When Finance Fails: Why Economists Didn’t See a Coronavirus Collapse Coming

25 March 2020 by Peter Sands, Executive Director of the Global Fund

If being the CEO of a major international bank and now the head of a global health organization has taught me one thing, it’s that there’s a chasm of mutual incomprehension between the worlds of global finance and global health.

Finance leaders haven’t taken seriously the economic risks attached to infectious disease outbreaks. Health leaders have failed to understand why.

Our unpreparedness for Covid-19 and our panicked, stumbling, and unbalanced global response have their roots in this divide.

Since history, analysis, and now direct experience suggest that infectious disease outbreaks pose one of the greatest threats to economic growth, why is that such risks are barely mentioned in many macroeconomic analyses?

In 2016, in my brief sojourn as an academic between Standard Chartered and my current role at the Global Fund, I sought to explore this question. Together with two colleagues at Harvard, I started by asking whether it was true that health risks were underestimated in economic forecasting. Taking a sample of 15 places that had suffered infectious disease outbreaks, including Hong Kong with SARS and Korea with MERS, we examined the relevant reports from the International Monetary Fund, the Economist Intelligence Unit, and Standard & Poor’s for both the two years after each outbreak and the two years before, some 400 reports in total. We wanted to see whether these renowned institutions had regarded the infectious disease outbreaks as having had a significant impact on the country’s economy after the fact, and whether they had considered the risk of an outbreak as a potential threat to the economy before it happened.

The results were striking. Taking the IMF, 63% of their reports written after the outbreaks in the 15 countries considered the impact on the economy worth mentioning. But not one IMF report for any of the 15 countries written in the two years before mentioned the potential risk to the economy of an infectious disease outbreak. The EIU and S&P fared no better.

I confess my efforts to bridge this gap have been largely unsuccessful. I devoted considerable effort in trying to get the IMF to incorporate health-related risks in its economic analyses, and specifically its periodic Article IV assessments of countries’ economies and policies, but failed. We ran workshops for business leaders so that they could explore what might happen to their businesses (including one in 2017 based on the scenario of a coronavirus more contagious than MERS emerging in China), but found ourselves largely talking to companies already involved in public health. Most recently, more than a month ago, I wrote to a few of the world’s leading institutional investors and central bankers, individuals I know personally, saying we really needed to talk about Covid-19. Most didn’t reply. One got their office to offer me a meeting sometime in the summer.

Since then, of course, stock markets have plunged, even more than in 2008. Central banks have made several attempts to arrest the rout, deploying all array of tools developed during the financial crisis. But despite trillions of dollars of support, markets have continued to sink.

Why have leading economists and financiers been so blind to the risks of infectious disease outbreaks? And why have the tools that proved so powerful in response to the financial crisis not been so effective in arresting the market rout this time?

One reason is that economic analysts are not immune to the broader human tendency to struggle with low-probability, high-impact risks. We typically lurch between wildly overestimating them (shark attacks, terrorism) and grossly underestimating them (financial crises, pandemics).

A second is that economists and financiers seem most comfortable assessing risks they think they understand. I recall a revealing conversation with one senior official at the IMF who said the reason they included factors like commodity prices in macroeconomic risk assessments, but not health risks, was simply that they understood commodities, but didn’t understand epidemiology, and that we had better data for commodities than for infectious disease outbreaks.

The global health community’s tendency to make every health issue an urgent global priority backed by often flaky, overblown analysis probably hasn’t helped either.

The answer to why the massive interventions by central banks and governments have so far proved less effective in arresting the market panic seems clear. During the global financial crisis, the actions taken by central banks and finance ministries addressed the consequences and the causes of the panic simultaneously. Injecting capital and providing liquidity did both. This time, central banks can help mitigate the immediate impact, but tackling the root cause, the pathogen itself, is beyond them. Until we get on top of Covid-19, all they can do is stop the economic and financial consequences spiralling out of control.

But this is where the policy response is wildly unbalanced. Trillions of dollars have been mobilized to mitigate the economic consequences. Yet so far it’s proved extremely challenging to mobilize hundreds of millions, let alone billions, to scale-up testing and treatment, and accelerate the development and launch of new diagnostics, therapeutics, and vaccines. For example, think how the market would react if scientists quickly identified a treatment for Covid-19 that would halve the mortality rate. Then ask why the world of finance isn’t falling over itself to step up to support initiatives like the Therapeutics Accelerator launched by the Bill & Melinda Gates Foundation, Wellcome, and Mastercard a couple of weeks ago. With initial funding of $125 million, this platform is designed to fund and coordinate large-scale trials of existing off-patent drugs as therapies for Covid-19, such as chloroquine and various antiretrovirals, and where these look promising, to support the scale-up of manufacturing. For on-patent drugs, like Gilead’s remdesivir, there’s a commercial incentive to invest, but for off-patent drugs there’s no such incentive. To play this role effectively, the Therapeutics Accelerator needs more like $3 billion.

Covid-19 is a health challenge with massive human and economic consequences. We must rebalance our response to put more resources toward fighting the virus itself. We must seize this opportunity to bridge the chasm between the worlds of health and finance.

This op-ed was first published by Barron's.