The Economics of the COVID-19 Pandemic

The “COVID-19 virus,” first identified in Wuhan, China, in January 2020, spread rapidly around the world due to its high transmissibility and reached the pandemic stage. Because of the economic lockdowns caused by the COVID-19 pandemic, the global economy is expected to suffer the worst recession since the Great Depression of the 1930s. The Korean economy also posted a first-quarter growth rate of already –1.4%, and negative growth is expected for the first time since 1998, immediately after the foreign exchange crisis. This economic shock from the COVID-19 pandemic is expected to lead to corporate bankruptcies and rapid income declines, requiring policy responses to minimize the damage. For an appropriate and efficient policy response, it is necessary to understand the characteristics of pandemics through historical experience and, by analyzing what distinguishes the current COVID-19 pandemic, to forecast its future course and economic impact.

Among the pandemics that have appeared since the 20th century, the one that caused the greatest damage in every respect—including duration, mortality, and economic impact—was the 1918 influenza pandemic, commonly called the “Spanish Flu.” Its economic impact is estimated to have reduced world GDP by more than 5%, and some studies project that if a similar pandemic were to occur, global GNI would decline by 12%. Without exception, pandemics have involved at least two major waves, and their impact has varied depending on the timing of vaccine development and distribution and on the presence of immunity. The economic impact of a pandemic is proportional to its severity, but in particular, the longer the duration of the pandemic, the greater the shock. According to a World Bank study, the effects of infection avoidance account for 60% of the economic shock, which suggests that the shock is driven mainly by reduced demand resulting from social distancing, a feature that becomes more pronounced the longer the pandemic lasts.

COVID-19 is characterized by very high transmissibility, speed of transmission, and mortality, and it is a coronavirus rather than the influenza virus that had caused previous pandemics. Because the COVID-19 pandemic spreads quickly, the period of mass outbreak may be correspondingly shorter, but it is difficult to draw hasty conclusions given variables such as the absence of vaccines and treatments and the possibility of a second major wave. In the case of COVID-19, the shock from reduced demand caused by strong social distancing to avoid infection is overwhelmingly greater than the supply-side shock, so the economic impact is expected to exceed estimates from previous studies that did not sufficiently reflect the shock from reduced demand. In Korea’s case, effective quarantine and containment measures are expected to make the economic shock less severe than in advanced economies such as the United States, Europe, and Japan, but considering the possibility of a second major wave, Korea is highly likely to receive a worse report card than the IMF’s forecast for the Korean economy (GDP growth of –1.2% in 2020 and 3.4% in 2021).

Policy responses to the unprecedented economic shock caused by the COVID-19 pandemic must first minimize the period of reduced demand through strong and efficient quarantine and containment policies, and, alongside the establishment of routine preventive measures in daily life, it is necessary in the second half of the year to restore consumer and investor sentiment through a policy shift that eases excessive social distancing. In fiscal policy, priority should be given to spending in quarantine, containment, and healthcare, and urgent temporary government support is needed for firms and individuals facing bankruptcy, but emergency support in a disaster situation should not lead to the introduction of permanent new systems. Expansionary monetary policy is also needed to prevent corporate bankruptcies and ease the credit crunch, and the Bank of Korea should consider expanding the range of assets eligible for RP purchases to include corporate bonds and CP. However, since such measures should not be prolonged in Korea, which is not an issuer of a reserve currency, a time limit should be set. Labor reform is needed to promote greater diversity in employment and work arrangements reflecting the changes brought about by the COVID-19 pandemic. In addition, the COVID-19 pandemic is expected to bring changes to the industrial ecosystem, with new industries emerging through the expansion of online non-face-to-face services and the development of “untact” technologies, and this calls for dramatic regulatory reform, including a shift in the regulatory framework for new industries to a negative regulatory system.

I. Introduction

II. Historical Experience of Pandemic Effects

1. Memories of the “Spanish Flu”

2. The Impact of Other Pandemics and Influenza Outbreaks

3. Characteristics of Pandemics

III. The Distinctiveness of COVID-19 and the Outlook for Its Economic Effects

1. Characteristics and Distinctiveness of COVID-19

2. Outlook for Economic Effects

IV. Conclusion and Implications

References

Wiki:

https://www.cfe.org/w/bbsDetail.php?&idx=37

Original title: 코로나19 팬데믹(Pandemic)의 경제학

Author: Won-geun Song

Date: 2020-04-29

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=report&pn=2&idx=22592