WITTENBORG UNIVERSITY OF APPLIED SCIENCES

FINAL ASSIGNMENT
COVID-19 PANDEMIC SITUATION AND
ECONOMIC CHALLENGES

Student name: Hong Ngoc Bui

As COVID-19 makes headlines in almost all countries around the world, numerous studies have

been made to evaluate its social and economic impacts and other challenges. As of May 2020,

more than 4.5 million COVID-19 cases have been confirmed in more than 200 countries and

territories and more than 300,000 deaths have been recorded. Almost all aspects of the

economies have been impacted by the pandemic although the extent and severity varied across

countries, economic sectors and individuals. During this time of crisis, businesses and

government must take extraordinary actions to navigate a new normal plagued with uncertainties

complexities. This essay aims to provide some overview of the economic challenges caused by

COVID-19 pandemic, recommend some strategies for tourism businesses to overcome the

challenges and advocate some policies for the government from the perspective of Keynesian

and Neoclassical economics theories.

II. Current COVID-19 pandemic situation and economic challenges

COVID-19 pandemic poses challenges to countries around the world on both micro and macro

level. Regarding macroeconomic impacts, since there is still no effective cure or vaccines for the

virus, nonpharmaceutical solutions are the only options to restrain the virus. Therefore, most

countries imposed long and indefinite lockdown and travel restriction, disrupting ordinary

people’s daily life and business operation [ CITATION Gös20 \l 1033 ]. More gravely, the world was

caught by surprise by this event, and many countries were underprepared for the outbreak and its

devastation. The International Monetary Fund (2020) forecast that in 2020, the global economy

will contract by 3 percent, an outlook that is even worse than during the financial crisis in 2008.

In most countries, unemployment rates skyrocketed to a new record. For instance, the United

States reported a loss of 20 million jobs and an unemployment rate of 14 percent in April, 2020.

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The country might face a grim prospect of an unemployment rate of 25 percent in 2020, worse

than that during the Great Depression [ CITATION Ega20 \l 1033 ]. Healthcare spending was

projected to increase exponentially, exposing the vulnerabilities of the healthcare and insurance

systems in many countries, including the world’s most advanced economies [CITATION How20 \l

1033 ].

On a business level, companies are also ill-prepared for the pandemic. In most countries,

government mandates have been put in place to restrict citizen’s movement, and many

businesses that are deemed as non-essential are ordered to close for different periods of time. In

this scenarios, even though some sectors such as medical equipment producers and food

producers are better off, most other businesses face a disruption in their supply chain, production

capacity reduction, and future uncertainty. As a result, many businesses have declared

bankruptcy, and many workers suffer from mass layoff, lower quality of work in terms of wages

and work conditions. Moreover, workers who are more vulnerable such as people with disability

will be affected even more negatively [ CITATION Int201 \l 1033 ]. Although governments around

the world have launched several stimulus programs, the impacts of the pandemic will remain in

2020 and the years to come.

III. Impacts on a small tourism company

The COVID-19 pandemic has great impacts on the global economy, affecting almost all aspects

of life and the business activities. Nonetheless, it seems that the tourism sector has been hit the

hardest, and a small company in this sector appears to be the most vulnerable. In the first place,

demand for tourism products has been greatly reduced; and it is argued that the pandemic has

shifted the whole demand curve to the left. Shift in demand curve often occurs due to changes in

income, tastes, and expectations, and price of substitute and complement goods [ CITATION Man17

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\l 1033 ]. First, as the pandemic spread out of control, most countries had to close their borders

and impose strict security check and procedures to reduce transmission due to mass gathering;

thus, both domestic and international transportations have been greatly restricted. Consequently,

tourists expect travelling will be very different in 2020 and beyond and adjust their demand

accordingly [ CITATION Gös20 \l 1033 ]. Second, with the closure of many businesses, many people

are out of job and have their income reduced significantly. According to Jappelli and Pistaferri

(2010), consumption and demand indeed are very responsive to short-term income shocks, also

the impacts are not as clear in case of expected income changes. Additionally, responses to long-

term shocks are also more obvious than short-term fluctuations.

