Urbanization in China and Its Resultant Environmental Impacts Lee, Katherine S

Urbanization in China and Its Resultant Environmental Impacts

Author 1 Full Name : Lee, Katherine S.

(Last Name, First Name)

School Name : Seoul International School

I. Introduction

In a world where virtually every country has started to urbanize, the UN Population Division notes that at least two-thirds of those in developing countries are expected to live in urban areas by the year 2050 (Montgomery, 2011). At the heart of this rapid expansion is China, whose recent economic boom has led to mass urbanization in the past couple of decades. As a country initially centered on agriculture, China’s urbanization has opened up a new world of technological advancements and economic opportunities for its people. But with the nation’s rapid transition to urban areas also comes a myriad of issues that threaten the stability of urbanization such as environmental harms. As former Prime Minister of the United Kingdom Margaret Thatcher notes, the increasing rates of population growth and activities that humans tend to, such as polluting rivers and burning fossil fuels, has placed significant dangers to the global environment (Thatcher, 1989). The negative effects of this large-scale urbanization brought to China’s environment could pose potentially large threats to human health and the sustainability of China’s development, making it imperative for policymakers in China to create and revise strategies to tackle this issue (Chan, 2010). This situation that has arisen in China points to a critical question: What solutions would most effectively allow China to minimize the negative environmental impacts caused by urbanization? Despite the availability of unutilized land for government spending, central and municipal governments in China should cooperate to instead encourage more efficient urbanization to lessen the country’s resultant environmental impacts regarding pollution and energy consumption through the implementation of property taxes for remodeled infrastructure, better urban development planning in housing structures, and supervised regulations for clean water sources in urban areas.

II. Tax Implementations

One new policy that China should put into effect to undertake the environmental effects of urbanization is tax reforms, more specifically property taxes to remodel green building standards. Contrary to other developing countries, China does not have much control over tax implementations that defines the revenue that comes from land ownership and real estate; municipal or local authorities, in fact, barely have any legal hold on property taxes that can be placed on those who own property with land and housing structures. Out of the twenty four different taxes that China collects, the ones that generate the most revenue for the central and local governments are the value added tax (VAT), personal income tax, and business tax (Asian Development Bank, 2014). With much less of a focus on land and property when it comes to tax revenues, municipal governments’ monetary expenditures do not align with the rate of urban development that is actually needed for many of the cities that people are migrating to. Yang Dongfeng, a professor at Zhejiang Sci-Tech University, finds that the ineffectual development of land in currently urbanizing cities and lack of incentives that municipal governments provide to property owners to incorporate more space and energy efficient infrastructure is what has resulted in a rise in gaseous waste and air pollution across residential and industrial land per capita (Dongfeng et al., 2013). The Chinese State Administration of Taxation (SAT) finds through an assessment model based on computer-assisted mass appraisal (CAMA) that raised taxes on apartments and residences in large cities can lead to a raise in land related revenues that the government can use to finance the development of new housing and infrastructure in these urban area (Zhou, 2012). With taxes that are not redundantly levied based on income and are primarily targeted on industrial, commercial, or residential structures, the fiscal responsibility that landowners bear will be raised instead of simply leaving them to lax local policies. By increasing tax revenue through the revision of current tax focuses and passing new property and land economic policies through the central government, municipal governments will be able to increase their hold on the development of local infrastructure through raised revenue and provide incentives for land in urban areas to start being further developed upon for use that accommodates the growing urban population and doesn’t increase environmental harms like air pollution.

III. Urban Development Improvements

In addition to initiating tax reforms, central and municipal governments should also work to improve urban development planning through the modification of housing structures in current cities to achieve more affordability and reduce the rising levels of energy consumption in high-density areas. By getting various municipalities across the country to enforce a nationwide system instituted by the central government called inclusionary housing, or inclusionary zoning, urbanization will expand to sustainably include lower-income migrants and residents in a way that won’t require that excessive government spending and efforts to utilize completely new plots of land outside of central urban city areas. China has invested huge sums of money into experimental projects such as “shantytown” redevelopment programs, the government announcing that it had used 144 billion dollars two thirds into 2018 to demolish

