Leonardo Badea (BNR) – When crises overlap: Lessons (re)learned

Mihai-Alexandru Cristea 03/05/2022 | 10:21

Perhaps the most important lesson of the Covid-19 pandemic and the other crises we are facing is learning how to properly appraise what really matters.

By Leonardo Badea, Deputy Governor of the National Bank of Romania


The Covid-19 pandemic was, without a doubt, a turning point, a major challenge, with ample effects on states, societies, and international cooperation, generating permanent change and teaching us a number of important lessons.

When we talk about the transformations we will see in the near and medium term in society and in the functioning of the economy, the two recent and overlapping shocks to which we have been exposed can no longer be dissociated.

I am referring here to the fact that the exit from the pandemic has overlapped with the entry into an extremely high state of tension at almost all levels of society and the economy, as a result of Russia’s invasion of Ukraine.

The latter is only the latest manifestation of a long period of geopolitical tensions in the region. It has generated new obstacles in the process of economic recovery, at a time when we are still facing the problems caused by the pandemic. The challenges have become even more complex, given the evolution of the macroeconomic context and growing fiscal constraints, causing a new wave of vulnerabilities and uncertainties.

In the not-too-distant past we had other examples of overlapping crises, even if younger generations have not experienced them and do not remember them other than in literature.

Of course, there is a nuance to be discussed here because in some situations the overlapping of crises comes as a result of the causal relationship between them, such as the oil crisis of 1973 and the Yom-Kippur war, the crisis of 1980-83 (which was based on the energy crisis of 1979, caused by the Iranian Revolution), the Asian financial crisis of 1997-98 which overlapped with a crisis of governance at all significant political levels, and the 1990-91 recession that overlapped with Iraq’s invasion of Kuwait and the break-up of the Soviet bloc.

The effects of the two exogenous shocks for the economies of the countries in the region present an interesting series of similarities but also differences that deserve to be analysed.


Supply-side bottlenecks

Both shocks determined supply-side bottlenecks with a major impact on the economy and on price dynamics. In the case of Covid-19 this impact was much generalised, including a wide range of raw materials but also of products and services with a high degree of complexity, while in the case of the war in Ukraine it is found especially on some raw materials for the energy industry and fuels, as well as in the agro-food sector.

In the case of Covid-19, because demand was affected simultaneously with or even before supply, the impact on prices was delayed, being felt in the second half of the crisis, especially towards the end when demand returned strongly but supply continued to be affected.

In the case of the conflict between Russia and Ukraine, supply was the first to be affected, in some cases even before the war broke out, while the effects on demand spread with a lag and gradually increased as the conflict became more intense, and prospects of a diplomatic settlement declined.

The lesson learned is to reduce dependence on external sources of supply in the case of strategically important economic sectors. However, this is not always possible because many countries simply do not have the natural resources to avoid these external dependencies. Therefore, in the case of Romania, the advantage of access to many natural resources should not be wasted but must be strengthened by developing a competitive industrial sector and infrastructure to reduce access costs.


Technology and innovation

The role of innovation and new technology was highlighted in both cases, including in communications, internet access, data transmission security, and remote cooperation channels between teams.

In the case of Covid-19, the focus was on telework-related technologies, while in the case of the war what proved to matter most was the ability to collect, transmit, and analyse operational information, as well as the ability to transmit and receive real-time instructions for coordinating field actions.

In this context, the lesson learned for the future is that the field of IT and communications will remain of strategic importance, and the adoption of the newest, most efficient, and secure developments will remain of vital importance for the success of organisations. This also means taking steps to ensure the security of information systems and communication channels, to counter cyber risk, but also to focus on preparing highly skilled human resources to use these tools. Education and training must therefore continue to adapt to the efficient and competent use of these new technologies.


Consumers and investors

Both the Covid-19 pandemic and the war in Ukraine, through their direct and indirect effects, have affected and continue to affect consumer and investment sentiment. From this perspective, in the case of the pandemic, the deterioration has been relatively widespread, globally, while in the case of the war in Ukraine it is much more pronounced in the region, even if it is also felt to some extent globally.

The fact that the two shocks were practically chained together, succeeding each other almost immediately, greatly complicates the response function of the tax and monetary authorities in the region. Especially from a fiscal perspective, the fact that the war in Ukraine perpetuates the negative pressure on the economy felt during the pandemic, albeit in a different way, maintains the need for support through government programmes in order to reduce social costs and destructive effects on economic capabilities.

Indirectly but almost inevitably, this means maintaining an important role for the state in the economy. This need hides a latent danger: the risk of crowding-out, i.e. the risk that the growing involvement of the state will weaken the vitality of the private sector and its access to available funding, which is regressing due to the increasing risk aversion of investors. This would have negative long-term effects on competitiveness and also on fiscal sustainability.

