The social and economic costs of Covid-19
According to the IMF’s latest World Economic Outlook (WEO April 2021), the pandemic recession is the deepest since the end of World War II, with output contracting 3.5% in 2020, which represents a loss of 7% compared to the IMF’s 3.4. % growth expected in October 2019. More importantly, the consequences of the shock are likely to be long-lasting. While the medium-term costs are still uncertain and vary widely from country to country, it is safe to say that developing economies will be hit the hardest. While the IMF predicts that global GDP will be 3% lower in 2024 compared to the non-Covid scenario, the number doubles to 6% for the developing world despite the fact that the shock, as measured by Covid-related deaths , was more muted in low-income economies. In a recent article (Levy Yeyati and Filippini 2021), we make a preliminary assessment of these long-term costs by country and region.
What’s the size ?
First, we calculate the differences between the projected 2020-2030 exit paths before and after the pandemic (the shaded area in Figure 1) and estimate its present present value at a real interest rate of 0% ( a reasonably prudent assumption in a context where real rates are negative for most developed countries). This gives a total loss of about half of global GDP.
Figure 1 Global GDP projections (in constant USD, index 2017 = 100)
Then there is the issue of fiscal stimulus (equivalent to 15% of GDP, according to the IMF budget monitor) without which the loss of production in 2020 would have been much greater. To what extent is the economic impact of the fiscal unwinding properly factored into the revised growth projections (Beck et al. 2021), especially given that much of the stimulus (6% of the 15%) was below the line (loans, equity investments, guarantees) with a cost that depends on the speed and composition of the economic recovery in each country? There is no simple answer here. In addition, we ignore potential financial crises or debt restructuring in heavily indebted countries (Persaud 2021), as well as the second wave of stimulus already in line for 2021 in many advanced economies. All things considered, adding the 15% of GDP as an indication of the cost of budget support does not seem unreasonable.
Third, there is the value of excess deaths from Covid-19. There is, of course, no uncontroversial way to place a value on human life. For argumentative purposes, we follow a recent estimate for the United States by Cutler and Summers (2020) which uses the value of “statistical lives” to put it between $ 10 million and $ 7 million per life. If we take the $ 5 million per life considerably more cautiously, recognizing that the statistical value may vary from country to country, the global cumulative death cost recorded so far stands at 16.9 % of world GDP.
Fourth, we are addressing education losses. School closures translate into a loss of human capital through a drop in both actual hours of schooling and retention rates (Burgess and Sievertsen 2021). Globally, school closures affected 1.6 billion students at the height of the pandemic (World Bank 2020b). Azevedo et al. (2020) estimated the lifetime loss of labor income for the affected cohort at $ 10 trillion, or about 12% of global GDP.
Table 1 Economic costs of the Covid shock (% of GDP)
There are many other losses that are more difficult to quantify: the destruction of jobs and businesses (with its concomitant loss of job-specific human capital and of social capital and business know-how), diseases untreated / undiagnosed and psychological losses due to social distancing, which can only be speculated at this point. In any case, taking all this into account, our estimated cost of the pandemic, roughly equal to 100% of global GDP in 2019 (see Table 1), should be considered a fairly conservative lower bound.
In a sea of averages, the dwarves are drowning
In a recent article, Deaton (2021) highlights something of a silver lining. Despite all the relevance of higher initial conditions (state capacity, formality of work) to cope with the Covid shock in advanced economies, the loss of production (measured by the difference in growth projections before and after Covid) was more important in the developed world than elsewhere. : Production losses in 2020 are slightly larger for high-income countries due to the higher virulence (so far) of the Covid shock in advanced economies.
