A marathon not a sprint

The countries that are currently seen as the best performers in managing Covid may have faded by year end. Expect more surprises in 2021.

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The trajectory of Covid has surprised many times over the course of the past year.  In early 2020, China was the epicentre of the outbreak of a new coronavirus.  It took until mid-March before reported cases outside China overtook those within China. 

China was seen as deeply exposed (see my note from February 2020).  China implemented a hard lockdown of large parts of its economy, suffered significant reputational damage with widespread concerns about its handling of the outbreak, and there were predictions of political instability in China. 

But 12 months on, China’s economy has been the fastest growing in the world, the aggregate reported number of cases and deaths per capita are low, and China’s political situation (from the outside) looks stable.  It is now engaged in vaccine diplomacy, sending its domestically developed vaccines to countries around the world. 

Past performance does not guarantee future success

More broadly, the past year shows that it’s very hard to judge future national Covid performance on the basis of current outcomes. 

Several countries that did well in the early stages of Covid-19 stumbled during later stages.  Several of the so-called ‘smart seven’ group of small economies that had a good early experience have subsequently experienced weaker outcomes.  Austria, Denmark, and Israel had significant outbreaks, and Singapore had to lock down after an outbreak in foreign workers’ dormitories.

And Sweden’s strong early performance, using its famously liberal approach, weakened over time – with tighter restrictions being imposed in response to rising cases.  Similarly, the performance of Switzerland and the Netherlands weakened through 2020 after a reasonable start. 

Only a few economies, like New Zealand and Taiwan, have consistently done well throughout the Covid period to date – with strong economic and health outcomes.

Several countries that experienced weak performances in the management of Covid-19 (Israel, UK, US) are now leading on vaccinations.  As I noted recently, some of the attributes that led to weak performance in controlling Covid have supported rapid progress in vaccinations (and vice versa).

‘It’s hard to make predictions, especially about the future’

So what should we make of the outlook for 2021?  The record of the past 12 months suggests that we shouldn’t assume the current profile of health and economic success will be sustained.  There are a few dynamics that are worth considering.

First, the winners’ curse.  Countries that have performed strongly in the ‘first half’ of Covid may struggle as they open up.  For example, New Zealand and Australia have done very well in controlling Covid-19 through an elimination strategy – closing their borders to the rest of the world. 

But this risk averse approach (and the ongoing public support for it) will make opening up challenging before vaccinations are fully deployed at home and offshore.  This means that a meaningful reopening will likely occur later than elsewhere, with a consequent economic drag in 2021.  This will offset the very strong economic performance seen through 2020.

And managing the political economy of the opening-up process in vaccination front-runners like the US and the UK will be challenging to get right.  Texas is a good example of a premature relaxation of restrictions.

Second, the tortoise and the hare.  Countries like the UK and the US have started very strongly in vaccinating.  But most of the population needs to be vaccinated before normality can resume.  And although Europe has started frustratingly slowly, it might be able to finish quickly given their strong (if bureaucratic) public health systems. 

Although there have been some negative surprises in vaccine production and delivery in Europe, there is the chance of positive surprises through Q2 and Q3.  There are also strong political incentives at national and EU-wide level to accelerate the pace of vaccinations to restore lost credibility. This would support economic performance.

Third, political institutions matter.  Covid will likely continue to surprise (new variants) and evidence on vaccines, treatments, and restrictions will continue to develop.  Countries that rapidly adapt to these developments, implementing new responses, and learning from others will likely do better than those with a more rigid approach.

Indeed, my assessment of the best single predictor of overall performance in managing Covid is state capability.  The World Bank’s measure of effective governance maps well onto combined health and economic outcomes in 2020; much more so than a recent index of pandemic readiness, which ranked the US and the UK well above New Zealand and Singapore. 

Small advanced economies rank particularly well on effective governance, which is central to my optimistic outlook on small economies in terms of delivering strong health and economic outcomes through 2021.

Political leadership is an important supplement.  For example, Greece’s management of Covid has been strong because of effective political leadership - whereas the US has underperformed.

Overall, it is too early to declare success for any economy yet.  And as a Liverpool fan, I know that a 3-0 halftime score does not mean much.

The countries that are currently seen as the best Covid performers may have faded by year end – and vice versa.  Although there is light at the end of the tunnel, managing Covid through 2021 will be at least as challenging as the first year has been.  Expect more surprises through 2021.

Get in touch if you would like to discuss this analysis.  I am also available for presentations and discussions on other global economic and political dynamics, and the implications for policymakers, firms, and investors. Do let me know if your organisation is interested in arranging a discussion.

Chart of the week

Q4 GDP data has been published for most advanced economies.  Full year GDP for 2020 was down by 3.5% in the US and 6.4% in the EU27; and by 9.9% in the UK.  Asian economies performed well: Taiwan and China had 2020 GDP > 2019 GDP.  Small advanced economies also performed well, supported by good domestic management as well as resilient world trade growth.  Israel, the Nordics, and Switzerland all outperformed the US.  And GDP data for Ireland (out later today) and New Zealand will also be in the top half of this table.

Around the world in small economies

Austria and Denmark are in talks with Israel to develop a vaccine alliance, including a joint approach to future vaccine production – and possible sharing of vaccine stockpiles.  And Israel has halted its ‘vaccine diplomacy’ – giving vaccines to countries that have aligned it with it on various diplomatic issues – after it attracted legal scrutiny.

Vaccine deployment remains sluggish in Europe relative to leaders like Israel, the UAE, the US, and the UK.  But across the EU, data from the European CDC show that small economies perform well – with countries like Denmark, Finland, and Malta leading in terms of first vaccine uptake. 

The New Zealand government has made further changes to the mandate of the Reserve Bank, after reforms to its mandate and governance made last year.  It is now required to give regard to the impact of monetary policy on housing affordability, particularly for first homeowners.  It is a long way from New Zealand’s simple inflation targeting days.

The Hong Kong budget was released, with additional support measures being announced as well as a higher stamp duty on stock trading.  Also in Hong Kong, China-backed legislative reform efforts are underway to further restrict the activities of opposition politicians.

The Danish Government has been a leader in technology diplomacy, with a Technology Ambassador located in Silicon Valley since 2017.  Denmark has just released an updated strategy for tech diplomacy, outlining its future goals in this space.

Singapore was ranked first in the Heritage Foundation’s annual Economic Freedom Index, followed by New Zealand, Australia, Switzerland and Ireland. Hong Kong and Macao were removed from the index rankings, because of the loss of policy autonomy from Beijing: Hong Kong ranked second last year.

And lastly, the Central Bank of Jamaica leads the central banking world on public communications with its reggae explainers.  Its inflation targeting dubplate from last year is fantastic, a lesson for other central banks.

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