Past holds some vital lessons for Canada's future

Dominique St-Pierre's team at the Natural Resources Canada forestry lab in Quebec City usually spends its time seeking out industry-threatening bugs that invade the woods.

But as the scientists were packing up a few weeks ago to work from home during the pandemic, they took a closer look at the robots and tools they use to extract DNA - tools that wouldn't be used while they were in self-isolation - and figured they might be of some use in fighting COVID-19.

Within hours, they were arranging to ship their delicate equipment to local hospitals, where the tools were used to dramatically speed up the detection of the coronavirus.

"The increase is colossal in many ways," St-Pierre said.

Their colleagues at the forestry lab in Sault Ste. Marie, Ont., had a similar experience. They realized they had all the ingredients for massive quantities of hand sanitizer, so they made 160 litres of it for the area's hospitals.

That kind of unconventional thinking is not unique to this crisis.

Tough times force people, companies and policy-makers alike to break with convention and think outside the box. Indeed, it's that kind of thinking, applied to health care and the economy alike, that will help propel us to the other side.

Consider economic crises past and a pattern emerges: They begin the same way, slamming us with despair and contagious misunderstanding; and they are resolved in the same way, through ingenuity, strong institutions, and creative liquidity - lessons Canadian governments ought to take to heart.

While scientific ingenuity will deal with the health side of our current crisis, history shows economic ingenuity will also be needed to help the economy recover and to carry Canadians through until it does.

Take Argentina's response to the so-called Asian Contagion of the late 1990s, which started with the crash of overheated markets in Thailand and other Asian countries and then spread around the world, sparking fears of a global financial meltdown.

A year after it began, the contagion had reached Argentina. The country's currency regime collapsed and the ability of regular people to get their hands on cash and continue everyday business evaporated. Forced into a corner, some Argentine provinces did something unthinkable: They started issuing their own promissory notes as a makeshift currency.

Amazingly, it worked. Barter thrived, allowing people to have some limited trade while the authorities sorted out the currency regime.

Crises force decision-makers and regular people alike to experiment with unimagined solutions. We're seeing signs of that in today's pandemic. Ottawa's tepid fiscal response in the first half of March, with relatively small income supports and wage subsidies, has roared into a unique multibillion-dollar response that focuses very specifically on keeping cash flowing to businesses and keeping people on their payrolls.

The aid package is huge and, more importantly, the government has indicated a willingness to tweak it and expand it as needs grow.

But is it creative enough? Business leaders from sectors across the board are muttering under their breath that the federal government has not consulted widely and is designing massive new programs without a thorough understanding of how businesses are operating in the hibernating economy.

The private sector hasn't been shy, though, in pushing ideas in public and in private. Banks are in deep talks with officials about how to make credit more available, and companies big and small are contacting government officials aggressively to present their own plans for survival.

If Ottawa is in a listening mood, ingenuity will have full reign.

However, ingenuity on its own isn't enough.

Contagion is a common word in these days of the epidemic, but we use it, too, to describe financial crises - and for good reason, says economist Rohinton Medhora, president of the Centre for International Governance Innovation in Waterloo, Ont.

A contagious fear about countries' ability to repay debts in the 1990s meant that traders and investors punished emerging markets indiscriminately. In the Great Recession, contagious fear was again the enemy - this time of toxic assets hiding in poorly understood financial instruments, which prompted a market sell-off on a wide scale.

A key part of interrupting that kind of contagion, whether it be in debt markets, derivatives or viruses, is having a solid, reliable international network of leaders and institutions that can see the big picture and foster confidence.

"Strong institutions are a necessary but not sufficient path to success," Medhora said.

During the Great Recession of a decade ago, international co-operation was crucial in interrupting the exposure to toxic assets and the ensuing lack of confidence that toppled major banks and investment houses.

Back then, central banks were slow to respond to a lack of liquidity in financial markets that was a major symptom of the crisis; when they finally did, they moved aggressively and collectively to flood the financial system with massive amounts of cash. Eventually, the mechanics of financial markets were repaired so that lending and borrowing could resume.