Figure 2 Growth revisions and per capita income (areas proportional to population; advanced economies in red)
However, judging relative costs solely by the 2020 slowdown could be misleading, as it ignores differential recoveries (Fornaro and Wolf 2021) and, more generally, the fact that many costs related to Covid will be enduring. For starters, the comparison already changes significantly once we factor in that the richer economies are likely to recover better and faster this year and next. The downward revisions to growth in 2021 and 2022 have clearly favored the global north.
figure 3 Revisions to GDP per capita growth (WEO forecast January 2020 vs. April 2021, percentage points)
The reasons are not difficult to find: better state capacity, more solid labor markets, privileged access to vaccines and, last but not least, larger budgetary envelopes financed by the issuance of debt to negative real rates, as we have already noted here. The pandemic, in addition to highlighting the traditional problem of differential fiscal space to deal with the crisis via fiscal stimuli, revealed two other equally critical aspects: the ability of governments to cushion the health and economic impact. and prioritizing and allocating scarce resources efficiently, and the crucial role played by the structure of the labor market in inhibiting government efforts to mitigate impact (Levy Yeyati and Valdes 2020). All of these handicaps will be at play in the comparative recoveries (Cárdenas et al. 2020).
To illustrate how these losses compare across countries and regions, in Filippini and Levy Yeyati (2021), we run the previous cost accounting of Covid by country and find that although the immediate production loss in 2020 was greater or smaller for developed countries than for advanced economies, this difference – and the absolute cost of the crisis – is eclipsed by the estimated loss over ten years. As might be expected, the negative relationship between the country’s income and Covid-related losses is changing sign: both globally and within rich OECD countries, the poorest countries are growing. do less well.
Graph 4 Economic costs, ten-year window (areas proportional to population; advanced economies in red)
Source: Author’s calculation.
The regression coefficients also change sign. The relationship between the country’s income and Covid has a coefficient of -0.57 (t = -2.16) considering only the short-term impact (2020); when we look at a longer horizon that includes the recovery path (2020-30), the coefficient becomes positive and significant: +13.43 (t = 2.00). This result is robust when running a population-weighted regression, excluding China, or adding fiscal stimuli. On the latter, the relationship is strengthened when only the measurements below the line are taken into account (coefficient: +14.06, t = 2.19) and softens marginally by including the full stimulus (coefficient: + 12.73, t = 2.33) reflecting the fact the savings had a much larger above-line (debt-financed) budget response.
There are other factors, even more difficult to quantify, that should be added to this account: the destruction of jobs and businesses (with its concomitant loss of job-specific human capital and social capital and company know-how), untreated / undiagnosed illnesses, and psychological loss of social distancing. Either way, the data indicates that the estimated global cost of the pandemic in Table 1 (around 100% of GDP) is likely a lower bound, and that the negative correlation with income is likely stronger than suggested. in Figure 2 and Table 1.
Beck, T, E Carletti and B Bruno (2021), “Unwinding Covid support measures for banks”, VoxEU.org, March 17.
Burgess, S and HH Sievertsen (2021), “Schools, Skills and Learning: The Impact of Covid-19 on Education,” VoxEU.org, April 1.
Cutler, DM and LH Summers (2020), “The Covid-19 Pandemic and the $ 16 Trillion Virus”, Journal of the American Medical Association 324 (15): 1495-1496.
Deaton, A (2021), “Covid-19 and Global Income Inequality”, NBER Working Paper 28292.
Filippini, F and E Levy Yeyati (2021), “Pandemic Divergence: Covid-19 and Global Income Inequality,” Torcuato Di Tella University School of Government Working Paper.
Fornaro, L and M Wolf (2020), “Coronavirus and Macroeconomic Policy,” VoxEU.org, March 10.
Hanushek, EA and L Woessmann (2020), “The Economic Impacts of Learning Losses”, OECD Education Working Paper 225, Organization for Economic Co-operation and Development, Paris.
International Monetary Fund (2021), Sequelae of the Covid-19 pandemic: prospects for medium-term economic damage, World Economic Outlook, October 2021, Washington, DC.
Levy Yeyati, E and R Valdes (2020), “Covid-19 in Latin America: How is it different from advanced economies? », In S Djankov and U Panizza eds., Covid-19 in developing economies, CEPR Press.
Levy Yeyati, E and F Filippini (2021), “The social and economic impact of Covid-19”, Mimeo, WHO, April.
World Bank (2020b), “The Human Capital Index 2020 Update: Human Capital in the Time of Covid-19”, Washington, DC.
Persaud, A (2021), “Three Steps to Stop Health Crisis From Turning Into Biggest Emerging Market Debt Crisis,” VoxEU.org, April 1.