and rebuild poorly structured housing in medium to smaller sized cities in China (Chen, 2018). While this program briefly provided those with lower incomes the opportunity to move into better residential housing, this initiative was intended more for the restimulation of China’s economy and has not been continued on as large of a scale since then; a new set of urban development policies with similar intent but better and more sustained execution could effectively reorganize the distribution of affordable housing while maintaining the inherent structure of cities and its energy consumption levels. Brantley Liddle, a research scientist at the National University of Singapore, finds through a production function model on energy use in correlation with urban/economic development that the rapid and wide-scale urbanization in China has inevitably led to a huge increase in city energy consumption, which the Chinese government has not necessarily addressed in terms of enforcing maximized energy efficiency (Liddle, 2013). Liddle notes that condensed housing structures across an area with higherdensity, particularly within urbanizing cities, can be effectively geared towards energy efficiency. This can be most realistically achieved with the mass furbishing of collective electricity and gas installments across inclusionary housing zones, which will ideally hold higher numbers of residents due to its increased affordability in comparison to a widely distributed set of residences. Approaching urbanization through an improved urban development housing plan to accommodate the large amount of population with medium to low income will increase the efficiency of urban expansion in China and lessen the inefficacious use of energy in cities.

IV. Water Quality Regulations

China’s central government should also aid municipal governments in supervised regulations for water sources and sewage outlets in urban areas to prevent the continuation of water pollution and ensure a constant abundance of water supply. Especially in smaller cities still undergoing urbanization today, municipalities lack the resources or managerial capacity to effectively deal with the issues that urbanization may bring up, in this case environmental harms such as the transfer of polluted water sources within urban areas and between agricultural provinces as well (Montgomery, 2008). Montgomery also notes in his published Science article that many cities suffer from a lack of adequate water supplies, similarly calling for a more centered awareness on the need to tackle urbanization related problems (Montgomery, 2008). The lack of clean water supplies goes hand in hand with the polluted water sources that have largely resulted from the development of sewage outlets in protected areas for water facilities and fertilizers for agricultural use; in fact, these sources of pollution can lead to not enough clean water being able to be supplied to people living in urban areas, somewhat resulting in a vicious cycle of unclean or inaccessible water supply (Han et al., 2018). Instead of deriving water for cities from a multitude of sources, individual municipalities should select single clean water suppliers who also follow a set of guidelines including the ecological waterline protection, prohibition of sewage outlets built within water supply facilities, and other regulations to prevent extraneous water pollution travelling in and out of China’s cities. Regulations ensuring that cities are provided with hygienic and environmentally

friendly sources of water will help reduce some of the environmentally harmful water pollution caused by China’s urbanization.

V. Counterclaim

Given, some people believe that a more effective way of addressing the environmental impacts caused by urbanization would be the utilization of new plots of land; many point out that the high levels of population density in urban cities is enough to be environmentally friendly to a certain extent amidst China’s urbanization. By embarking on new infrastructure projects on completely undeveloped land, municipalities will have more firsthand control over developments in green infrastructure, whether it be to reduce gaseous waste and pollution over a large urban area or create filtering facilities for water sources into cities, as well as housing that will be available to residents who migrate to urban areas (Grumbine, 2014). The largescale movement of China’s population into urban cities has also introduced more effective ways of life such as public transportation in high density areas, using less energy and causing less pollution than what would otherwise be many more cars travelling to and from different provinces or regions (Seto, 2013). However, a report published by the United Nations Population Division shows that there is still a fair distribution of the population across lower density areas in the country that cannot account for the environmental efficiency of selective cities (UN Population Division, 2018). If taxes aren’t collected for established land or property and completely vacant land is used as an attempt to develop, government expenditures will increase too much without enough revenue for land development, landing them in further deficit without a clear accomplishment in green infrastructure improvements. Central governments need to take action by working with municipalities to pass tax legislation that ensures tangible improvements on already existing buildable land and helps reduce the gas emissions in those urban areas (Meng, 2018).

