Dr Dan Steinbock is an recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the leading advanced and large emerging economies. 

 

He is a Senior ASLA-Fulbright Scholar (New York University and Columbia Business School).

 

The Tragedy of Missed Opportunities
COVID-19 Human Costs and Economic Damage 

 

By Dan Steinbock

Shanghai Institute for International Studies (SIIS)

[To download the report, click here; for SIIS introduction in Chinese, click here]

[To download the new report, click here; for SIIS introduction in Chinese, click here]

Executive Summary

 

 

As of this writing - April 26, 2020 - the novel coronavirus has caused some 3 million confirmed cases and 200,000 deaths around the world, and a major global contraction. Even if the pace decelerates, the cases and the deaths could double by the end of June (and recorded figures are only a part of the full story). This report is an attempt to explore the costs of the missed opportunities that led to the pandemic.

 

Although mobilizations in Europe and the United States began only in late March, both began monitoring the outbreak in China already in the first week of January and had their own first virus cases in late January. So did Singapore and Hong Kong, which also began proactive mobilization. Advanced economies in the West did not.

 

The 1st Opportunity: Early Mobilization. Between the first recorded case in Wuhan (Dec 30, 2019), and the WHO’s announcement of the international emergency (Jan 30, 2020), the epicenter of the outbreak was centered in Wuhan, Hubei, and proximate Chinese provinces. Yet, during the same period, first cases were also recorded in some 20 countries worldwide. In China, social distancing was initiated in late January to flatten the epidemic curve, along with broad containment measures. As a result, human costs and economic damage are likely to prove significantly lower than in the West. The same goes for Hong Kong and Singapore where the mobilization was proactive. Yet, the information that these two used for early mobilization was also available to the White House on Jan 3 and European CDC began its risk assessments only days later. Yet, neither chose to mobilize.

 

The 2nd Opportunity: Late Mobilization. The second critical opportunity to contain the virus outbreak covers the 1st quarter. On Mar 10, the WHO declared the virus a pandemic. Although the epicenter moved to Europe and then to the U.S., full mobilization in both ensued only 1-2 weeks after the pandemic warning; almost 3 months later than proactive mobilization in Hong Kong and Singapore. Until early February, most countries failed to provide WHO full case reports, which penalized international cooperation at a critical moment. Complacency and inadequate preparedness contributed to new challenges, including faulty test kits and long delays in testing; huge shortages of personal protective equipment that endangered the lives of frontline healthcare professionals; other shortages, due to trade wars; failed responses to the  outbreak, which added to health risks; sensational media coverage that was high on hype, but short on facts causing an ‘infodemic.’ Many international observers also began an odd battle against the WHO and its leaders.

 

The 3rd Opportunity: Failed Mobilization. In cumulative terms, this period covers the first two quarters of the year. It could be dated from the WHO’s declaration of the pandemic on Mar 10, yet effective responses in the U.S. and Europe only began in late March/early April. As escalation continued in Europe, the epicenter moved from the West Coast to the East Coast in the U.S. while quarantines and lockdowns diffused worldwide. It was only now that the social distancing measures first initiated in China in January were widely introduced in the West. As late mobilization and weaker enforcement proved less effective, the result was effective herd immunity. Instead of flattening the epidemic curve, many countries initially fattened that curve for weeks. When the human and economic costs soared, some government leaders sought to evade responsibility via a “paranoid style of politics.” So, the WHO and its chiefs, and China, were targeted, as politically expedient scapegoats.

 

The 4th Opportunity: Resource-Poor Mobilization. In this period, the epicenter will move from advanced economies to emerging and developing countries with weaker healthcare systems. Although many of these countries have been willing to fight the outbreak, they lack adequate resources. Any public health catastrophe in the developing economies is likely to have adverse feedback effects worldwide.

 

There was nothing inevitable about these response trajectories. In the U.S., the Trump administration initially engaged in a short-sighted effort to “protect the economy” (read: the markets). So, it chose not to develop an adequate policy response on science-based evidence. The story also features whistleblower complaints and dangerous ideas, such as Trump’s chloroquine plan and proposed disinfectant injections. In contrast, the European Union (EU)  may have been more willing but was unable to fight the virus earlier. It is not fully integrated and thus lacks the requisite common institutions for effective response.

 

In the baseline case - the Coronavirus Contraction scenario - the slump is currently seen as steep and broad, but somewhat temporary. Yet, the contraction could prove a major medium-term challenge, depending on its duration, depth, and aftermath.

