This chapter uses new data and novel modeling techniques to examine the effect of containment and policy measures in affecting the health and economic consequences of the COVID-19 pandemic.
Lockdowns: The Importance of Acting Fast
The analysis quantifies the impact of COVID-19 containment measures on the number of infections and on economic activity using real-time containment measures implemented by 129 countries (Deb and others 2020a; 2020b). Daily data on the number of COVID-19 infections and fatalities are used, along with novel high-frequency indicators of economic activity, such as the level of nitrogen dioxide (NO2) emissions. The results suggest that containment measures have been effective in fattening the pandemic curve. For example, the very stringent containment measures put in place in New Zealand (such as an international travel ban and early restrictions on gatherings and public events, followed quickly by school and workplace closures and stay-at-home orders) are likely to have reduced the number of infections by almost 90 percent relative to a baseline of no containment measures (Figure 3.1, panel 1). Containment measures have been associated with a strong decline in mobility and were more effective in halting the spread of the virus in countries where de facto mobility was curtailed the most, either because of compliance or greater voluntary social distancing stemming from fear of becoming infected (Figure 3.1, panel 2; October 2020 World Economic Outlook, Chapter 2). The fattening of the pandemic curve ensured that medical systems were not overwhelmed and reduced fatalities, laying the foundation for recovery (Figure 3.1, panel 3) and medium-term growth (Barro and others 2020).
While necessary to save lives and pave the way for recovery, containment measures resulted in large short-term economic losses. The analysis suggests that in countries where stringent measures were implemented, NO2 emissions—a proxy for economic activity—cumulatively fell by almost 99 percent 30 days after their implementation, relative to the country-specific path without containment (Figure 3.1, panel 4). Translating this into economic terms, containment led to about a 12 percent decline (month-on-month) in industrial production, which is in line with the decline in industrial production observed in many Asian countries after lockdowns, including China (more than 10 percent) in January–February, Japan (10 percent), and Vietnam (15 percent) in April. The impact of containment has been adverse across all sectors, but tourism has been affected the most. This is particularly important for the Pacific island countries and other Asian economies that rely on tourism, such as Cambodia, New Zealand the Philippines, South Asia, and Thailand.
However, a look behind the average effects of containment measures shows that their impact varies significantly across countries, depending on local factors and characteristics. Containment measures were more effective in countries with a large share of elderly in the population, and where de facto mobility was curtailed. Other factors also affected the spread of COVID-19, such as population density and the strength of a country’s health system. The latter implies that containment might be more challenging in some of the more densely populated Asian emerging markets with weaker health systems, such as India.
Speed of response is another critical factor. The analysis suggests that public health response time, measured as the number of days taken to implement containment measures after a significant outbreak (set at 100 cases, in line with the epidemiology literature such as Mishra and Mishra [2020]), played a significant role in fattening the curve. On this measure, Asia did relatively well compared with other regions, probably because of its experience with previous pandemics (Figure 3.2, panel 1). Countries such as Vietnam or the Pacific island countries, which put measures in place swiftly at the start of the pandemic, witnessed a reduction in infections by more than 95 percent relative to a baseline with no containment measures (Figure 3.2, panel 2).
This empirical evidence is supported by model analysis—based on the Susceptible, Infected, Recovered, or Removed (SIR) macro model (Eichenbaum, Rebelo, and Trabandt 2020) with fiscal policy (Engler and others 2020)—and emphasizes the importance of early intervention. When containment measures are delayed, model simulations illustrate that the cumulative number of infections is significantly higher, and the depth of the economic contraction is more pronounced (Figure 3.3). The reason is that with raging infections, the negative externalities associated with economic activity are very large. Even if containment measures are eventually introduced, the delayed response still leads to higher fatalities and economic losses.
Results from an Extended Susceptible, Infected, Recovered, or Removed Macro Model
Results from an Extended Susceptible, Infected, Recovered, or Removed Macro Model
Results from an Extended Susceptible, Infected, Recovered, or Removed Macro Model
Exit Strategies: Timing Is Key
Several Asian economies began to ease lockdowns early, and as a result, many containment measures had already been lifted by July. Exit strategies vary across countries (Box 2.1), but in general, they have been accompanied by an improvement in economic activity (October 2020 World Economic Outlook, Chapter 2). However, because of changes in individual behavior associated with the fear of becoming infected and measures left in place to maintain social distancing and reduce contagion, the positive impact of exiting lockdowns on economic activity has been smaller in magnitude than the negative impact of lockdowns. The analysis shows that, on average, lockdowns led to a contraction in economic activity (as measured by industrial production) of about 12 percent a month, but an eventual full reversal of containment measures would increase economic activity by only about 6 percent (Figure 3.4, panel 1). In other words, scarring from the pandemic is already apparent in the weak recovery thus far.