That is why, in my opinion, government support programmes need to be carefully calibrated so as to strengthen the private sector of the economy and encourage initiative. The lesson learned for the future is that we must do our utmost to keep public finances in good order at all times and especially when the economic situation is favorable and to ensure that we have a healthy competitive environment as well as a legislative and fiscal framework to encourage private initiative, because this is where both the majority of jobs and the largest share of budget revenues come from.


Global long-term risks

Both shocks have diminished the focus on global long-term risks, which have continued to intensify.

These risks include: increasing inequality in both the West and the developing world, fueled in most cases by the access of children and young people to education and training; deterioration of the environment and worsening of climate change, which continue unabated, making it increasingly difficult to maintain global temperatures at an increase of only 2°C over the pre-industrial period (objective of the Paris Agreement); demographic change, which is leading to rapid aging in most countries around the world.

These three global issues will continue to haunt us in the post-Covid world, especially in the context of geopolitical tensions and economic sanctions that are likely to continue for a much longer period of time, regardless of the dynamics of the military conflict in Ukraine.

It is in the context of the deterioration of budgetary balances induced by government measures taken in response to these two risks that the implementation of solutions to these problems will be even more difficult, so we can expect them to worsen in the near future, which is likely to cause new shocks to economic systems.

Again, the lesson learned in this case is that the robustness of the economy and the public budget must be constantly strengthened. As time passes, it becomes increasingly clear that several issues we faced in the pandemic were not new, with the crisis only highlighting numerous gaps and shortcomings in various areas.


Robust financial systems

Both the Covid-19 pandemic and the shock of the war in Ukraine have demonstrated the extremely important, positive role that a robust financial system plays in maintaining the functioning of the economy in adverse conditions. That is why it is very important that we continue to take the necessary steps to strengthen it and to be concerned about improving its functioning.



The realities of the crises we are going through have also triggered the reconsideration of many beliefs, with potential effects on the medium and long-term choices for society and the economy.

The high level of solidarity in the face of common threats, in terms of relations between people and between states, has been the most surprisingly positive aspect observed in the last two years and can be added to the list of similarities between the two recent shocks: the pandemic and Russian aggression against Ukraine.


Accelerating trends

As history has shown, major crises have led people to move beyond the past and imagine the world again.

Many trends already manifesting in the global economy have been accelerated by the effects of the pandemic, such as the digitalisation of the economy, the development of digital behaviour and the expansion of e-commerce, artificial intelligence, work and distance learning, implementation of new techniques and technologies in telemedicine, etc.

This acceleration is the result not only of technological advances, but also of other considerations regarding health services or increased safety. Extrapolating such developments can accelerate other structural changes, such as streamlining supply chains or cross-border data flows in response to the new challenges we face today.

During this period a lot has changed in our approach to the issues that affect us all and that require collective and even global efforts (such as managing pandemics or climate change), but also in terms of attitude towards the balance between economic efficiency/profitability and resilience, the importance given to industrial policy, agricultural policy, etc., to the role of governments and institutions and their ability to cooperate and coordinate their actions effectively.

In the general context of the rapid evolution of global exogenous shocks, there is already a broad consensus that we need to improve our long-term policy approach so that it better serves the public interest. In today’s geopolitical and geo-economic environment, crises and conflicts are more frequent and complex, uncertainties are growing, and governments are facing multiple pressures that make it increasingly difficult to steer long-term policies.

Exposure to the many waves of the pandemic, the consequences of climate change, the conflicts between regions in the geopolitical world we face today, and the many economic, political, and social implications reveal that we are not dealing with a phenomenon in the short term, but with significant long-term challenges.


The way forward

The experiences and lessons learned from the Covid-19 pandemic and other events that have changed the world in recent years show at least three directions for improving policy tools and mechanisms to help creating more responsive and robust governance systems that ensure that, in an uncertain future, we can respond more effectively to such exogenous shocks: increased agility, greater reliability, and a more effective science – politics – society interface, respectively.

Events have highlighted the urgent need to increase efforts to transition to sustainable, coherent, and robust economic development. The development of public and private funding models can play a crucial role in this regard. In this context, steps such as: maximising the use of European funds, continuing the process of fiscal consolidation and implementing prudential budgetary mechanisms, stimulating investment, accelerating the transition to digital and green economy, combating cyber threats, improving institutional quality, etc., are an imperative.

The choices made during or because of crises can shape the world for decades to come. We can paraphrase the title of one famous book of the American economist Hyman Minsky stating that we need to find ways to restore the stability of an economy that we sense will continue to be hit by significant exogenous shocks in the coming period, without any certainty about the form and the moment of their manifestation.

The world will look significantly different only if, as we emerge from the many crises we are going through, we decide to take action to address short-term, conjunctural as well as structural problems and make fundamental changes, for example by capitalizing on and transforming the initiatives that have proved effective in the short term, especially in critical times, into long-term policy objectives.

An important challenge in such a context is the need for collective approaches and actions to build economies that ensure inclusive growth, prosperity, and security for all. We are much stronger united than divided.

Last but not least, potentially the most important lesson of the Covid pandemic and the other crises we are going through is to learn how to properly appraise what really matters.

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