Essential requirements: unity and solidarity

COVID-19 pandemic is externality on a worldwide scale and as such it requires a multilateral response

As then prime minister of the Republic of Korea, I was able to witness how the world leaders came together to deal with the global financial crisis.

Now we have a new crisis, and one that is deeply concerning. The COVID-19 pandemic has already wrought havoc with public health and the global economy.

One of the reasons that it is so concerning is that at the moment there appears to be no end in sight to this crisis. Social distancing, self-isolation, face mask wearing, the lockdown of cities and regions, teleworking and online business transactions will help protect people from infection but only a vaccine offers a permanent solution to this crisis.

Another reason is that unlike the response to the financial crisis, it is difficult to see any genuine international cooperation among global leaders to collectively deal with this global health crisis and its aftereffects on the global economy and finance.

Henry Kissinger, the former US secretary of state, wrote in The Wall Street Journal on April 3 that the COVID-19 pandemic will forever alter the world order. When the pandemic is over, many countries and institutions will be perceived as having failed. While the assault on human health will be temporary, the political and economic upheaval it has unleashed could last for generations.

In his media briefing on April 29, Tedros Adhanom Ghebreyesus, director-general of the World Health Organization, said: "More than ever, the human race should stand together to defeat this virus. It is more than any terrorist attack. It can bring political, economic and social upheaval."

Gordon Brown was one of the most ardent proponents of global cooperation to deal with the global financial crisis. At his initiative, I have joined 117 former heads of state and government (most of them are the members of the World Leadership Alliance/Club de Madrid) along with 104 prominent economists and others to send a letter to the governments of the G20 nations urging urgent coordinated action.

The letter calls for immediate internationally coordinated action to address the deepening global health and economic crisis caused by the pandemic, which has several distinctive features compared to global financial crisis.

First, compared with the crisis when the financial sector was the major source of the problem, the current crisis of COVID-19 is a crisis of the real economy such as manufacturing, services and the labor market.

Second, social distancing, self-isolation, lockdowns, online learning and teleworking, among other things, have begun to increase the use of the internet and to impact tremendously on the rapid advancement of digital transformation. One of the long-term consequences of the COVID-19 together with the rolling out of G5 will be that the fourth industrial revolution will be further advanced. The crucial importance of big data will become much more evident when we discover how to deal with COVID-19 with vast amount of already accumulated data.

Third, the welfare state of the advanced Western countries has been shown to be somewhat lacking. There was a strong belief that the welfare system initiated by the United Kingdom's Beveridge Report for social measures including the National Health Service introduced soon after the end of World War II was the best example of the universality of the welfare system. However, COVID-19 has exposed the vulnerability of the welfare state model.

Fourth, on the whole, Asian countries, particularly China and the ROK, seem to have better managed the pandemic than most of the Western countries including the United States and Western European countries. In the case of the ROK, it had a sharp increase in cases during February, but it has managed to slow the spread since March. The ROK has taken such measures as rapid scaling of testing (5,500 tests for every million people compared with the UK's 750), readily available tests and contact tracing, and targeted testing by using a government application to locate people.

Fifth, the race between demand and supply due to the unexpected economic impacts of the pandemic will reduce a huge amount of Marshallian surplus. Supply will be reduced because companies lack liquidity to fulfill their commitments while facing lower demand and thus are forced to file for bankruptcies. Particularly the traditional, non-digital service sector may be adversely affected. Demand will also shrink because workers who lose jobs will have no income anymore and therefore there will be less consumption eventually depressing aggregate demand. Even the other income earners will take precautionary measures in case of a further emergency.

According to the International Monetary Fund, the early lessons from China are that right policies make a difference in fighting the virus and mitigating its impact although some of these policies come with difficult economic tradeoffs.

Chinese policymakers have targeted support to vulnerable households and looked for new ways to reach small companies, for example, by waiving social security fees, utility bills and channeling credit through fin-tech companies. The authorities quickly arranged subsidized credit to support scaling up the production of health equipment and other critical activities involved in the outbreak response.

Safeguarding financial stability requires strong and well-coordinated action. The Chinese authorities stepped in early to backstop interbank markets and provide financial support for companies under pressure, while letting the renminbi adjust to external pressures. Among other measures included are guiding banks to work with borrowers affected by the outbreak, incentivizing banks to lend to smaller companies via special funding from the People's Bank of China and providing targeted cuts to reserve requirements for banks. Large companies, including State-owned enterprises, enjoyed relatively stable credit access throughout - in large part because China's central bank continued to lend generously to them.

The author is former prime minister of the Republic of Korea and chair of the International Monetary Institute at Renmin University of China. The views don't necessarily reflect those of China Daily.