VI. Implications

If these solutions are to be implemented as actual governmental policies in China, the municipal governments across the country will initially bear an immense economic burden to enforce pollution regulations and switch poorer quality housing areas to inclusionary housing zones. Infrastructure improvements will generally be supported by the newly property tax revenues that local governments will receive, although the policy will definitely take some time to be approved of and officially implemented in cities across China. After the solutions are implemented, urban hubs will probably see a gradual increase, or even a classified wave, of migrants moving into these areas and furthering the country’s process of urbanization.

VII. Conclusion

China has done a tremendous job of urbanizing to accommodate parts of one of the

world’s largest populations, all in a relatively short period of time. Although the nation is still urbanizing, however, an array of environmental harms such as pollution and high energy consumption has resulted from this urbanization. Through various new government initiatives that are remodeled from similar policy ideas, China’s central and municipal governments should cooperate to encourage more efficient urbanization to lessen the country’s resultant environmental impacts. The largely top-down approach of urban development in nations should be loosened, albeit revealing the need to also delve deeper into the research of the interrelationship between governmental strategies and urban growth. This will be especially crucial to developing countries such as Philippines and Vietnam: nations in Southeast Asia that are now rapidly urbanizing themselves. This paper conceptually suggests that these steps may be taken by implementing property taxes for infrastructure improvements, revising urban development planning to create more affordable housing structures, and passing strict regulations to ensure an abundant supply of unpolluted water in urban areas.

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Corporate Bailout during the COVID-19 Pandemic: Lessons from the 2007 Global Financial Crisis

Author 1 Full Name : Choi, Jang Kyung

(Last Name, First Name)

School Name : Singapore American School

Abstract

In 2020, the Coronavirus Disease-19 (COVID-19) hit the world economy, thereby hampering economic growth of most countries in the world. The United States and the Republic of Korea have been no exceptions. In order to maintain economic vitality, both the Trump administration and the Moon administration adopted corporate stimulus packages. Corporate bailout, in particular, has been one of the most important forms of government intervention due to its ability to prevent an economic collapse and the number of jobs that are able to be saved by preventing a bankruptcy of a large corporation. Yet, the corporate bailout also sparked heated debates between proponents and opponents of government intervention. Similarly, the 2007 global financial crisis led to an unprecedented level of government intervention in the financial market. During the recent COVID-19 pandemic, the US government adopted similar measures, which mainly took form in the Federal Reserve buying corporate bonds. While proponents of such intervention claim that this financial aid from the government benefits the broader economy as a whole, critics often highlight the ethical concerns associated with such interventions. This thesis will analyze specific examples - especially from the United States and South Korea - in order to assess these claims. Using various economic and statistical methods, this thesis will conclude that corporate bailouts are necessary to prevent a stock market crash, which can cause an economic collapse, and to protect the countless jobs that will have been lost otherwise.

Keywords: Corporate Bailout, COVID-19, Global Financial Crisis, Corporate Bonds, the United States, the Republic of Korea, the Federal Reserve

I. Introduction

The 2007-8 global financial crisis and the recent COVID-19 pandemic brought many firms to their knees, very nearly triggering a financial and economic collapse which cost many people their jobs. By mid-2008, Wall Street titans Bear Stearns and Lehman Brothers collapsed, sending the already shaken financial markets in free fall with US indexes suffering record losses. The devastation these bankruptcies had on the economy forced the Federal Reserve to put forth a comprehensive plan to prevent further bleeding, and the Wall Street bailout package was approved in October 2008.

Yet, the bailout package incited severe public backlash, with many expressing their outrage at big corporations receiving support which they thought were immoral. Even to this day, government bailouts are among the most contentious topics in economics, as demonstrated with the recent COVID-19 pandemic. When the Federal Reserve announced that they would be buying corporate bonds to combat the highly volatile stock and corporate debt markets, many were quick to denounce such practises - similar to the 2007-8 Global Financial Crisis.

Contrary to popular opinions that the central bank must intervene as “lender of last resort” in a crisis, this paper will argue that, although corporate bailouts do entail some significant unintended consequences, they are a necessary tool that governments should use to weather an economic crisis. To do so, this paper will analyse various corporations that did and did not receive government assistance and the consequences of those outcomes. By comparing the differing impacts of these decisions on the broader economy, this thesis will ultimately arrive at the conclusion that bailouts are pivotal in mitigating the brunt of an economic crisis.

