Growth Lab Research Explores Horrible Trade-offs in a Pandemic

New research discusses how fighting a pandemic involves horrible trade-offs between ‘lives and livelihoods’ and even between ‘lives and lives’ and what can be done to alleviate these trade-offs

Women in Japanese food market

Fighting COVID-19 involves horrible trade-offs. For lack of better-targeted policies, governments all over the world opt for partial and full lockdowns that bring significant parts of the economy to a halt. The lockdowns have enormous economic costs, with GDP falling and unemployment rising at unprecedented rates. It is widely agreed that this cost in terms of ‘livelihoods’ is justified by the threat to ‘lives’ from the pandemic. This view, however, assumes that societies can absorb the economic shocks. But what if part of society is at or close to subsistence, already struggling with making a living in normal times? In such cases deepening the recession through a lockdown can be extremely costly as it may lead vulnerable parts of society to suffer from deprivation. In other words, the central trade-off for optimal policy is not one between ‘lives and livelihoods’ but an even more excruciating one between ‘lives and lives’, i.e., between saving households from the pandemic or deprivation.

In a new paper, Growth Lab director Ricardo Hausmann and postdoctoral fellow Ulrich Schetter analyzed these trade-offs, how they can be alleviated, and what this implies for optimal policy.

Q. In your analysis, you emphasize a trade-off between ‘lives and lives’ in times of a pandemic. Can you tell us more about this trade-off and why you think it is important in the current situation?

A. Many public and academic debates on COVID-19 are centered on a horrible trade-off between ‘lives and livelihoods.’ In essence, these debates ask how strict a lockdown are we willing to afford? Considering the sheer magnitude of the pandemic and the current recession, this is obviously a very important margin to consider, but it ignores the fact that according to the World Food Programme, global hunger is going to double this year, and that in June 2020 even in the United States 14 million children were not getting enough to eat according to the Brookings Institute. Distortionary lockdowns add to this humanitarian tragedy, i.e., in parts of the developing world and beyond stricter lockdowns to fight the pandemic cause more households to suffer from deprivation. It is in such cases that fighting COVID-19 involves an excruciating trade-off between ‘lives and lives.’

Q. What does this imply for optimal containment policies? Should lockdowns be less strict in more impoverished societies where a more significant fraction of the population is threatened by deprivation?

A. Yes, this is true, but to what degree critically depends on a country’s fiscal space. There are many reasons why optimal lockdowns should depend on the stage of economic development of a country, encompassing differences in the demographic structure, differences in urbanization rates, and differences in the quality of the healthcare system. But leaving these differences aside, there are two main reasons why lockdowns may be less desirable in the developing world: They are less effective because people are less able to comply. And they are extremely costly because they lead to more deprivation. Indeed, our work suggests that it is generally not optimal to fight more the pandemic if that means that a significant share of the population suffers from deprivation. In other words, whenever there is a trade-off between ‘lives and lives,’ this imposes strong bounds on optimal lockdowns.

This trade-off, however, can be mitigated by providing transfer payments to vulnerable parts of society. Transfers also increase compliance with a lockdown and, hence, with sizeable transfers, even if they are costly, differences in the desirable levels of lockdowns are relatively small between rich and poor countries. The problem is that in the midst of a global recession that has a major impact on commodity prices, tourism, remittances, and capital flows, many developing countries lack the fiscal space that is needed for such transfers, and that has devastating consequences: These countries see themselves forced to fight less the pandemic, more people die from the disease, but still, this may not be enough to save all parts of society from deprivation. That is why there is a dire need to provide additional financial support to the developing world in the current crisis.

Q. Your arguments suggest that the pandemic and policy have important distributional consequences. Can you elaborate?

A. Yes, our work points to important distributional effects of the pandemic and policy. The previous arguments suggest that during the pandemic poorer countries that have a larger fraction of the population in poverty suffer from more deaths and greater welfare losses. This is true with unlimited fiscal space, and can get much worse if government borrowing is constrained. Within countries, poorer households disproportionately suffer from the pandemic because they have a higher risk of suffering from deprivation and because they are less able to comply with a lockdown, increasing their personal risk of catching the disease. For that same reason, they also benefit the most from transfer payments.

Q. And what about distributional conflicts within countries? Have you also looked at these?

A. We address the arising distributional conflict within countries in two ways: We first ask, what does it imply for policy outcomes in the political process? As we have just argued, our work suggests that poorer households suffer more from a lockdown, but benefit more from transfer payments. What these differences in preferences over policies allow us to do is to think about how political outcomes depend on the income level of pivotal ‘voters.’ So, for example, these arguments suggest that we should expect to observe stricter lockdowns and fewer supportive transfers in countries that are governed by an elite. The opposite is true in countries with populist governments. Our work may thus help explain some of the differences in policy outcomes that we observe in the current situation.

Second, we ask whether supporting the poor may nevertheless be in the self-interest of the rich. We show that the answer is affirmative if the externality of working on the pandemic is sufficiently large, that is, if compliance by the poor is sufficiently important for the pandemic and the risk for the rich of getting infected. Hence, providing transfers to vulnerable parts of society in times of a pandemic is not only the right thing to do, but it may well be for the benefit of society at large.

The Growth Lab established its COVID-19 Task Force to support our project counterparts across the globe. Explore our research and resources.

See also: Poverty