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HONG KONG: In 1960, the Nobel Prize winning economist Ronald H. Coase brought up the “social problem.”
Human activities have negative externalities, so individual rights cannot be absolute. Institutions must intervene.
There is no example of this dynamic other than the COVID-19 crisis.
While virtually all countries have suffered from the pandemic, some have done so much more than others. While some have reduced COVID-19 instances to almost zero, others have expanded infection and death rates for months.
As McKinsey & Company noted, economic activity related to discretionary mobility has returned to being general for the old group. Among the latter, this activity remains approximately 40% below the pre-pandemic point.
UNMATCHED SUFFERING
Not everyone suffers the same way. Low-paid staff, limited to medical care and with fewer opportunities to stay at home, for example, because their jobs are classified as “essential,” are bearing the clinical and economic burden of the crisis.
It puts everyone at risk. After all, even if a country suffers the first wave of COVID-19 infections, it will remain vulnerable as the virus continues to be imported from the worst-performing countries.
In other words, the social prices of insufficient regulation and enforcement in some countries are passed on to those with well-functioning institutions.
WHAT MATTERS? THE ROLE OF THE GOVERNMENT
The first step in solving this challenge is to identify the maximum effective institutional arrangements to lower the social prices of the COVID-19 crisis. These are not, as one imagines, strong institutions.
The United States and the United Kingdom are institutionally robust, and both had weeks, if not months, to prepare before their outbreaks began, but both have had among the world’s highest infection and mortality rates.
By contrast, East Asian countries were the first to be infected, meaning they had little, if any, time to prepare. And yet many of them are among the countries that have reduced COVID-19 cases to near zero.
The difference boils down to attitudes: what role and day-to-day work society assigns to government and to what extent it expects the network to act as a collective agent of the common good.
In the United States, the overly focused emphasis has been placed on non-public freedom. “Small government” is an unusual refrain, and many argue that Americans who act as interested participants in markets and social and political processes will naturally produce positive results.
Government intervention, even in the event of a pandemic, undermines individual rights and, indeed, the American being himself. Protests over on-site shelter orders and masking orders reflect this view.
WHAT ALSO MATTERS? ENSURING COMPLIANCE
This is very different from the mindset in East Asia. For example, many Western observers have attributed China’s good fortune by containing COVID-19 to its regime, which would have violated individual freedoms, privacy, and economic power in a way that no democratic government could ever have done.
Coase’s theory shows why this logic is imperfect. As he explains, the market is likely to minimize social prices if all players have complete data and face transaction prices close to zero. But those situations are unrealistic even in general times.
During a pandemic, no one person can obtain complete and existing data on the virus. In fact, the very lifestyle of asymptomatic carriers precludes the possibility of “complete data”.
And since the transaction prices for masking, quarantine and touch tracking are high, making compliance a matter of individual selection will never be enough to engage the virus.
SET CLEAR RULES
But a centralized Soviet-style intervention is not possible: state agents cannot practice each and every movement of each and every user and apply each and every precautionary habit at all times. And, contrary to popular belief, this is not what China has done.
Instead, realizing that completely voluntary action was inappropriate, the state provided comprehensive and binding regulations to facilitate individual and network compliance, as well as fiscal and logistical for implementation.
To illustrate this, upon arrival in Shenzhen from Hong Kong, one of us went to a designated hotel, provided with medical testing of action and temperature tracking, for a mandatory 14-day quarantine.
On the way to the hotel, the owner and a web touch user made contact, after being briefed through the government to prepare for a new arrival from abroad.
From the airport to the quarantine hotel and home, each and every individual – immigration officers, bus drivers, security inspectors, medical staff, and hotel staff – wore full non-public protective gear.
The usual spaces were disinfected. The state provided all required resources.
Of course, a traveler would stop by before staying in a quarantine hotel for two weeks. But the ostensibly high compliance prices for Americans do not exceed the general social prices for biased interventions.
So, with institutional and transparent recommendations, provided through many channels, adding social networks, other people took the mandatory precautions. Responsibility for implementation has also been explained transparently among government agencies.
RECEPTIVE TO GOVERNMENT INTERVENTION
The effects – greatly reduced COVID-19 infections and deaths – speak for themselves. Other East Asian countries, such as Japan, Singapore, South Korea and Vietnam, have achieved similar success, very similar institutional approaches.
In all cases, the government intervened swiftly, drafted comprehensive regulations and guidelines, and provided the necessary resources to put the applicable measures into effect. And in all cases, the society receptive to government intervention aimed at promoting the common good.
Above all, these countries have very different cultures and political systems. Attempts at an effective institutional reaction to the pandemic on a political or ideological battlefield are therefore misguided at best.
The Coasian lesson is that regardless of ideology or politics, each and every society will have to expand institutional arrangements that minimize social costs. After all, those who suffer the consequences of the decisions of others are unlikely to enjoy their “freedom.”
Andrew Sheng is a leading member of the Asia Global Institute at the University of Hong Kong and a member of UNEP’s Advisory Council on Sustainable Finance.
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Xiao Geng, president of the Hong Kong Institution for International Finance, is professor and director of the Maritime Silk Road Research Institute at the HSBC School of Business at Peking University.