08/02/2021 | Press release | Distributed by Public on 08/02/2021 09:37
As developing countries struggle to scale up vaccination in the face of new waves and variants, smart containment could help soften the trade-off between lives and livelihoods.
In the early policy debate regarding COVID-19, countries were expected to face a trade-off between flattening the pandemic curve on the one hand, and recession curves on the other (Gourinchas, 2020). However, cross-country evidence shows that many of the countries that suffered high COVID-related mortality rates were often also the countries that saw the largest GDP contractions (Figure 1). Thus, saving lives was associated with saving rather than sacrificing livelihoods. Why the supposed trade-off did not materialize has been the subject of much casual observation but little empirical analysis. In our recent paper, we show that the presumed trade-off was associated with lockdowns as the primary instrument of containment. Early transition from lockdowns to testing-tracing-isolation-based containment softened the trade-off within countries and explains the absence of a trade-off across countries.
Figure 1. Lives vs. Livelihoods: correlation of growth and mortality in 2020
Note: Data obtained from World Bank Economic Monitoring, Global Economic Prospect-January 2021, and Oxford Covid-19 Government Response Tracker 2020. Interested readers can refer to Islamaj, Le, and Mattoo (2021) for further details.
Framework to analyze the effects of smart containment
Several studies have emphasized the role of smart containment, including targeted lockdowns, testing, tracing and other non-pharmaceutical interventions (NPIs), in fighting infections while lowering the economic costs of the pandemic (Acemoglu et al. 2021; Eichenbaum et al. 2021). However, these studies rely on ex-ante simulations of the impact of alternative strategies. Our paper offers an ex-post integrated assessment of the health and economic implications of smart containment.
Our analysis first presents a theoretical framework that demonstrates the trade-off between the health benefit (e.g., lower infections and/or mortality) and the economic benefit (e.g., lowering economic output) associated with a more stringent government lockdown measure (figure 2). We see that the combination of lockdown and testing can soften the lives vs livelihoods trade-off, since testing can help attain any desired containment level at a lower economic cost, or higher economic benefit - as depicted on the graph.
Figure 2. How testing can soften the health-economic trade-off associated with lockdowns
Note: Y-axis represents the health benefits and X-axis represents the economic benefits associated with the containment measures (lockdown without testing - F1, and lockdown with testing - F2). H* represents the desired containment level. E1 and E2 denote the level of economic benefit associated with containment measure F1 and F2, respectively.
When we take our investigation further, we find that both mobility restrictions and open COVID-19 testing policy help contain the spread of infections, especially when these measures were implemented early in the pandemic (figure 3A). However, our results also show that mobility restrictions or shutdowns have a strong negative effect on economic growth. In contrast, testing is positively (though less robustly) correlated with output growth across countries, even after controlling for the level of mortality rate and the stringency of lockdowns (figure 3B). In fact, by allowing countries to relax shutdowns without compromising on containment, COVID testing could have indirectly contributed to about a 0.6 percentage point boost in economic growth. It is possible that testing also infused greater confidence in people to step out and engage in economic activity, and thus could have added another 0.6 percentage point to growth.
Figure 3. Determinants of disease containment and growth
Note: Authors' calculation, based on data from the World Development Indicators, Global Economic Monitoring, Europe CDC, and Oxford Covid-19 Government Response Tracker 2020. Interested readers can refer to Islamaj, Le, and Mattoo (2021) for further details.
The continued importance of testing
Finally, drawing the above elements together, we argue that the supposed trade-off between lives and livelihoods was associated with lockdowns as the primary instrument of containment. Overall, our results suggest that testing softened the trade-off within countries and explains the absence of a trade-off across countries. Testing had positive indirect effects on growth and perhaps even positive direct effects, by helping relax private precautionary behavior. As the world struggles to scale up vaccination in the face of new waves and variants, continued emphasis on testing could help limit infection without recourse to costly lockdowns.
Acemoglu, D., V. Chernozhukov, I. Werning, and M. D. Whinston. 2021. 'Optimal targeted lockdowns in a multi-group SIR model.' American Economic Review: Insights. Forthcoming.
Eichenbaum, M. S., S. Rebelo, and M. Trabandt. 2020. 'The macroeconomics of epidemics.' Technical report, National Bureau of Economic Research.
Gourinchas, Pierre-Olivier, Ṣebnem Kalemli-Özcann, Veronika Penciakova, and Nick Sander. 'COVID-19 and SME Failures'. NBER Working Paper No. 27877. National Bureau of Economic Research, Inc. September 2020.
Islamaj, Ergys; Le, Duong Trung; Mattoo, Aaditya. 2021. 'Lives versus Livelihoods during the COVID-19 Pandemic: How Testing Softens the Trade-off.' World Bank Policy Research Working Paper No. 9696. World Bank, Washington, DC. © World Bank.
Kermack, William Ogilvy and McKendrick A. G. 1927. 'A contribution to the mathematical theory of epidemics' Proceedings of Royal Society A. 115700-721.