Rethinking “Economic Fundamentals” in an Era of Global Physical Shocks: Insights from the Philippine Experience with COVID-19

Having “strong macroeconomic fundamentals”, as the Philippines supposedly did pre-COVID-19, matters much less (if at all), in and of itself, to economic outcomes in the context of a physical shock. Using a model for 21 countries in ASEAN + 3, developing East Asia and South Asia as well as Australia and New Zealand to explain the difference in actual 2019 and forecasted 2020 GDP growth, we find that, ceteris paribus, stronger national capacities to detect and respond to emerging outbreaks, in particular, laboratory capacity, are associated with better short term economic outcomes. For the Philippines, up to 3.6 percentage points in lost GDP growth forecasted in 2020 could have been saved. Our results suggest that a dearth in health system capacity should be prioritized over and above any other type of spending, including traditional stimulus (e.g. large-scale infrastructure) spending. Our results also underscore the need to rethink what is necessary for the stability and resilience of an economy – what are the “economic fundamentals” - in an era of global physical shocks, including those brought about by climate hazards. Given physical shocks, efficient and prepared government institutions matter. A macro economy is not resilient if these are not.