As a result of a shift in the demand curve, all else constant, it is expected that the price of tourism

products will decrease in short term. On the other hand, as found by such author as Crouch

(1994), the price elasticity of demand for tourism product is highly elastic, meaning that a

change in tourism products’ price will lead to significant changes in tourism demand.

Nonetheless, price elasticity of tourism product varies depending on the characteristics of the

destinations, target audience, purposes of travel, and countries of origin of visitors. For example,

tourists travelling for medical purposes is less responsive to price changes than travelling for

pleasure [ CITATION Pen14 \l 1033 ]. Therefore, as the price of tourism products decreases, in the

short term, quantity demanded might increase.

Considering a small tourism company, these factors might considerably impact its operation. For

example, lower demand will lead to lower price and subsequently lower revenue. In this case, the

producer surplus will also be negatively affected [ CITATION Man17 \l 1033 ]. For the producer,

their production cost often consists of fixed costs such as building facilities, equipment and other

infrastructure, and variable costs such as labor costs. To maximize the profit, the company has

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two options, increasing its revenue or cutting its costs. It is recommended that in the short term,

it is not easy to decrease fixed costs; therefore, companies often try to find ways to cut variable

costs [ CITATION Gar11 \l 1033 ]. Therefore, for the tourism company, it can restructure its human

resources, downsizing, forcing unpaid leaves or implementing shift-based arrangement to reduce

the number of work hours. In the long run, the company can take more drastic actions such as

changing its business model to lower fixed costs. For instance, the company can migrate its

operation online to reduce investment in building or renting big offices and buying other office

equipment. In addition, the company can consider shifting its focus on a new customer segment

which is less responsive to the economic shock caused by COVID-19. To illustrate, domestic

travelling might be prefered by tourists when countries make it more difficult to obtain visas and

require strict quarantine and surveillance process. These compliance costs increase the total costs

of travelling both explicitly and implicitly. Hence, tourists will choose a new travelling option

that minimize their costs and increase their satisfaction and utility [ CITATION Hof16 \l 1033 ].

Moreover, small tourism companies which survive the economic recession following the

pandemic should reassess the tourism market, establish its new value proposition and marketing

mix, and anticipate market uncertainty to thrive in a new market structure. It is possible that

when price decreases as analyzed earlier, quantity supplied will eventually decrease, leading to a

new market equilibrium price. Therefore, many producers, including small tourism agencies, will

decide to exit the tourism market and probably shift the supply curve as well. When the number

of suppliers reduces, the tourism company might face less competition, gaining more market

share and having more control over its price. Typically, in most countries, tourism is a highly

competitive industry with the participation of hundreds of businesses, serving increasingly small

market niches and diverse demand [ CITATION Pag15 \l 1033 ].

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IV. Government’s policy recommendations

On a macro level, COVID-19 pandemic has unprecedented consequences on the economy. To

abate the situation, there are several policies that the government should employ to curb negative

impacts, stabilize the economy, and ensure people’s wellbeing. First, healthcare in relation to

COVID-19 treatment, preventative care such as vaccination and related research and

development should be subsidized by the government. Healthcare is often regarded as public

goods, which are often defined as goods that the majority of people can consume and share

without impeding others’ usage, and it is extremely difficult to exclude people from public

goods. Due to these special characteristics, the market is deemed unable to effectively regulate

these goods or determine an optimal price. Hence, public goods are argued to be better managed

by the government [ CITATION Kau03 \l 1033 ].

