The Unpredictable Social and Economic Cost of the Coronavirus (Covid-19) Outbreak

Submitted by Patricio V. Marquez on Thu, 02/27/2020 - 10:01 PM

The Unpredictable Social and Economic Cost of the Coronavirus (Covid-19) Outbreak

Financial Times (FTWeekend) February 22/23 2020

With the realization that a novel coronavirus pandemic (Covid-19) is likely, people across the globe are getting alarmed, and financial markets are starting to tumble. Given inadequate expenditures on public health and insufficient disease prevention effort, perhaps this is an opportune time for high level political authorities, ministers of finance, and other global actors to once and for all be convinced that predictable and sustainable budgetary allocations for disease prevention, early detection, surveillance, preparedness, and response capacity across a medical care continuum is not an optional expenditure, that be neglected due to political shortsightedness or per the whims of fiscal rectitude.  Rather, these allocations should be considered priority investments in country budgets to enhance societal resilience and preparedness to prevent and control the emergence and reemergence of highly infectious pathogens, such as Covid-19. 

If we look at the consequences of recent infectious disease outbreaks, one learns about their destructive potential, both in terms of human toll and severe economic disruptions. In particular, influenza, a zoonotic disease (animal to human transmission), poses an unpredictable threat of international importance because of its potential capacity to mutate in ways that allows sustained human-to-human transmission across national borders and continents.

The impact of the 1918-1919 Influenza Pandemic, for example, was enormous (Garrett, TA, 2007).  It killed 40 million people worldwide from the early spring of 1918 through the late spring of 1919.  Only the Black Death that spread throughout Europe from 1348-1351 killed more people (roughly 60 million) over a similar time period.  Data for the United States shows that since males aged 18 to 40 were the hardest hit by the influenza, it had serious economic consequences for the families that had lost their primary breadwinner.  Although the 1918-1919 influenza pandemic in the United States was short-lived, an assessment by the US Federal Reserve Bank of St. Louis documented that many businesses, especially those in the service and entertainment industries, suffered double-digit losses in revenue. Other businesses that specialized in health care products, however, experienced an increase in revenues (Garrett, TA, 2008).

More recently, the SARS outbreak in 2003 killed an estimated 10 percent of more than 8,000 individuals infected (National Institute of Medicine, 2004). Estimates done suggest that the cost in 2003 of SARS for the world economy as a whole was close to US$40 billion. The SARS shock disproportionately affected Hong Kong due to its economic dependence on services (e.g., travel, tourism), and significant short-term losses also accrued in China as a result of a sharp decrease in foreign investment.

What caused the economic loss? According to Jong-Wha Lee and Warwick J. McKibbin (2004), researchers who studied the economic impact of the SARS epidemic, the impact was due not to the consequence of the disease itself for the affected people, but to the impact of the disease on the behavior of many people within these economies. They also observed that the impact depended on the disease associated adjustment of expectations reflected in integrated real and financial markets.  So, given the spread of the disease through droplet transmission, people tried to minimize face-to-face interactions. The result was a drop in demand in service sectors such as tourism, mass transportation, retail sales, hotels and restaurants. Business costs also increased due to workplace absenteeism, disruption of production processes and shifts to more costly procedures.

In low- and middle-income countries, infectious disease outbreaks have the potential to erase development gains, aggravating poverty and inequality.  World Bank Group estimates showed that the Ebola epidemic in West Africa in 2014-2015 severely weakened the economies of the affected countries (World Bank, 2015).  The three affected countries were growing briskly in the first half of 2014, but full-year 2014 growth dropped to an estimated 0.5 percent in Guinea, although a growth rate of 4.5 percent was expected before the crisis. In Liberia it fell to an estimated 2.2 percent from 5.9 percent expected before the crisis and, in Sierra Leone, it fell to 4.0 percent from 11.3 percent expected before the crisis. While these rates already imply shrinking economies in the second half of 2014, the estimates showed that second-round effects and investor aversion led to a 2015 growth of -0.2 percent in Guinea, 3.0 percent in Liberia, and -2.0 percent in Sierra Leone. The estimates imply foregone income of about US$1.6 billion across the three countries in 2015 alone. This is more than 12 percent of their combined GDP and has translated into weaker revenues, while government spending needs grew, with a severe negative impact on public finances that may derail country investments needed to attain the Sustainable Development Goals (SDG) by 2030.  Besides the financial cost posed by these disease outbreaks, human capital development stand to be affected due to the loss of lives, particularly of health workers who were infected and died in the line of duty.

