Economic Impact of COVID-19 Pandemic and Transfer Expenditures
The COVID-19 outbreak affects the economy through: (i) the shock caused by the contraction of China in the first quarter of 2020, (ii) the supply shock caused by the disruption of the supply chain, (iii) the demand shock caused by the negative impact on investment plans due to low consumer demand and uncertainties and (iv) the effect of the liquidity restrictions on companies (European Commission 2020).
The emergence and spread of the first case in China required the restriction of trade and circulation with China worldwide. However, the fact that China is the first link of the supply chain in some sectors has caused these restrictions to adversely affect the supply (Gault 2020). Production and employment are decreasing due to the negative supply shock arising from the epidemic. Negative supply shocks cause a greater contraction of demand than the shock itself in production and employment (Guerrieri 2020). As a result, a crisis occurs in supply and demand.
COVID-19 is not only a health problem, but also a cause of an economic crisis that will go beyond the 2008 crisis. Quarantine, restrictions, and prohibitions applied to prevent the spread of the pandemic cause a decrease in economic activities. These effects create more difficult problems for countries with weak financial, macroeconomic, labour and health policies (Loayza and Pennings 2020).
Since the beginning of the crisis, monetary policy practices such as financial expansion, liquidity increases, increasing loan supply, loosening loan payment terms and swap agreements made in developing countries have been followed (IMF 2020a). However, the crisis is not one-sided enough to be solved only by monetary policy. In this struggle, a need emerged for governments to execute their monetary and fiscal policies in coordination.
Expansionary monetary and fiscal policies were advised by international authorities to overcome the negative effects of the crisis.
The IMF (2020b) has presented its proposals to increase the total demand by offering additional financial incentives to businesses and individuals affected by the crisis in order to prevent long-term economic damage in the fiscal policy measures to be taken against the COVID- 19 virus. OECD (2020) also states the necessity of providing income support to economic actors. It was also stated that income subsidies may increase demand again, but might not compensate for the disruptions caused by mandatory workplace closures and travel restrictions.Considering the practices during the pandemic, fiscal policy is presented through methods such as transfer expenditures to households and businesses, expansion of health and social security payments, and tax regulations. Some examples are; cash payments and consumption coupons to low-income individuals, wage and rent supports to businesses in South Korea; supports such as expanding short-time working allowance and childcare support in Germany; increasing National Health Service (NHC) funds, tax reductions and deferrals, grants to companies in UK (Elgin et al. 2020).
Income supports, subsidies, tax reductions and deferrals and financial supports are transfer expenditures. Transfer expenditures can be presented as conditional or unconditional transfers in eliminating the stagnation experienced in the COVID- 19 process. Conditional transfers are offered to those who previously worked but are unemployed due to quarantine. The logic of both transfer expenditures is to increase decreasing income and liquidity possibilities, thus compensating for reduced consumption expenditures and overcoming the quarantine shock (Bayer et al. 2020).
However, the struggle against the negative effects of COVID-19 becomes difficult due to the high level of informality, deficient labour market and limited financial opportunities in developing countries. While the use of monetary and transfer expenditure mechanisms is recommended in developing countries, considering that the monetary transmission mechanism is weak and the value of the fiscal multiplier is low in these countries, demand-oriented policies also carry the risk of being inadequate to overcome the crisis. Providing income support to people in need and having no social security and protecting their health should be the main objective instead of a multiplier mechanism; bankruptcies and collective layoffs should be prevented by providing support to households and businesses in the short term through economic policies; continuity of public services and social supports should be ensured in the medium term, along with monetary and financial incentives (Loayza and Pennings 2020).
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