 

Human Costs. In the baseline scenario, the pandemic effects are predicated on the rise and fall of the epidemic curve in China in the 1st quarter; in the U.S. and Europe mainly by the end of the 2nd quarter. Yet, the cumulative human costs will continue to linger. Having peaked in February, the cases in China were over 82,000 at the end of the 1st quarter, whereas those in Europe and the U.S. were over 425,000 and 140,000, respectively, and will continue to climb for months.

 

Even assuming gradual deceleration, the cumulative cases at the end of the 2nd quarter could double worldwide. Human costs will climb until the epidemic curves gradually normalize. Conversely, if the late mobilizers and the failed mobilizers had followed the proactive measures of the early mobilizers, hundreds of thousands, even millions of people might have avoided COVID-19.

 

Cumulative Losses, Alternative Pandemic Effects.  Even in the baseline case, the level of the GDP will remain below the pre-virus benchmark. In this scenario, the negative differences between the pre-virus forecast (as measured by the IMF’s World Economic Outlook, Oct 2019) and the current forecast (WEO/IMF, Apr 2020), is of historical magnitude. In this view, the cumulative loss to global GDP over 2020 and 2021 could amount to about $9 trillion. That’s more than the world’s third and fourth largest economies - Japan and Germany - combined. The Euro Area/UK would have to cope with a steep contraction (-8.9% and -7.9%, respectively), while the U.S. loss would be unique in its history (-8.0%). Despite rapid rebound, even China would have to absorb a historical loss (-4.6%) (Figure ES1a). Yet, the baseline scenario’s underlying assumptions are too optimistic. In the  alternative scenarios, the post-pandemic environment would be similar to the U.S. Great Depression assuming continued potential policy mistakes, particularly new trade wars. And since the advanced economies’ output potential is today low relative to that in the 1930s, the secular stagnation that preceded the pandemic is likely to depress the economic outlook in the medium-term.

 

Even when coupled with alternative outcomes, the baseline is not adequately realistic because it effectively ignores the dire economic landscape that preceded the pandemic. In the past decade or so, the world economy has coped with the global financial crisis, the European sovereign debt crisis, and a decade of secular stagnation. There was a brief historical moment around 2017/18, when world trade, investment and migration showed a promise of mild recovery. But that moment was missed, thanks to new protectionism and tariff wars. These trade wars and technology conflicts occur against the backdrop of a huge accumulation of global debt, which climbed to an all-time high of 230% of world GDP already in 2018. With the global pandemic, all major economies will take far more debt to deter the damage. Ironically, the protection they will achieve in the short-term will make them highly vulnerable to debt crises in the longer-term.

 

A more benign realistic baseline scenario is a “mumbling through” trajectory in which the pandemic could eventually fade, while the worst excesses of trade wars could be avoided. Yet, trade and tech friction would prevail along with geopolitics and weaker economic prospects. Let’s assume two alternative pathways.

 

Great Power Conflicts Scenario. The Great Power Conflicts scenario presumes progressive deterioration of pandemic and economic costs. In the first alternative, a protracted pandemic would be coupled with protracted pandemic, trade and geopolitical friction and more economic deterioration. In the second, a milder outbreak in 2021 would result in new social-distancing measures, greater contraction risks and deeper economic scarring. In the third case, lingering pandemic risks would generate intense trade and technology wars, “hot” geopolitical conflicts and a long global depression.

Great Power Cooperation Scenario.  Friction and conflict are not the only alternatives, however. In the Great Power Cooperation scenario, pandemic and economic costs would be significantly reduced. In the light of the pandemic effects and the first alternative, a protracted pandemic would lead to a prolonged trade truce, while geopolitical risks and economic would remain, but a recovery from the pandemic would ensue after 2020. In the second alternative, new social distancing measures would have to be deployed, yet contraction risks would remain moderate, trade truce would be continued with subsequent economic recovery. The third alternative would mean lingering pandemic risks longer than expected, but trade deals in trade and technology and subdued geopolitical friction would result in the eventual return to economic recovery.

 

In early February, the WHO called for $675 million to implement priority public health measures, in order to support countries to prepare for and respond to the pandemic spread. On Mar 25, UN Secretary-General António Guterres launched a $2 billion coordinated global humanitarian response plan to fight the pandemic in the world’s most vulnerable countries. Yet, these efforts have faced obstacles in fund raising.

 

In view of the baseline scenario, the expected cumulative output loss has already soared to $9 trillion and will climb higher in the early 2020s The combined fund-raising WHO/UN target represents barely 0.03% of these losses. Why would the choice between the two be so difficult? And why would new delays, more lost lives and new losses be preferable to swift, multilateral global action? (Figure ES2).

 

What is needed is multilateral cooperation among major economies and across political differences. In this quest, China, where containment measures have been relatively successful, can show the way, along with those government leaders in the United States and Europe, who take pandemic risks seriously.

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