This note offers a conceptual framework for analyzing the economic impact of the coronavirus disease (COVID-19) and considers some policy implications. It is a general note, limited in scope, covering fundamentals that are likely to affect a typical developing economy.
The coronavirus disease 2019 is produced by a new virus for which currently there is no pharmaceutical treatment. The dynamics of the disease are such that, in the absence of non-pharmaceutical interventions (NPIs), it overwhelms the capacity of national health care systems. Hence, governments chose to enact NPIs to contain the spread of the Coronavirus COVID-19 pandemic.
The persistence of universal non pharmaceutical interventions (NPIs), like social distancing that significantly reduce the labor supply and prevent a large sector of the economy from having any activity at all (travel, entertainment and some retail), have significant output costs. They could lead to an output decline that exceeds that of the great depression. All those who temporarily lost their income have to finance their fixed costs (e.g. consumption for households, wages for firms). This creates an unprecedented need for liquidity. If universal NPIs persist, it is likely that many firms will go bankrupt and unemployment will soar. The best policy option is to adopt more efficient NPIs that target only infectious individuals and protect those most likely to strain hospital capacity. A global multilateral cooperative approach to contain the epidemic will achieve better outcomes faster.