Economic Resilience and the Covid-19 Pandemic: A Non-Linear Approach

Purpose: In recent years, the COVID-19 pandemic has imposed considerable harm on economies globally. This situation has prompted researchers to thoroughly examine the issue from different perspectives and view bolstering the resilience of countries as the most effective strategy to address the vulnerabilities. Such efforts can mitigate the harmful effects and negative outcomes of the disease. The susceptibility of economic systems to the shock of the COVID-19 pandemic varies, with some being significantly more vulnerable to its effects. In this context, the greater a country's ability to mobilize its resources against such risks, the more resilient it becomes. Hence, economic resilience is regarded as a comprehensive approach to enhancing the existing capacities and reducing economic vulnerability in the face of various crises and environmental threats. Moreover, economic resilience is shaped by the implementation of economic policies and has an accumulative nature. Individuals and different schools of thought have focused on the concept of resilience within the economic realm, structuring their studies accordingly. Economic resilience emerges as a pervasive criterion in the literature on economic stabilization.
In the economic discourse, particular emphasis is placed on assessing the composite index of economic resilience against external shocks, aiming to quantify this notion. This study sets out to investigate how the COVID-19 pandemic has impacted the economic resilience of countries across high, medium and low levels of income. Addressing 150 nations, this research employs the PSTR model over the timeframe spanning 2020 to 2021. The Economic Resilience Index is computed utilizing the Bruegel method for this inquiry.
 
Methodology: The PSTAR (Panel Smooth Transition Autoregressive) model is a powerful tool utilized to analyze nonlinearities and regime shifts in panel data. It extends traditional autoregressive models by allowing for smooth transitions between different states or regimes, thereby capturing complex dynamics in economic time series data.
The PSTAR model assumes that the relationship between variables evolves smoothly over time and across different regimes. It is particularly useful in capturing threshold effects, where the impacts of one or more variables on the dependent variable change abruptly beyond a certain threshold level. This is achieved through the specification of transition functions, which determine how the model transitions occur between different regimes based on the values of certain threshold variables. The PSTAR model estimation involves several steps, including the specification of transition functions, estimation of model parameters using maximum likelihood or other suitable methods, and diagnostic checks to assess the model's goodness-of-fit and validity of assumptions. Additionally, we conduct robustness checks and sensitivity analyses to ensure the reliability of our findings.
Findings and Discussion: This study reveals a significant negative impact of the COVID-19 pandemic on the economic resilience of countries across different income levels. Employing a two-regime model, the analysis demonstrates a nonlinear correlation among the variables, suggesting varied adjustment speeds among economic regimes. Specifically, countries with high incomes experience a moderate pace of adjustment, those with moderate incomes adjust slowly, and low-income countries adjust rapidly. This suggests that economic changes in response to the pandemic occur at different speeds across income groups.
The COVID-19 pandemic has induced structural and performance alterations in economies worldwide, including increased unemployment, reduced growth, and shifts in consumption and investment patterns. These changes, coupled with challenges such as quarantine restrictions and decreased incomes, have led to considerable adjustments in economic dynamics, varying in speed from one state to another.
Overall, economic changes during the pandemic are of significant diversity across countries, affecting consumption and production behaviors, policy frameworks, and international relations. Threshold values, representing critical points of pandemic severity, determine whether economic variables behave linearly or nonlinearly. When the pandemic's impact surpasses these thresholds, economic variables begin shifting to nonlinear regimes.
Estimations from the smooth panel regression approach indicate a notable negative effect of the pandemic on economic vulnerability, affecting countries with high, medium, and low incomes alike. Per capita GDP, remittances, and foreign direct investment emerge as key influencers of economic resilience. While per capita GDP decreases during the pandemic for high and medium-income countries, it increases in the second threshold regime and boosts economic resilience. Remittances positively impact economic resilience in high-income countries but negatively affect medium and low-income ones initially, transitioning to positive effects after crossing the threshold. Foreign direct investment initially reduces economic resilience across all income levels but becomes positive and significant in high-income countries after crossing the threshold.
In summary, the study underscores the complex interplay between the COVID-19 pandemic and economic resilience, emphasizing the need for tailored policy responses to mitigate its adverse effects across different income groups.
Conclusions and Policy Implications: Although the public health system is evolving, the world remains susceptible to shocks caused by contagious diseases that present fundamental challenges to economies. The vulnerability resulting from the COVID-19 pandemic has spurred countries to allocate more funds to ensure economic security and global health. Nations across the globe are working to reduce the economic impact of the COVID-19 crisis through well-balanced policies, seeking to mitigate risks to the society as much as possible. To tackle the COVID-19 crisis, extensive actions are being taken, including sharing knowledge and experiences regarding strategies, policies and improvement plans, examining common responses, and coordinating actions to enhance resilience and effective recovery preparedness. Strengthening communication among policymakers, development planners, and relevant stakeholders, establishing strong multilateral institutions with political support for global health shock coordination, creating fast financial procurement mechanisms for essential goods, increasing investment in disease surveillance at global and regional levels, developing regional production capacities for vaccines, tests and medicines, sharing medical technology and knowledge, and transferring medical technologies are the measures being taken. Additionally, strategic approaches to national improvement, including economic and financial measures, effective financial procurement design, and financial resource mobilization efforts to mitigate the effects of COVID-19, are being pursued. These measures aim to enhance the resilience and sustainability of public health systems and foster systematic research and development for the preparation of effective and safe vaccines against any virus. Therefore, based on the findings of this research and similar studies, policymakers need to focus on strengthening the economic resilience of countries, in addition to implementing other policies aimed at reducing the spread of and preventing the COVID-19 disease. These actions may include policies to strengthen healthcare infrastructure, develop economic and social crisis response plans, and encourage the development of human resources needed to combat the disease and its economic impacts.