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Is COVID-19 really an exogenous shock?

by Dev Nathan, Govind Kelkar

"We cannot solve problems by using the same kind of thinking we used when we created them."  – Albert Einstein

Economists invariably divide shocks into two types: endogenous and exogenous. Endogenous shocks arise from within the economic system. The Great Recession of 2008 was sparked off by the shock of the financial crisis. This clearly originated from within the economic system. In India, the demonetization of 2016 was a shock caused by an economic policy. Therefore, it was an endogenous shock from within the economy, including its policy formulation and governance system.

COVID-19, and SARS, are different from the above-mentioned endogenous shocks. They seem to originate not from the economy or even from human society, but from the animal world and the biosphere. So is there any doubt that this is an exogenous shock?

A truly exogenous shock would be something like an earthquake and the tsunami in its wake. The manner in which the shock affected the economy would, however, depend on the nature of the economy. The Fukushima tsunami affected a region of Japan that was intimately connected with global value chains in manufacturing. This spread its effects quite widely across the globe.

Perhaps the most spectacular exogenous shock was the asteroid that caused the extinction of dinosaurs and changed the history of the planet.

COVID-19 is obviously not something that came from outer space. It is also not something that came solely from an unmediated process of nature, such as the shifting of tectonic plates. COVID-19 came from the biosphere around us, and it was human interaction with nature that caused the transmission of the virus from one species to another — most likely from bats, through some intermediary host, to humans.

But is the transmission of COVID-19 to humans a shock endogenous to the economic system? The economy is the production and exchange of goods and services. Much production necessarily involves exchanges with nature. For instance, we take wood, water, nutrients from the soil, for many products. However, this taking is never a one-sided activity — there is always an exchange, where something is taken and something else is put back. In the process of interaction, there is the co-creation of what exists today, whether it be denuded forests or acidic oceans. Therefore, interaction and/or exchange is part of any relationship, not only those between humans, as in trade, but also those between humans and nature.

Exchanges with nature are then part of the economy. This exchange affects and influences natural processes. As Jane Goodall has pointed out, our destruction of bio-diverse forests has forced animals ‘to crowd closer and closer together, which means that a virus can pass from one animal to another … When they (different animals) are in stressed conditions in the markets as pets or whatever, that’s when the virus that started in another animal ends up in this animal and now that it can cross the species barrier into humans … make a new mutation, which has caused the COVID-19’.

The wet markets of China, or livestock rearing in various parts of the world, are locations of human economic relations with animals. With the species jump of viruses to humans promoted by such close and continuous proximity between humans and other animals, it can be concluded that the COVID-19 shock is not exogenous but endogenous to the economy, a shock co-created by humanity’s economic relations with the biosphere.

Consequently, we not only use the resources of the biosphere, but we also change or co-create them. The field of economics has yet to come to grips with this co-creation of the natural world today, which is why COVID-19 is characterised as exogenous. Economic theory promoted capitalism’s endless accumulation without being mindful of the changes human actions were bringing about. Now, the unintended consequences of our modifications of the biosphere are coming back to haunt us.

What does this mean for policy? While we rightly pay attention to social security and gender and other inequalities, in adaptation to COVID-19 we also need to think of mitigation, or reducing risks from our exchanges with the biosphere. To incorporate mitigation, we must look to see how our economic theories can incorporate the reflexive nature of co-creation. Or, that in economic relations, we do not only use resources, we also co-create them.

There are policy consequences of the endogeneity thesis. YES, we should mitigate COVID-19 transmission, through vaccines, research, and modifications to human contact (isolation, distancing, face masks), AND we also need to reduce pandemic threats by modifying our interactions with nature; e.g., reverse the reduction of the biosphere that results in crowding of animals, increase biosecurity to reduce transmission of pathogens from livestock, reduce stressed conditions of existence of animals, and modify forms of human–animal interaction that may not have been a threat in small-scale societies but can create pandemics in a globalized world. 

Recognizing that COVID-19 is an endogenous shock is only the first step in developing an appropriate economic analysis. This needs to be followed up by theorizing or modelling human–nature interaction and integrating the co-creation of the natural world into economic theory. These are much more difficult tasks.

The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.

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