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HONG KONG: In 1960, the Nobel Prize-winning economist Ronald H. Coase presented the “social cost problem.”
Human activities often have negative externalities, so individual rights cannot be absolute. Institutions must intervene.
There is no better example of this dynamic than the COVID-19 crisis.
While virtually all countries have suffered as a result of the pandemic, some have done much better than others. While some have reduced COVID-19 cases to almost zero, others have had infection and death rates steadily rising for months.
As McKinsey & Company has noted, the economic activity associated with discretionary mobility has returned to normal for the former group. Among the latter, this activity remains approximately 40% below the pre-pandemic level.
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UNEQUAL SUFFERING
Not everyone suffers equally. Low-paid workers with inferior access to health care and fewer opportunities to stay home, for example because their jobs are classified as “essential,” are bearing the clinical and economic burden of the crisis.
This puts everyone at risk. After all, even if a country contains the first wave of COVID-19 infections, it will remain vulnerable, as the virus continues to import from countries with the worst performance.
In other words, the social costs of inadequate rules and enforcement in some countries are spreading to those with well-functioning institutions.
WHAT MATTERS? THE ROLE PLAYED BY THE GOVERNMENT
The first step in addressing this problem is to identify which institutional arrangements are most effective in reducing the social costs of the COVID-19 crisis. It is not, as might be supposed, just about having strong institutions.
People wearing masks after the coronavirus disease (COVID-19) outbreak walk down a street in a commercial area in Beijing, China, on August 25, 2020 (Photo: Reuters / Tingshu Wang).
The United States and the United Kingdom are institutionally strong, and both had weeks, if not months, to prepare before the outbreaks began, but both have had one of the highest infection and mortality rates in the world.
By contrast, East Asian countries were the first to be infected, meaning they had little time, if any, to prepare. And yet many of them are among the countries that have reduced COVID-19 cases to almost zero.
The difference comes down to attitudes: what role and responsibilities each society attributes to the government and to what extent it expects the community to act as a collective agent of the common good.
In America, the emphasis has long been on personal freedom. “Small government” is a commonly heard saying, and many argue that individuals who act as interested participants in markets and in social and political processes will naturally produce positive results.
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Government intervention, even in the event of a pandemic, infringes on individual rights and, indeed, the very meaning of being an American. Protests over shelter-in-place orders and mask mandates reflect this view.
WHAT ALSO MATTERS? ENSURING COMPLIANCE
This is very different from the prevailing mindset in East Asia. For example, many Western observers have attributed China’s success in containing COVID-19 to its regime, which allegedly infringed on individual freedoms, privacy, and economic efficiency in a way that no democratic government could.
Coase’s theory shows why that logic is flawed. As he explains, the market can minimize social costs if all actors have complete information and face almost zero transaction costs. But those conditions are unrealistic even in normal times.
During a pandemic, no individual can receive complete and up-to-date information about the virus. In fact, the mere existence of asymptomatic carriers precludes the possibility of “complete information”.
FILE PHOTO: Medical workers in protective suits are seen at a nucleic acid testing site outside the IBC mall in Shenzhen after a worker was confirmed to have coronavirus disease (COVID-19), Guangdong Province, China, August 14, 2020.REUTERS / David Kirton
And, because the transaction costs of mask use, quarantine, testing, and contact tracing are high, making compliance a matter of individual choice will never be enough to contain the virus.
ESTABLISHMENT OF CLEAR RULES
But centralized Soviet-style intervention is not feasible: state agents cannot watch every move every person makes and enforce every precautionary behavior at all times. And, contrary to popular belief, that is not what China has done.
Instead, recognizing that entirely voluntary action was inappropriate, the state provided comprehensive and mandatory rules to facilitate individual and community compliance, as well as fiscal and logistical support for implementation.
For example, arriving in Shenzhen from Hong Kong, one of us made his way to a designated hotel, equipped with medical personnel conducting tests and monitoring temperatures, for a mandatory 14-day quarantine.
On the way to the hotel, both the landlord and a contact person from the community got in touch, having been informed by the authorities to prepare for a new arrival from abroad.
From the airport to the quarantine hotel and home, each individual – immigration officers, bus drivers, security inspectors, medical staff, and hotel staff – wore full personal protective equipment.
Common areas were regularly disinfected. The state provided all the necessary resources.
Of course, a traveler would rather go home, rather than stay in a quarantine hotel for two weeks. But the ostensibly high costs of compliance for people do not exceed the overall social costs of partial interventions.
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Therefore, with institutional support and clear guidance, delivered through many channels, including social media, people have taken the necessary precautions. The responsibility for implementation has also been clearly outlined in all government agencies.
BE RECEPTIVE TO THE INTERVENTION OF THE GOVERNMENT
The results – very low COVID-19 infections and deaths – speak for themselves. Other East Asian countries, such as Japan, Singapore, South Korea, and Vietnam, have achieved similar success, using very similar institutional approaches.
In all cases, the government intervened early, developed comprehensive standards and guidelines, and provided the necessary resources to implement the relevant measures. And in all cases, society was receptive to government intervention designed to promote the common good.
Employees wait for a shuttle bus at a 5G test park at Huawei’s headquarters in Shenzhen, Guangdong province, China, on May 29, 2019 (Photo: REUTERS / Jason Lee).
Fundamentally, these countries have very different cultures and political systems. Attempts to turn an effective institutional response to the pandemic into a political or ideological battlefield are, at best, misguided.
The Coasian lesson is that regardless of ideology or politics, each society must develop 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 Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance.
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Xiao Geng, president of the Hong Kong Institution for International Finance, is a professor and director of the Maritime Silk Road Research Institute at the HSBC School of Business, Peking University.