Easing of Containment Measures Has Asymmetric Effects, Depending on the Strength of Testing and Tracing Policies
Easing of Containment Measures Has Asymmetric Effects, Depending on the Strength of Testing and Tracing Policies
Easing of Containment Measures Has Asymmetric Effects, Depending on the Strength of Testing and Tracing Policies
The average effect of exits on economic activity also masks significant heterogeneity across countries. Strong testing and tracing policies, implemented in Korea for instance, along with targeted lockdowns, appear crucial for avoiding a spike in infections when containment is eased (Figure 3.4, panel 2). To minimize the risk of a second wave, health considerations suggest that without herd immunity, reliable vaccines, or effective treatment, the rollback of strict containment should begin only when there are clear signs that new infections are declining (WHO 2020). Many Asian economies seem to be following this strategy. Testing and tracing policies at the time of exit were relatively high in Asia (Figure 3.4, panel 3), and the median seven-day average of new cases was less than 1 per million people—among the lowest across all regions (Figure 3.5, panel 1).
The Importance of Getting the Timing Right
The Importance of Getting the Timing Right
The Importance of Getting the Timing Right
The analysis indicates that appropriately timing the exit from lockdowns is key to limiting the risk of a new wave of infections, restoring confidence, boosting economic activity, limiting scarring effects, and laying the foundation for a stronger recovery Empirical results show that in countries that eased lockdowns when new infections were very low, exits have been associated with a significant increase in mobility (which proxies individual behavior in relation to the fear of becoming infected) and economic activity By contrast, in countries that started reopening when the number of new infections was still high and increasing, mobility did not increase significantly (Figure 3.5, panel 2), and neither did economic activity (Figure 3.5, panel 3). Model simulations also illustrate another dire consequence of exiting too early and before the pandemic peaks: early exits lead to a significantly higher number of infections and fatalities, which can plunge the economy into a second recession and weaken the medium-term recovery (Figure 3.5, panel 4).
Macroeconomic Policies Can Mitigate Economic Costs and Support Recovery
Supportive policies can mitigate the economic costs of containment measures. Using aggregate data provided by the IMF Policy Tracker on discretionary fiscal and monetary measures implemented and announced in response to the COVID-19 pandemic, empirical analysis confirms that such policy measures have been effective in mitigating the economic costs associated with containment measures. Such measures had a much larger impact on economic activity— equivalent to a 22 percent decline in industrial production—in countries with relatively small fiscal packages. Likewise, some of the adverse impact of containment measures was mitigated in countries with larger cuts in policy rates (Figure 3.6, panel 1).
Policies Can Cushion Economic Impact of Containment Measures
Policies Can Cushion Economic Impact of Containment Measures
Policies Can Cushion Economic Impact of Containment Measures
To shed more light on the effectiveness of fiscal measures, a daily database of new announced fiscal plans—encompassing direct fiscal measures as well as guarantees and loans to households and firms— was constructed for a sample of 39 advanced and emerging market economies, based on narrative information in the IMF Policy Tracker and newspaper reports (Deb and others, forthcoming). Using high-frequency identification—that is, purging the fiscal news by daily indicators of economic activity (NO2 emissions, mobility)— the analysis provides evidence that fiscal announcements had significant effects on economic activity. Estimates suggest that fiscal announcements of 1 percent of GDP increased year-on-year industrial production by about 0.4 percent— equivalent to a fiscal multiplier of about 0.2–0.3. Consistent with Ilzetzki, Mendoza, and Végh (2013), multipliers are higher in economies operating under fixed exchange rates in more closed economies, and where debt-to-GDP ratios are relatively low (Figure 3.6, panel 2). The analysis also finds that multipliers were higher during months of larger losses in economic activity (proxied by mobility indices and NO2 emissions) with fiscal announcements of 1 percent of GDP leading to about a 1.2–1.4 percent increase in industrial production (corresponding to a fiscal multiplier of 0.6–1). It was also found that, generally, fiscal announcements have larger effects when containment measures are more stringent, as periods of lockdowns also correspond to periods of weak economic activity. However, when controlling for the effect of fiscal announcements during months of weaker economic activity, the analysis found evidence of a bigger impact of fiscal news when containment measures are lower—that is, when supply-side restrictions from lockdowns are smaller (Figure 3.6, panel 2).
Finally, model simulations show that fiscal measures targeted to the most vulnerable households (such as consumption coupons in Korea and cash transfers to casual workers in Australia) also helped reinforce greater social distancing and reduce the number of infections (Figure 3.6, panel 3) and fatalities.
Conclusions
Countries in Asia have taken significant measures to contain the COVID-19 pandemic while aiming to limit its economics costs. In the absence of a vaccine or effective treatment, several Asian countries locked down their economies quickly and decisively to stabilize the spread of the virus and enable them to gradually reopen economic activity. The early implementation of containment measures proved crucial in fattening the pandemic curve and avoiding a deeper and more protracted recession. Meanwhile, the rollback of containment measures only after the stabilization of outbreaks and with strong testing and tracing regimes led to a stronger rebound in economic activity and better health outcomes. The substantial macroeconomic policies implemented and announced helped reduce the economic costs of containment and sustain the recovery while limiting scarring. Targeted fiscal announcements were essential for protecting the most vulnerable, stimulating economic activity, and helping contain the spread of the pandemic, and thus should not be withdrawn prematurely.
Several economies in Asia have handled the pandemic well so far, but some have yet to bring the outbreak under control. These countries need to contain the virus while balancing the short-term economic costs. The challenges are ongoing and large, including the ever-present risk of a second wave of infections that could put more lives at risk, mandate other lockdowns, and damage economies further.