A multitude of sources were referenced to conduct this study. However, the majority of the referenced sources were news articles, especially due to the lack of published papers on the recent COVID-19 pandemic. Using these sources, the paper aims to weigh the benefits and the drawbacks of bailout packages, aiming to determine the true efficacy of such policies. That said, prior research was included to generalise the effects of a bailout, which can be extrapolated to the COVID-19 pandemic as well.

The paper opens by solidifying the definition of a bailout. This is done to help mitigate potential confusion, as bailouts can take many different forms. The next section discusses the recipients and the non-recipients of corporate bailouts, analysing them for the implications that corporate bailouts have on the economy. In particular, I have chosen to compare Lehman Brothers with American International Group, of which the former did not receive government assistance and the latter did. The following sections compare the forms of government assistance provided in the US and South Korea, and apply it to pre-existing macroeconomic theories, deducing the necessity of such forms of government intervention.

II. Body

II-1. Defining a corporate bailout

A bailout refers to a form of financial aid, typically issued during an economic crisis such as the Great Depression or the global financial crisis. It can take the form of loans or bonds and stock purchases by a government or a financially stable corporation. (Corporate Finance Institute) This bailout may turn out to be a success or a failure. Due to the bailout of General Motors, for instance, the taxpayers incurred a net loss of over $11 billion; of the $50 billion disbursed, they managed to return a little over $38 billion. (ProPublica, 2020).

Proponents of corporate bailouts commonly argue that such forms of government intervention play an essential role in preventing layoffs while simultaneously making a profit (from the repayment of these financial aid), and allowing for a faster economic recovery. Yet, corporate bailouts remain to be a heavily contentious topic. Many also claim that these bailouts may negatively affect the economy, primarily due to companies misallocating the funds they receive (especially on excessive executive compensation and stock buybacks). They also express their concerns with the seemingly excessive cost associated with bailing out large corporations, which entails some moral concerns. Moreover, the bailout might excessively incentivize companies to take more risks, which is also referred to as a moral hazard. In history, there have been some noteworthy cases in the late 2000s, which notably include the cases of Lehman Brothers and the American International Group. These examples can shed light on the recent COVID-19 pandemic time period, when governments are also eager to intervene in markets. In the next section below, I will delve more into these case studies.

II-2. Theory: A macroeconomic approach to the corporate bailout

This paper is, by no means, an attempt to refute the existence of the various drawbacks to corporate bailouts. Admittedly, corporate bailouts are not the perfect solution. There inherently lies a multitude of problems with these bailouts - one of which is a problem known as moral hazard. This is especially a problem among large corporations that are “too big to fail”. These companies are incentivised to take risks (to maximise returns) because they know the government will bail them out if needed. Many economists claim that bailouts and the moral hazard problem form a vicious cycle that will increase the need for a future bailout. Moral hazard was most prominently seen in the 2008-9 Global Financial Crisis, during which many governments bailed out numerous financial institutions, mostly through loans. Furthermore, there exists cases where government assistance of a failing corporation would not have significant social and economic benefit - and hence would not make sense; for a bailout to be advisable, certain criterias must be met.

Despite the significant drawbacks, government intervention - particularly in the form of bailouts - seems to be necessary in most economic crises. The commonly adopted Keynesian Economics Theory captures this perfectly. In direct contrast to the previously held belief that economies should be self-regulated (known as the Classical Economics Theory), Keynesian

Economics encourages activist fiscal and monetary policies to manage the economy. In particular, it argues that governments should work to solve economic problems in the short run, rather than wait for them to be fixed by the free market over an extended period of time. One of the many things that John Maynard Keynes, the father of the Keynesian Economics Theory, argued for was the deficit spending in the labor intensive infrastructure projects to combat employment and stabilize wages during economic downturns, which shows a lot of parallel with the recent forms of corporate bailouts.

