Coronavirus calculus: Unpacking the economic costs of pandemics

The health threats posed by the coronavirus have dominated media for the last month, and in the Arab world, they have become tangible, with the number of cases rising. While it remains too early to assess the economic impact of the coronavirus, we can draw on studies of previous pandemics to understand the primary channels.

The first tranche of economic costs are those caused directly by a pandemic. The loss of life, and the reduced ability of sufferers to work. There is also the treatment cost, which can be considerable: the drugs, the facilities, including elaborate quarantines, the emergency evacuations, the extra staff hours, the masks, the sterilizers, and so on. Moreover, new processes will have to be developed, and people trained under pressure to implement these processes. Saudi authorities will surely be working around the clock preparing for the 2020 Hajj pilgrimage, which represents a massive technical challenge for public health experts.

For the most part, this first tranche of economic costs is irrecoverable, though it does confer the benefit of capacity-building for future crises. This silver lining certainly applies to the costs associated with developing a vaccine like the coronavirus vaccine currently under development, and these costs should be classified as an investment.

The second tranche is the first-order indirect effects of the response measures: flight cancelations, border closings, summits postponements, representing foregone economically productive activity. For example, China took the prudent decision of indefinitely postponing its 2020 Formula 1 race. Insurance policies help diffuse these costs, such as the loss of sponsorship and TV revenues, but the costs still have to be borne by society at large. Saudi Arabia’s recent announcement of limits on Umrah pilgrims falls under this category.

These costs are partially recoverable; postponed events can eventually still yield significant benefits. For example, some Umrah pilgrims are likely to reschedule to a future date when travel is safe.

In the long-run, by far the biggest economic impact is in the second-order indirect effects, which refers to the downstream impact of the first-order indirect effects. When schools close, people have to take time off work to supervise their children. Many workers volunteer or are ordered to engage in prophylactic absenteeism from work. That means lower spending on restaurants for business lunches, and less work for taxis that ferry people between work engagements. In China, entire factories are closed for this reason.

More importantly, the widespread disengagement from public life has a large, adverse economic impact. Cinemas sit empty, the ice cream trucks that serve children in the park are idle, and employees in airport gift stores stare at their mobile phones.

Similarly, the Gulf countries are hurting at present due to the sharp decline in oil prices, as Brent has fallen to around $50 per barrel after seemingly stabilizing at $60 for most of 2019. The world is experiencing a large-scale contraction in aggregate demand, and the price of key material inputs, including oil and gas, inevitably suffer.

Again, many of these costs are gone forever. Once authorities contain the coronavirus, and most of the restrictions are lifted, there will be a noticeable boost to consumption: people will be aching for a meal at their favorite restaurant, or a session at their local gym. But it is unlikely that the increase will compensate for the cumulative decrease experienced during the pandemic. For example, workers who are legally required to stay at home do not, upon returning to work, set about working double shifts to compensate for the lost hours; they just resume normal service, meaning that several days of output are simply gone.

Naturally, with the advent of the internet, children can continue to engage in distance learning during the pandemic, and many workers can work well from home. But for chemistry students in a laboratory, or constructions workers in a building site, there is no substitute for the hours put in on site.

In a 2009 paper in the UK’s leading medical publication, the British Medical Journal, Prof. Richard Smith and his colleagues developed a model that accounted for these various channels, and used it to estimate the impact of an influenza pandemic on the UK. Their estimates varied from around 1 to 5 percent of GDP, depending on the level of fatalities. These figures likely underestimate the impact of a global pandemic, which is what the coronavirus is threatening to become.

But one should not fixate on the economic costs. Given that China has been at the center of the unfolding crisis, it is worth closing with a quote by former US president, John F. Kennedy: “The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger – but recognize the opportunity.”

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Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.

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Last Update: Wednesday, 20 May 2020 KSA 09:54 - GMT 06:54
Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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