While the world is nowadays concerned about the Covid-19 spread, with an increasing number of countries reporting new cases and deaths (as of today, 48 countries, 82,700 infected people per official counts, and at least 2,809 people have died, all but 65 in mainland China), it is important to understand how this public health crisis is starting to impact economic activity globally.  As assessed in a Financial Times (FT) article (Greene, M, 2020), one transmission mechanism from China’s coronavirus is the interruptions to global supply chains which may cause problems for growth and international markets.  While the Chinese government has adopted measures to mitigate the impact on firms and households in the country, the resumption of activity may be hindered by bottlenecks caused by depleted inventories, delays in reopening factories, return of workers to places of work, reactivation of transport, and the reopening of ports.  Given that Chinese firms are integrated into “complex, global supply chains” and western firms depend on Chinese inputs for their production lines, the disruptions in China may cause firms in other countries to look for new suppliers (not an easy task), halt production as it already happened with Korean firms Hyundai and Kia, or simply go out of business.  On the latter point, it is important to observe, as highlighted in the FT article, that Hubei, the epicenter of the Covid-19 outbreak in China, is a “cog” in global supply chain in cars, health care, electronics, aerospace and defense, and construction materials.

In the financial markets, fear of a potential hard hit to economic growth and markets if the virus becomes a full-blown global pandemic, is behind the stock market plunge in global markets as investors continued to dump stocks and seek safer investments.  In the United States, for example, the S&P 500 index plunged to its worst loss in almost nine years and investors worldwide grew increasingly fearful that the coronavirus outbreak could cause a recession as it squeezes corporate profits (New York Times, 2020). European stocks were also trading about 2.5 percent lower after the Nikkei in Japan closed down 2.1 percent. Oil prices have also fallen, while the price of gold rose, signaling continued nervousness among global investors.

The New York Times (Phillips, M, 2020) is also reporting that the outbreak has taken a toll on multinational companies.  For instance, Anheuser-Busch InBev is forecasting a steep drop in quarterly profit, which led to sharp drop in the value of its shares, while Marriott, the American hotel company, reported that the virus would weigh on its fee revenue this year. Shares of Microsoft, the most valuable company in the United States, fell 7 percent after the company announced that sales in the current quarter would be lower because of the outbreak’s effect on its supply chain. Companies such as the French cosmetics giant L’Oréal, and Nestlé, the Swiss-based food company, have announced that they are suspending all international business for their staff until the end of March. The outbreak could crush consumer demand as well, as people limit travel or stay home even without a government order to do so, aggravating economic performance.

What to Do?

A question to pose is what can countries do to contain and mitigate the health, social, and economic damage of the COVID-19 pandemic?

Dr. Tom Frieden (2020), the former director of the US CDC, has outlined some immediate and medium-term actions to deal with the initiation and acceleration phases of the pandemic.  A summary of these actions is as follows:

  • Find out more about how Covid-19 spreads, how deadly it is, and what we can do to reduce its harms. This information is critical as it would guide decisions about the interventions to implement.  
  • Reduce the number of people who get infected.  The spread of the virus can be minimized by quickly isolating those who are ill, cleaning potentially contaminated surfaces often, and changing common routines. And the promotion and adoption of well-known hygienic habits such as washing hands, covering coughs, and, if a person is sick, staying home or wearing a mask. If it turns out that many of those infected become severely ill, drastic social distancing measures such as closing or curtailing hours of schools, limiting public gatherings, and reducing social contact may be warranted. We also need to keep in mind, as advised by Dr. Anthony S. Fauci, director of the US National Institute of Allergy and Infectious Diseases, that travel restrictions become ‘irrelevant’ in a potential pandemic because “you can’t keep out the entire world” (Higgins-Dunn, 2020).
  • Protect health care workers. As witnessed during the West Africa Ebola epidemic of 2014-2015, a large number of health workers and patients got infections in health care facilities. To prevent this occurrence, fast and drastic improvements in triage, treatment, cleaning, and overall infection prevention are required, including ensuring that enough medical masks are available for health care workers.
  • Improve medical care and prevention of Covid-19. Since a vaccine is not yet available, preparation for a worst-case scenario will require training, equipment, and detailed operational plans for a surge in the number of patients who seek care and for the subset of those who need to be mechanically ventilated. 
  • Protect health services. During the 2014-2016 Ebola epidemic in West Africa, more people died because of disruptions in day-to-day health care than died from Ebola. Telemedicine needs to become much more accessible, and people with chronic conditions should receive three months of medications whenever possible, in case there are supply disruptions. Routine vaccinations and other preventive services need to be preserved.
  • Support social needs. Patients and their families will need support, especially those who are isolated and less familiar with virtual social support or delivery services.
  • Protect economic stability. Continuing to plan, teach, learn, and work will reduce disruption. Businesses need to be ready to maximize telecommuting, increase cross-training, and operate with as many as 40 percent of their staff ill or quarantined. Mission-critical enterprises need practical plans to continue to operate.

The Medium-Term Task

Assuming that the world learns from this new disease outbreak, investment and recurrent-cost funding for veterinary and public health structures and functions in accordance with one-health principles, coupled with timely access to essential medical care for all when needed, are an inescapable budgetary priority for all countries to reduce vulnerability and build resilience to deal effectively with zoonotic diseases that account for 70 percent of emerging infectious diseases. Indeed, a collaborative, international, cross-sectoral, multidisciplinary one-health is required to address threats and reduce risks of detrimental infectious diseases at the animal-human-ecosystem interfaces.

Let’s be clear:  globalization is not going to wither away, as it has been part of human history for millennia.  Rather, we are and will continue to live in an increasingly interconnected world.  While there are multiple benefits from globalization, there are also public health risks that are associated with demographic and economic pressures on ecosystems that facilitate the transmission of new pathogens from animals to humans.  

Moving forward, as a colleague from the World Bank Group mentioned to me today, we need to work hard to ensure that public health investment becomes ingrained in the DNA of country budgets and in the support programs of bilateral and multilateral organizations, as well as of private donors.  Neglecting to invest in public health will lead to new uncontrolled infectious disease outbreaks, preventable deaths, and significant economic losses.  

To this end, echoing a suggestion that I recently made, it would be critical that institutions such as the World Bank Group and the International Monetary Fund spearhead efforts to include robust, well-structured and -funded veterinary and public health platforms, including disease surveillance and preparedness and essential medical care for all, as a critical indicator in country credit and investment risk assessments ratings, which are used to determine financing terms and conditions of officially supported export credits, as well as for commercial loans and direct investment decisions by financial and corporate sectors (Marquez, PV 2020)  This type of institutional “nudge” at the international level is needed to prevent governments, along with other global stakeholders, from forgetting the lessons of recent disease outbreaks, with their associated high human toll and significant economic losses.

Although the task at hand is difficult and will require sustained effort over the medium- and longer terms, particularly in low- and lower-middle-income countries, it can be accomplished if we start acting now.

As the saying goes, a crisis poses challenges but also offers opportunities to learn and evolve.  All of us in the global health community have an obligation not only to learn from the current coronavirus outbreak and what has worked before but to avoid, paraphrasing the Harvard philosopher George Santayana, being condemned to face unprepared similar crises in the future.

Source of images:

First Image:  Financial Times (FT Weekend), February 22/23 2020

Second Image: Coronavirus Map: Tracking the Spread of the Outbreak, New York Times; data from The Center for Systems Science and Engineering at Johns Hopkins University; National Health Commission of the People's Republic of China; local governments. Data as of 9:30 p.m. E.T., Feb. 27, 2020.  


Map of coronavirus global spread New York Times February 27 2020