In normal market condition, some people might argue that healthcare should not be a public good

because people have to pay to purchase healthcare. Moreover, applying Pareto efficiency

principles, as the resources are finite, one person’s gain will be another person’s loss; hence, the

use of health care can be mutually exclusive. Nonetheless, the COVID-19 pandemic has

strengthened the claim that healthcare should be categorized as public goods. Superior healthcare

quality can have multiple positive impacts on the national gross domestic product (GDP) and

competitive advantages by providing citizens’ sense of security, improving the human

productivity, and lowering the negative impacts of the pandemic [ CITATION Hor19 \l 1033 ] . In the

case of COVID-19 pandemic, it is clear that unmonitored and untreated patients can pose great

danger to the whole population, making it much more expensive to curb the spread and control

the situation. Thus, by treating healthcare as a public good and subsidizing the services, the

government can advance the public wellbeing and minimize losses. Nevertheless, it is worth

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noticing that to reduce market failure due to government interference, the government must

foresee unintended consequences to come up with mitigation plans and apply check and balance

mechanisms to ensure transparency.

Second, it is quite common for governments to adopt fiscal policies to intervene and adjust the

economy on a macro level. To be particular, before or during a recession, the government might

decide to develop and launch stimulus packages to inject money into the economy. Although

there are both pros and cons with this solution, it is still a recommended policy for most

governments. Firstly, the government multiplier effect claims that government spending on

households boosts household consumption, which in turn increases production and services. This

circle will go on, multiplying the initial amount of money. Christiano, et al. (2011) also added

that the multiplier impacts appeared to be biggest when the nominal interest rate was zero.

Besides, the stimulus package is believed to have positive spillover effects on other sectors of the

economy and other regions due to the interconnectedness of the economy [ CITATION Kar18 \l 1033

]. For instance, enhanced consumption and business activities in one country can lead to more

economic development and growth in another country or region. In addition, the stimulus

package can also be directed at tax breaks and other financial support for companies, especially

small and medium enterprises. The support can help companies to ease their short-term cost

burden, lowing taxes or covering labor costs. In the long term, it can propel growth and spur

innovation as more resources can be utilized for research and development [ CITATION KPM201 \l

1033 ].

Conversely, stimulus policy can raise some concerns as well. The most conspicuous question is

whether stimulus package raises government debts tremendously to an extent that the

government is unable to pay for the cost. At some point, unmanageable public debt might lead to

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higher taxes, government bankruptcy, even default, and hyper inflation [ CITATION Leã15 \l 1033 ].

Therefore, the government should proceed with the package with caution and monitor the costs

and impacts.

V. The perspective of Keynesian and Neoclassical economics for the proposal

The policy recommendations is very likely to win support from Keynesian economists. Firstly,

for Keynesian economics, fiscal policy including increasing government spending is believed to

stimulate the economy, especially in the face of economic crisis and challenges. In fact, the term

government spending multiplier was populated by John Maynard Keynes himself. Keynes

argued that money mattered to individuals and could provide a reasonable incentive for them to

act [ CITATION Man17 \l 1033 ]. Moreover, most policies focus on solving the short-term problems,

rather than finding a long-term solutions. Rojas (2012) argued that Keynesian theory was the

best framework to explain the global economy and individual behaviors during the time of

uncertainty. When there exist too many unknowns, it is impossible to assume that people will act

as they normally do, and the future will be different from the past. Moreover, due to the

pandemic, the free market can not operate efficiently and readjust all aspects of the economy

quickly enough. Therefore, government intervention is the most optimal solution to help the

economy recover quickly and bring some stability to the situation. However, this policy will be

deprecated by Neoclassical economists according to their theory points that the government will

do more harm in the long run when trying to boost businesses’ trust by spending more to

increase aggregate demand. People will immediately begin to save more to pay for future tax

increases or higher inflation due to increased government spending.

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VI. Conclusion

In conclusion, the pandemic is still ongoing, causing new issues and complications on a daily

basis with no definite end in sight. Hence, small tourism businesses should adjust to their new

ways of operation and make the most out of economy reopening opportunities. For the

government, though they need to step in and improve the economic landscape, it is important to

constantly reevaluate the situation to adapt the plan accordingly. As countries learn their lessons

from the crisis response and action plan, new solutions might emerge to offer new insights and

better management for all economic sectors.

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