On The Relationship Between Lockdowns and Economic Activity

Lockdowns are necessary to control the spread of Coronavirus. But lockdowns have a huge economic cost. In the short term, lockdowns tend to adversely impact economic growth. However the short-term pain is nothing compared to the long-term economic growth that awaits. In addition, lives are also saved with stringent lockdowns. Countries that have understood this basic and fundamental concept have fared well during this pandemic. Countries that dithered or foolishly wanted to have economic growth and control the virus with leaky lockdowns or no lockdowns are paying a heavy prices not only in economic cost but also with thousands of deaths.

For example, China’s economy grew by an astonishing 4.9% between July and September while the US is projected to have a growth rate of -3.5% in 2020. The lockdowns in the US were very different to the lockdown in China due to political and cultural difference between the countries.

With that brief introduction, the following chart from an IMF report shows that tougher lockdowns lead to severe economic declines.

Click to enlarge

Panel 1 of Figure 2.1 shows the correlation between the stringency of lockdowns during the first half of 2020 and the decline in GDP relative to pre-pandemic forecasts. The figure illustrates that countries that implemented more stringent lockdowns experienced sharper GDP contractions.

Figure 2.1 thus provides suggestive evidence that lockdowns tend to have a negative short-term economic impact. Nonetheless, these findings should be interpreted with caution given omitted variable concerns that affect cross-country analyses and endogeneity concerns about lockdowns. The decision to deploy lockdowns is indeed not random; rather, it may reflect time-invariant country characteristics that also affect economic outcomes. For example, countries with higher social capital may not require stringent lockdowns—as people take greater precautions against infecting others—and could also better withstand the economic impact of the crisis. This may generate a spurious negative correlation between the stringency of lockdowns and economic activity.

Source: World Economic Outlook, October 2020: A Long and Difficult Ascent, IMF

The below chart from FT shows that countries that were unable to control the virus have suffered suffered the most economic pain. Countries such as the US, UK, Spain, etc. have suffered sharp GDP declines while East Asian countries such as Vietnam, China, Korea, etc. have no economic declines or very low decline.

Click to enlarge