Understanding Pandemic Crisis in a Dependent Economy: A Structuralist Analysis
| Published date | 01 November 2024 |
| DOI | http://doi.org/10.1177/00157325231166763 |
| Author | Moumita Basu,Rilina Basu,Ranjanendra Narayan Nag |
| Date | 01 November 2024 |
Understanding Pandemic
Crisis in a Dependent
Economy: A
Structuralist Analysis
Moumita Basu1, Rilina Basu2 and
Ranjanendra Narayan Nag3
Abstract
The pandemic crisis and associated lockdown have led to diminution in demand
on one hand and different types of supply side bottlenecks on the other. The
article makes a theoretical attempt to assess macroeconomic dimensions of
COVID-19 along with consequences of such crisis using a two-sector depend-
ent economy model. In particular, the article investigates the implications of
unanticipated adverse shock such as COVID-19 and wage cut for the dynamic
interaction of Tobin’s q, price of non-traded goods and the exchange rate and
sectoral composition of output and level of employment. The effects of expan-
sionary fiscal policy and increase in risk premium are also highlighted as the part
of concluding remarks. The results in this article critically depend on the differ-
ence in the speeds of adjustments in the Tobin’s q, exchange rate and price of
non-traded goods and different types of cross effects emanating from changes
in interconnected macroeconomic variables. While the pandemic crisis leads to
contraction of all the sectors and decrease in level of employment in the short-
run with uncertain medium-run implications, the wage cut somewhat arrests the
fall in employment.
JEL Codes: E24, F41, G12
Keywords
COVID-19, employment, exchange rate, dependent economy, non-traded
sector, Tobin’s q
Original Article
Foreign Trade Review
59(4) 562–587, 2024
© 2023 Indian Institute of
Foreign Trade
Article reuse guidelines:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/00157325231166763
journals.sagepub.com/home/ftr
1 Department of Economics, Krishnagar Government College, Krishnagar, Nadia, West Bengal, India
2 Department of Economics, Jadavpur University, Kolkata, West Bengal, India
3 Department of Economics, St. Xavier’s College, Kolkata, West Bengal, India
Corresponding author:
Moumita Basu, Department of Economics, Krishnagar Government College, Krishnagar, Nadia,
West Bengal 741101, India.
E-mail: 3.moumita@gmail.com
Basu et al. 563
Introduction
The pandemic crisis and associated lockdown have not only generated major
health concerns on a global scale but also far-flung adverse macroeconomic fall-
outs. While on one hand, there has been a diminution in demand, on the other
there have emerged different types of supply side constraints. The article makes a
theoretical attempt to assess macroeconomic dimensions of COVID-19 using a
two-sector model, which may apply to a large class of developing countries. In
particular, the dependent economy model in this article will explore the dynamic
interaction of the price of non-traded goods and Tobin’s q when an adverse shock
has impinged on the economic system.
In global economic context, the effects of unanticipated adverse shock like
COVID-19 cannot be delinked from the interaction between real sector and finan-
cial sector, pertaining specifically to the openness of the economy. ‘Coronanomics’
(Eichengreen, 2020) or ‘Black Swan’ (Petro, 2020) suggest that the lockdown has
brought about ‘deglobalisation’ preventing normal cross-border flow of goods
and services. As Baldwin and di Munro (2020) predicted, the G7 countries, which
account for 60% of world GDP, 65% of world manufacturing and 41% of world
manufacturing exports have suffered significantly, with the contraction being
worse than the downturn of 2009. If the major players in the world economy faced
such an ordeal, the plight of the developing nations becomes obvious. Such a situ-
ation requires a careful understanding of the underlying interconnections between
the different macroeconomic variables.
The prolonged lockdown and the uncertainty attributable to spread of the virus,
dampened aggregate demand. There was a reduction in consumption expenditure due
to unexpected job loss, wage cut and reduction in stock of wealth.1 The health of
financial sector too was no exception to this economic fallout. One of the reflections
of fragility of the financial sector at an early stage was declining stock market valua-
tion, which has a debilitating effect on private investment. It is pertaining to note that
the relationship between the stock price and the real sector is rather loose. This is
exactly an issue driven home by Krugman (2020).2 Mann (2020) argued that recovery
of the capital markets would not be a smooth process given the nature of intercon-
nectedness between the global financial markets and public sentiment. Raychaudhuri
(2020) emphasised economic contagion effect of COVID-19 worldwide since inves-
tors have been sceptical of investing their funds in shares and bonds. Moreover, there
was a significant capital outflow from India during March and April of 2020.
One of the important consequences of the pandemic shock is the rising risk
premium faced by emerging market economies. A concomitant shock was reduced
volume of world trade and payments. Net exports declined because of worldwide
recession and restrictions imposed on overseas trade. The rising risk premium and
the reduction in net exports together cause currency depreciation.3 Figure 1 shows
global stock the trend of the market index as well as Indian stock market in the
pandemic situation.
The supply shock on the other hand was brought about by supply chain disrup-
tion,4 transport dislocation and scarcity of labour, which occurred with reverse
migration of labour. With the lockdown imposed with the objective of containing
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