At the same time, G20 leaders agreed to spend two per cent of their countries' GDP on a co-ordinated stimulus package to nurse the global economy back to health.

This time around, the central banks from rich, developed countries are talking to each other about keeping borders open to trade and money markets functioning as normal, although they're not always moving in tandem.

But global co-operation that would see countries act in unison to keep the economy on track or the virus at bay is on very shaky ground, Medhora points out.

The G20 is meeting virtually and has yet to make much of an impact. More worrisome, though, is the disdain that U.S. President Donald Trump has toward the very institutions that have dealt with crises in the past. Meanwhile, the virus is spreading to impoverished countries that don't have the means to handle the damage.

During previous financial crises, "there was a go-to institution, a go-to process," Medhora says. "There was a system to resolve those crises" - co-ordinated actions by the G20, but also the G7 and the International Monetary Fund - but "this time, it strikes me that we have none of that ... The climate has completely changed."

Ingenuity and strong institutions are vital parts of any recovery, but there can be no end to our current crisis without steady cash flow.

For better or for worse, markets around the world are deeply connected - to each other, and to the livelihoods of regular people. When cash stops flowing in the regular way, the effects cascade into the economy of everyday life, undermining confidence and destroying wealth.

In a typical recession, the flow of money is not really the key issue; rather, it's a decline in production that's often at the base, says economist Chris Ragan, director of McGill University's Max Bell School of Public Policy.

But the COVID-19 pandemic prompted businesses to shut down and cash to stop flowing, spilling over into a problem in the banking system and money markets, turning regular borrowing and lending activity into a very difficult and expensive prospect.

The Bank of Canada, the Department of Finance, and the Office of the Superintendent of Financial Institutions knew immediately what to do this time, though, mainly because of their experience in the global recession of a decade ago and their work on developing tools to intervene since then. Like in 2008 and 2009, they opened up the hatches with money, credit, and buying activity to keep the money markets functioning.

"They were slower off the mark in 2008 because they'd never seen it before. This time, they had it ready to go," Ragan says.

There are hitches, of course. The measures required in this crisis far surpass anything done in the past, and many businesses still have cash-flow problems. They are stumbling along, with their fingers crossed that they'll be able to stave off bankruptcy.

And governments still haven't figured out how to make sure money doesn't fall into hands that don't need it. Do big corporations and well-paid CEOs need government bailouts? In the Great Recession, many a big bank, large corporation, and CEOs walked away with money in their pockets despite being partially to blame for the meltdown. The public anger persists until this day.

This time around, Ragan is watching to see if financial authorities are able to learn from the past and make sure they don't give money to those who can figure out their own way through.

"I have a hard time giving the money ... to a big company," he said.

We're now at the stage of this crisis where the horrific realities of the virus's human and economic toll have sunk in, and our governments are in overdrive, reaching for solutions at any cost.

If crises of the past can teach us anything, they tell us that now is the time to step in with big, bold ideas that defy convention - at the policy level and at the community level.

"It's time for policy-makers to be humble and really think outside the box," implores Ragan.

We've seen some of that already, with the federal government's introduction of a 75 per cent wage subsidy for any company that has seen its revenues drop 30 per cent - a measure hardly imaginable in times past.

In the private sector, we've seen the auto sector dig deep into its institutional knowledge to turn its production lines towards medical equipment.

We've seen communities come together to support their local businesses, knit medical masks, repurpose their 3D printers, find protective equipment for health-care workers, and pool ideas on how to take care of the kids.

But we have yet to see how the airline sector, the energy sector, and tourism will come through this crisis without lasting damage.

And we have yet to plot a path to economic recovery.

It can be hard to see a path out amid all the fear and uncertainty.

But history does hold clues.

Twitter: @hscoffield

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This article was written by Heather Scoffield Opinion from The Toronto Star and was legally licensed by AdvisorStream through the NewsCred publisher network.