert 4 lockdowns is most important. But figuring out how to let more firms operate safely during Alert 3, or during any potential future lockdowns, will also matter. 

The unexpected winner of Covid-19: China
Leonard Hong | Research Assistant | leonard.hong@nzinitiative.org.nz
Two centuries ago, Napoleon Bonaparte called China a sleeping lion and advised to “let her sleep, for when she wakes, she will shake the world." Bonaparte's prophecies are relevant again today. The lion is now awake and she is becoming increasingly assertive.

Early in the Covid-19 crisis, there was a view that China would be weakened by it. Some even pondered the downfall of President Xi Jinping and the Chinese Communist Party. With the Hong Kong revolts, the death of Wuhan's whistle-blower Dr Lee Wenliang, the looming global recession and economic confidence deteriorating within China, those predictions were not surprising.

But the coronavirus may just be a hiccup and Mr Xi’s government appears to have regained its domestic legitimacy. Instead of falling victim to the virus, the party could be deemed the victor in the international system. The losers seem to be the United States and the wider liberal international order. The balance of power has shifted in favour of China.

China covered up the origins of the virus to the World Health Organisation. As a result, Western countries such as the US, Spain, Italy and Germany have far more cases and deaths than China.

China is using the crisis to extend its geopolitical reach. In the last few weeks, it has sent additional masks and medical supplies to help the Italians and French. As President Xi pledges more support to Europe, he is using it to further legitimise his ambitious $1.4 trillion Belt and Road Initiative.

The virus has become useful for Beijing to add an element of soft power, which is necessary to become the so-called benevolent global force. By repairing the serious reputational damage caused to it by the pandemic, China is framing itself as a responsible power.

The United States led the international system since the end of the Second World War, but under President Donald Trump, its diplomatic efforts have changed tack and are now more nationally focused. China, by contrast, appears increasingly determined to fill that global leadership void.

Great power politics is still a ruthless business in the international system, and Covid-19 has resulted in a new phase of security competition between the US and China. Covid-19 unsettled the balance of power in a way few would have predicted just a few months ago.  

Wage subsidies compared
David Law | Research Fellow | david.law@nzinitiative.org.nz
Early in the pandemic crisis, the Government was quick to offer a wage subsidy scheme to help protect both employers and employees. But is this scheme still fit for purpose?

To recap, the level of subsidy is $585.80 per week for a full-time worker and $350.00 for part-time workers. That’s about 60% of the median wage, or 46% of the average wage, for a full-time worker. The subsidy is paid as a lump sum and covers 12 weeks per employee at an estimated cost of between $8-12 billion.
 
Since its introduction, the scheme has been changed twice significantly increasing its scale: first to go was the cap on the total level of support to companies of $150,000 and then went the requirement that companies must pay at least 80% of an employee’s wage.  So far 1,073,129 workers have either received or are due to receive a wage subsidy payment, or 41% of the New Zealand workforce, at a cost of $6.6b.
 
Nevertheless, New Zealand’s wage subsidies lag those of other countries with similarly designed schemes and potentially don’t do enough to protect Kiwi’s hardest hit by the Covid-19 crisis.
 
In Canada, wage subsidies for companies of all sizes cover up to 75% of a worker’s wage, or 80% of the average Canadian weekly wage of $C1050 ($1255). The subsidies are backdated to March 15 and will apply for three months, with an expected cost of $C72 billion ($86.06b).
 
The Canadian Government will also create a verification system to catch anyone trying to take advantage of the scheme. In New Zealand, the Ministry of Social Development has just released its own list of companies that have signed up for the wage subsidy scheme.
 
The Australian Government has also introduced its own version of the scheme, called “JobKeeper payment,” which equates to about 70% of the median wage with an expected cost to the Australian taxpayer of $A130 billion ($133.5b). An important difference as compared to the New Zealand scheme is that support in the Lucky Country can last for up to six months.
 
Before this crisis, unemployment hovered near 4%. Many now predict it will rise well into double digits. The stakes are high for getting New Zealand’s wage subsidy scheme right.
 
More spending is not necessarily better, however. Policymakers’ and economic commentators’ understanding of the Covid-19 crisis, as well as its severity, has evolved significantly since the policy was first set out. Nevertheless, the scheme’s flexibility and generosity should be constantly reevaluated, as in other countries, to ensure it does what we need it to do. Complementary and alternative measures must also be considered. For example, the Initiative has recommended extending the Student Loans scheme to non-students to provide additional income support. 
 
More details on the differences between wage subsidy schemes can be found in our recent report Relief measures: comparing Covid-19 wage subsidy schemes.
 
 
On The Record
 
All Things Considered
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