The rapid demise of banks, in particular, could pose a serious problem for the economy as a whole, which further explains the need for a Keynesian approach during times of economic crisis. The bailout of banks, for example, is seen to have higher social benefits than private benefits, according to a study by Centre for Economic Policy Research (CEPR). The CEPR explains that this is due to three primary reasons: “First, it affects uninformed depositors who do not have the incentives or the means to assess the risk they face. Second, the bank's knowledge of its customers, and especially of small corporations, is an asset that would be lost in a bankruptcy. Finally, the bankruptcy of one bank may generate a negative externality for all other banks through a contagion effect.”

Such sentiments, that the benefits of a bailout often outweighs potential downsides, is expressed in a multitude of other studies. Numerous papers hypothesize that bailouts can, in fact, reduce systemic risk “either through a higher charter value effect (Cordella and LevyYeyati, 2003) or through a reduction in undiversifiable contagion risk across banks (Freixas, Parigi, and Rochet, 2000; Allen and Gale, 2001; Diamond and Rajan, 2005; Dell'Ariccia and Ratnovski, 2013; Choi, 2014),” just as the CEPR concluded).

II-3. Case studies: corporate bailouts and the United States

Here below, I will share three case studies that show us how the US administrations used the corporate bailout as a way to fight against economic depressions. First, two cases - one on Lehman Brothers and another on the American International Group (hereinafter AIG) - will be analyzed. Second, this thesis will introduce to readers a current corporate bailout case during the COVID-19 pandemic. These cases were selected to demonstrate that a strict ‘no bailout’ policy is not advisable, nor feasible, during times of economic crisis. The case studies are not to be interpreted as an extrapolation that bailouts are necessary for all failing corporations. Rather, they are to be interpreted as cases that highlight the certain criterias that warrants a bailout.

1) 2007-8 Financial Crisis: Lehman Brothers

On Monday, September 15, 2008 the Lehman Brothers shook the world when it filed for bankruptcy. At the time, the Lehman Brothers was the 4th largest investment bank in the United States, employing over 25,000 people and managing assets totaling over $691 billion. Until this day, the bankruptcy marks the largest in US history. The collapse of Lehman Brothers was arguably the catalyst for the complete freeze of global money markets that followed. By

Wednesday, September 17, just 2 days following the bankruptcy of Lehman Brothers, investors withdrew an astounding $196 billion from their money market accounts, where businesses keep cash to fund daily operations. “Had this trend continued, the economy would have collapsed in just a few weeks” (Amadeo).

The Fed chairman, Treasury Secretary, and the president of the New York Fed at the time (Ben S. Bernanke, Henry M. Paulson, and Timothy F. Geithner, respectively) claimed that Lehman Brothers “was in such a deep hole from its risky real estate investments” that the Federal Reserve was not legally authorised to intervene. However, “interviews with current and former Fed officials” directly contradict that claim. Indeed, a group within the New York Fed had come to a conclusion that Lehman Brothers was only narrowly solvent - and hence might have qualified for a bailout (Stewart).

The fall of Lehman Brothers ultimately caused the loss of thousands of jobs, as well as put a severe strain on the global economy as a whole. To this day, the Fed’s decision to let Lehman go under is heavily debated. Warren Buffett recently revealed in an interview that if he “were chairman of the Fed,” he would’ve bailed them out “whether [he] could do it or not”. Buffett added that although “it would have been very tough to do” - especially given the public sentiment at the time - it would have been an act that should have been done “in the interest of the country.” According to the proponents of the corporate bailout, the uncontrolled demise of Lehman Brothers was a government failure. Those who are for the government intervention argue that the bailout was not only important but also mandatory.

Such sentiment is further exemplified by Todd Keister, who authored Bailouts and Financial Fragility in 2010. Here, Keister argues that “when there is aggregate risk in the economy, it is efficient for some of this risk to be borne by the public sector.” He adds that a ‘strict no-bailout policy’ will not achieve the effective allocation of resources that is necessary during times of crisis.

2) 2007-8 Financial Crisis: AIG (American International Group)

In contrast to the Lehman Brothers case, the US government instantly intervened in saving AIG with taxpayers’ money. The American International Group - most commonly known as AIG - was one of many corporations that received financial aid during the 2007-8 Global Financial Crisis. During the crisis, the United States government took a controlling share of AIG in exchange for the $85 billion in assistance they provided under the Troubled Asset Relief Program (TARP). While the bailout seems excessively costly at first, its long term cost was much less than the initial payout. Ultimately, taxpayers made a profit of over $22.7 billion after the Treasury sold its last shares of this insurance giant (Webel, 2017).

