Social and economic impact of COVID-19

Social and economic impact of COVID-19

Eduardo Levy Yeyati Federico Filippini

BROOKINGS GLOBAL WORKING PAPER #158 JUNE 2021

Social and economic impact of COVID-19

Eduardo Levy Yeyati Nonresident Senior Fellow, Global Economy & Development at Brookings Institution

Dean of the School of Government at Universidad Torcuato Di Tella Federico Filippini

Visiting Professor at Universidad Torcuato Di Tella June 2021

Brookings Global Working Paper #158 Global Economy and Development program at Brookings

brookings.edu/global

Acknowledgements Prepared for The Independent Panel of the World Health Organization. We are grateful to Mauricio C?rdenas, Ricardo Hausmann, Anders Nordstrom, Rodrigo Vald?s, Andr?s Velasco, Alejandro Werner, Ernesto Zedillo and members of The Independent Panel for their useful comments, and Joaquin Marandino for excellent research assistance. The usual disclaimers apply. The Brookings Institution is a nonprofit organization devoted to independent research and policy solutions. Its mission is to conduct high-quality, independent research and, based on that research, to provide innovative, practical recommendations for policymakers and the public. The conclusions and recommendations of any Brookings publication are solely those of its author(s), and do not reflect the views of the Institution, its management, or its other scholars. Brookings recognizes that the value it provides is in its absolute commitment to quality, independence and impact. Activities supported by its donors reflect this commitment and the analysis and recommendations are not determined or influenced by any donation. A full list of contributors to the Brookings Institution can be found in the Annual Report at brookings.edu/about-us/annual-report/.

1. Introduction ..........................................................................................................1 2. The costs of COVID-19 in 3 stages ........................................................................4

2.1 Stage 1: The macroeconomic impact ..................................................................... 4 2.2 Stage 2: The fiscal reaction.....................................................................................7 2.3 Stage 3: The recovery..............................................................................................9 3. Initial conditions .................................................................................................12 3.1 Fiscal space ..........................................................................................................12 3.2 State capacity........................................................................................................13 3.3 The labor market channel......................................................................................14 3.4 Initial conditions and economic impact ................................................................ 16 4. Dealing with the pandemic...................................................................................20 4.1 Cross-country evidence on lockdowns and economic activity ............................. 21 4.2 Fiscal response to the pandemic .......................................................................... 24 5. The role of IFIs....................................................................................................31 6. Estimating the economic costs of the pandemic ...................................................33 7. Final remarks......................................................................................................36 References .............................................................................................................38

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1. Introduction

The impact of the pandemic on world GDP growth is massive. The COVID-19 global recession is the deepest since the end of World War II (Figure 1). The global economy contracted by 3,5 percent in 2020 according to the April 2021 World Economic Outlook Report published by the IMF, a 7 percent loss relative to the 3.4 percent growth forecast back in October 2019. While virtually every country covered by the IMF posted negative growth in 2020 (IMF 2020b), the downturn was more pronounced in the poorest parts of the world (Noy et al. 2020) (Figure 2).

Figure 1. Global GDP growth in a historical perspective

8

6

4

2

0

-2

-4

-6

-8

-10

GDP growth

-12

Per capita GDP growth

Sources: Bolt et al. (2018), Kose, Sugawara, and Terrones (2019, 2020), and IMF-WEO Apr-2021. Shaded areas refer to global recessions.

The impact of the shock is likely to be long-lasting. While the global economy is expected to recover this year, the level of GDP at the end of 2021 in both advanced and emerging market and developing economies (EMDE) is projected to remain below the pre-virus baseline (Figure 3). As with the immediate impact, the magnitude of the medium-term cost also varies significantly across countries, with EMDE suffering the greatest loss. The IMF (2021) projects that in 2024 the World GDP will be 3 percent (6 percent for low-income countries (LICs)) below the no-COVID scenario. Along the same lines, Djiofack et al. (2020) estimate that African GDP would be permanently 1 percent to 4 percent lower than in the pre-COVID outlook, depending on the duration of the crisis.

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Figure 2. Global GDP growth 2020

0 -1 -2 -3 -4 -5 -6 -7 -8 -9

Em. Asia LAC ex. CHN

SSA MECA EMDE World Em. Eur. AE

China United States

Source: IMF-WEO Apr-2021. Note: AE = Advance economies; Emerging Asia ex. CHN = emerging and developing Asia excluding China; EM. Eur = Emerging and developing Europe; LAC = Latin America and the Caribbean; MECA = Middle East and Central Asia; SSA = sub-Saharan Africa.

Figure 3. Quarterly World GDP (GDP forecast in Jan-2020 vs. Jan-2021, 2019 Q1 = 100)

120 115 110 105 100

95 90 85 80

2019:Q4 2020:Q1 2020:Q2 2020:Q3 2020:Q4 2021:Q1 2021:Q2 2021:Q3 2021:Q4 2022:Q1 2022:Q2 2022:Q3 2022:Q4

China

Aes

EMDE

Source: IMF-WEO Jan-2021. Note: dashed lines indicated estimates from Jan-2020 World Economic Outlook Update.

The pandemic triggered a health and fiscal response unprecedented in terms of speed and magnitude. At a global scale, the fiscal support reached nearly $16 trillion (around 15 percent of global GDP) in 2020. However, the capacity of countries to implement such measures varied significantly. In this note, we identify three important pre-existing conditions that amplified the impact of the shock:

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