Leviathan As a Partial Cure? Opportunities and Pitfalls of Using the State-Owned Apparatus to Respond to the COVID-19 Crisis

16 Pages Posted: 31 Mar 2020

See all articles by Sérgio G. Lazzarini

Sérgio G. Lazzarini

Insper Institute of Education and Research

Aldo Musacchio

Brandeis University- International Business School; National Bureau of Economic Research

Date Written: March 27, 2020

Abstract

The unprecedented Covid-19 pandemic has sparked a new debate on the merits of markets vs. states for addressing acute societal crises. While some argue that market forces are imperative to stimulate increased supply of critical products and services, others contend that dealing with the pandemic requires rapid adjustments in supply that may be constrained by a host of factors. Even if usual discussions have centered on policies to promote financial liquidity and industry survival, we examine whether the state apparatus—not only state-owned enterprises but also development agencies and investment funds—can promote rapid experimentation and adjustment in production processes to increase prevention and treatment infrastructure and capabilities. Potential actions include complementary public-private effort addressing both discovery and coordination problems—such as collaborative effort to develop prevention and treatment technologies, as well as injections of state capital to stimulate retooling and expansion of strategic infrastructure. The state apparatus, especially the existing public bureaucracy, can help access remote and critical areas with higher marginal costs, with relatively lower private returns. In contrast, selective support to industries must be implemented with caution, especially in the case of sectors whose demand may suffer permanent shifts due to changes in lifestyle. To avoid the risk of perpetuating unjustified and ineffective state support, exit strategies must be carefully crafted, with milestones and termination clauses based on clear performance indicators. We argue that while using the state apparatus as a countermeasure entails its own set of risks, perhaps paradoxically not using it also increases the risk of extending the crisis and ending up with a bloated state sector (e.g. due to massive bailouts), making it more difficult to implement subsequent adjustments.

Keywords: COVID-19, state-owned enterprises, development banks, state capitalism

JEL Classification: I18, O35, O38, L32

Suggested Citation

Lazzarini, Sérgio Giovanetti and Musacchio, Aldo, Leviathan As a Partial Cure? Opportunities and Pitfalls of Using the State-Owned Apparatus to Respond to the COVID-19 Crisis (March 27, 2020). Available at SSRN: https://ssrn.com/abstract=3562406 or http://dx.doi.org/10.2139/ssrn.3562406

Sérgio Giovanetti Lazzarini (Contact Author)

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil
55-11-45042387 (Phone)

HOME PAGE: http://www.insper.edu.br/docentes/sergio-lazzarini-en/

Aldo Musacchio

Brandeis University- International Business School ( email )

415 South Street MC 32
Waltham, MA 02454-9110
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/aldo_musacchio

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