Even if the Treasury were to lose taxpayers’ money in the bailout of AIG (in an eventual bankruptcy, for example), it still would have been worthwhile for the Fed to bail them out, due to the significant economic implications their collapse would have. The former Federal Reserve Chairman, Ben Bernake, emphasised that, as infuriated as he was with AIG’s undertaking of

significant risks with unregulated products, the government had no choice but to bail out the insurance giant, as its bankruptcy would have caused a similar form of economic collapse that occurred with the demise of Lehman Brothers. AIG was so large at the time that its failure would have a profound impact on the entire global economy. As a major seller of credit default swaps (CDS), AIG’s bankruptcy would have also triggered the bankruptcy of the innumerable financial institutions that had bought these swaps. “When the government bailed out AIG, it did so in part to protect Goldman Sachs and AIG’s other counterparties, which collectively constituted the core of the financial system. Spreading the pain would have spread the dysfunction. Moreover, because so many of a bank’s creditors are depositors or others who can easily run, protecting creditors is often critical to promoting stability.” To those who were worried about the ripple effects that the demise of the AIG would have caused, saving the AIG was a must.

Yet, not everyone agrees on the theoretical effects of the bailout. Although the proponents claim that the corporate bailout is essential to an economy in the period of economic downturns, opponents still think that the bailout is not a panacea, and rightfully so. There exists a few major flaws within the corporate bailout system - one of which is a problem known as moral hazard. Moral hazard refers to the “situation that arises when an individual has the chance to take advantage of a financial deal or situation, knowing that all the risks and fallout will land on another party” (“Moral Hazard - Overview, Origin, and Example”). In other words, one party is able to take advantage of another party if it chooses to do so. A lot of economists argue that the existence of bailouts may potentially alter future corporate behaviors, especially by incentivising them to take more risks (in an effort to produce greater returns). More specifically, “by allowing shareholders and creditors to avoid losses they agreed to bear,” these bailout policies may encourage companies to take on too much debt. This, in turn, “increases the fragility of the corporate sector,” which may warrant another government bailout in the future. Wharton finance professor Robert Inman believes that recipients of corporate bailouts will inevitably become “sloppy and inefficient” knowing that they will be bailed out in the future. One such example lies with American carmakers of the 1970s, says Gerald Faulhaber, a professor of management and public policy at Wharton. Faulhaber says that when American car manufacturers failed to compete with the Japanese counterparts, they received significant government help through protective tariffs. Despite this, he adds, the American companies did little to “respond with meaningful change.” In essence, he explains that “basically, they just took the money and ran” (“Are Government Bailouts Bad Business?”). Thus, according to the opponents of the corporate bailout, the government intervention will bring about a significant moral hazard issue.

Furthermore, determining the exact criterias that warrants a bailout can be especially challenging. That said, it is generally agreed that the banking industry plays a pivotal role in the broader economy, warranting the need for government assistance during times of crisis. In particular, the banking industry is highly vulnerable to a ‘contagion effect’, which may exacerbate the economic condition rapidly. In short, the vulnerability of the banking industry lies with three points. First, the perceived fragility in the banking system may develop bank

runs. Second, the “general distrust regarding the creditworthiness of counterparts leads to a halt in the uncollateralized interbank markets.” And third, as the liquidity gets squeezed, “banks are forced to sell some of their assets in the market, which puts downward pressure on the price of financial assets.” (2008, p. 85)

3) COVID-19: the US approach to the failing companies during the pandemic

As we have seen from the above, the US government used the corporate bailouts to help the financial industry overcome the global financial crisis. About eleven years since then, the United States is again experiencing economic difficulties in the COVID-19 pandemic era. Here, the Trump administration is using corporate bailouts again to save some companies that have been hard-hit by the sudden economic downturns. On March 27 2020, The Congress passed a $2.2 trillion economic stimulus bill known as the Coronavirus Aid, Relief, and Economic Security Act (CARES). Of the 2.2 trillion dollar budget, 877 billion dollars were allocated to aiding large and small corporations (Snell). This stimulus package, particularly those allocated to helping small businesses, primarily aims to help these businesses stay afloat without having to layoff their workers. It’s important to note that a stimulus differs, fundamentally, from a bailout. While a bailout refers to the financial support to a company (or, in some cases, countries) facing bankruptcies, a stimulus refers to an increase in government expenditures (a fiscal response). The idea is that a stimulus package will reverse (or prevent) an economic recession by increasing the overall spending of the economy. In particular, the objective is to compensate for the loss in spending that would have otherwise been done by the private sector under normal circumstances. The boosting of government spending (and hence the overall spending) will ultimately lead to an increase in aggregate demand, closing the output gap in the process.

From the Small Business Administration (SBA) report released on July 6 2020, it’s clear that the stimulus package is having a significant impact on American employment rates. The SBA noted that the funding supported more than 51 million jobs, with the healthcare, scientific, technical services, construction, and manufacturing sector receiving the largest aid. “The Cares Act authorizes the Treasury Secretary to spend up to $877 billion in taxpayer money helping corporations, large and small. The Federal Reserve, using money authorized by the Cares Act and through its own initiative, has launched an array of programs to inject even more liquidity into the financial system and to help companies access the credit they need to survive. These interventions both replicate and expand on the tools used in 2008.” Businesses have taken at least half a trillion dollars in coronavirus aid from the American public, and the government is refusing to disclose which companies are getting the money. Yet, one thing is obvious - the corporate bailouts are back again during the COVID-19 pandemic era.

II-4. Assessment of the necessity of a corporate bailout

The government bailouts of the 2007-8 Global Financial Crisis and COVID-19 proved to serve an essential role in stabilising the economy. In particular, the studies above demonstrate the efficacy of a bailout when preserving jobs. One direct consequence of bailing out a large

corporation is the continuation of operation of that firm - which may employ thousands of workers. However, the implications of a bailout far extend the preservation of countless jobs. As seen with the unforeseen demise of the Lehman Brothers, uncontrolled bankruptcy of large corporations can inflict detrimental consequences on the economy that could have been prevented with suitable government interventions. Due to their sudden bankruptcy, panicked investors withdrew record amounts from their money market accounts, sending the stock market crashing down and very nearly causing the collapse of the US economy. AIG’s bailout serves as a testament to the US government’s realisation of the devastation that an uncontrolled bankruptcy of a big firm can have on the global economy. Knowing how interconnected AIG’s business was to other financial firms, the US government had no choice but to bail them out.

II-5. Comparison between the United States and Korea

We have witnessed thus far how the US government has used the corporate bailouts in order to boost the economy during the economic hardships. However, the principles of bailouts extend far beyond the domains of the US economy. For example, during the COVID-19 pandemic era, the Republic of Korea (South Korea) has been also using the corporate bailouts in order to rescue some faltering industries. Due to the fact that South Korea’s economy differs heavily from the traditional Here, this thesis would like to choose the airline industry of both the United States and Korea for further analysis. Through the analysis of both cases, this thesis will argue that both countries are staunch supporters of using corporate bailouts during the economic crisis. Through the bailout, these two countries aim to directly save a significant number of jobs and to prevent an economic collapse. Yet, one notable difference between the two governments was that the US government structured the loan to resemble a grant, whereas the Korean government intended its bailout to be a loan.

For the United States airline industry, the US government has undertaken the following measures. Recently, the US government approved $46 billion in loans, in a desperate attempt to save the workforce. US lawmakers have also agreed to a $15 billion payroll assistance package, which will directly save 32,000 workers who were previously furloughed. It has been reported by the US Travel Association that “without immediate aid, 50% of all travel-supported jobs” will have been lost by December of 2020 - which amounts to a staggering 1.3 million jobs. In addition to the positive effects toward the labor market, this measure produced another positive effect for the stock market. Even before the loans were officially approved, the stock market has responded positively to the news. In response to the talks of another bailout, airline stocks have performed well. This rise in stock prices provided the stock market with a positive signal - that the stock market will stay safe during this economic hardship. Economic downturns, in general, let the stock prices fall down, and this might trigger a domino effect for the entire stock market. Yet, with the help of the US government, these airline stocks do not encounter a crashdown, which will save the entire market from a simultaneous crashdown. On August 5th, American Airlines Group rose 9.5%, United Airlines Holdings rose 4.5%, while Delta Air Lines saw a 3.1% increase in response to the bailout. This is in stark contrast to the downward trend that characterised these airline stocks previously. Amid growing concerns that

the recovery of the airline industry will take time, US Airline stocks traded close to their all time lows.

Similar to the United States, the South Korean economy was also hard hit by the pandemic. South Korean airlines have also been making significant operating losses due to the pandemic, which prompted the South Korean government to assist these corporations through a bailout package. Asiana Airlines, in particular, has been hemorrhaging money recently, forcing its parent company, Kumho Industrial, to put its 31 percent stake in Asiana up for sale (link). The pandemic only exacerbated their financial crisis, and Korean Air agreed to acquire Asiana Airlines for $2.2 billion. To aid this acquisition, Korean state owned bank KDB stated that it would “provide up to $971 million in liquidity”. This government assistance package comes after the International Air Transport Association reported that stated that the collapse of the Korean aviation industry would “result in loss of 160,000 jobs and cut 11 trillion won in the country’s GDP”. Investors reacted very positively to the bailout news. On November 16th, for instance, shares of Korean Airlines (KAL) jumped 23.2 percent on the expectation that the merger would boost its value. Since then, its stock price has demonstrated a consistent upward trend, indicating that investors are confident in the outlook of this merger.

III. Conclusion

Government intervention at times of crisis is a heavily contentious topic - with avid supporters on both sides of the argument. While the process of bailing out corporations does entail some unintended consequences, namely the moral hazard problem, its immeasurable benefits ultimately outweigh its drawbacks. Corporate bailouts have proved to be an essential instrument that governments can use to induce a speedy economic recovery, especially by allowing the government to preserve existing jobs and by mitigating the full brunt of an economic collapse. As seen with the Lehman Brothers case, the uncontrolled collapse of a large corporation proved to have economic implications that are far more profound than what was anticipated; the bankruptcy of Lehman Brothers caused the Reserve Primary Fund to “break the buck”, freezing up the entire credit market. The efficacy of bailouts have been demonstrated, time and time again, in the midst of the global financial crisis and the COVID-19 pandemic, the most notable being the bailout of AIG (during the global financial crisis) and airlines (during the pandemic). The South Korean and the American Airline industry, in particular, which we analysed in this study, showed very positive reactions to the government assistance packages. The bailout of the aviation industry in these countries directly saved thousands of jobs, and managed to restore investor confidence, as demonstrated by the dramatic rise in stock prices of the constituents. Corporate bailout - when used in an appropriate manner - can save an economy from a full collapse.

In particular, through the case studies above, it becomes evident that firms that have high social value, and high social costs if they were to go under, such as banks and airlines, often necessitate the need for a bailout to prevent further exacerbation of the economic crisis.

In particular, even a singular bankruptcy in the banking sector generates a negative externality, potentially putting the whole banking industry at risk. This is in contrast to the bankruptcy of a non-banking, industrial firm, which generates a positive externality by providing its competitors with the opportunity to increase their previously unattainable market share. While it may be true that this positive externality may apply to banking entities, it’s also true that negative impacts of the collapse of a bank will outweigh the positive impacts, especially in a systemic crisis. In short, socially valuable firms like banks are far too large and interconnected to fail; their demise will lead to significant economic repercussions that are best avoided through a bailout.

Though this paper attempts to rationalise that a no-bailout policy during an economic crisis is not feasible, as demonstrated through a multitude of case selection, the paper lacks in that it does not make the conditions that necessitates a bailout very apparent. While banks are undoubtedly one class of entities that often warrants a bailout, there are also non-banking entities that may warrant a bailout under certain circumstances, which is not discussed in a comprehensive manner. In this particular paper, there was little attempt to rationalise those, albeit rare, cases.

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