What are the long-term economic consequences of pandemics?

KNOWLEDGE @ KRISTIANIA: Economic impact of pandemics

Months after the first outbreak, the ongoing pandemic remains an emergency, demanding immediate attention, quick responses and a lot of flexibility from all of us. Directly or indirectly, our lives have been affected, forcing us to focus on the short-term task of re-organizing routines and plans to adapt to ever evolving limitations, rules, and pathological conditions.

• Read also: Kunnskap Kristiania 2020/2021 (E-magazine).

The public response has similarly been concentrated on the impelling need to slow down the contagion, provide for the afflicted and organize appropriate quarantine measures. The specter of economic damage, and how to pay for the necessary accompanying stimulus measures, have entered the debate, especially in the EU, but remains somewhat marginal in the face of the second wave hitting Europe in the Fall.

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Changing everything, something, anything really?

These conditions make taking a long-term perspective quite difficult, as it is generally the case in any serious crises. Some debates have started, however, on how COVID-19 is going to change everything, something, anything really.

Many contradicting voices can be heard already. Perhaps it would be useful to listen to what economics has to say in this regard. The “dismal science”, that won such a somber title in consequence of its early fascination with the apparent inevitability of poverty, famine and disease, has since then largely abandoned the issue of pandemic and diseases.

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Long-term consequences of a pandemic

These topics are rarely found in economic textbooks anymore. However, some lessons can still be found in the scientific literature, provided one is willing to take a systematic and comprehensive look.

At Kristiania University College, we did just that, looking for a scientifically founded vision of what the long-term consequences of a pandemic would look like, from an economic perspective. Here is what we found.

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Black Death – a historical turning-point

The first surprising result is that, historically, most pandemics have had long-term beneficial consequences for socio-economic development.

Even the most terrifying of such events, the Black Death, is generally considered a historical turning point, whose long-term consequences were key to explaining the relative rise of Europe in relation to other previously more advanced areas, such as the Middle East and the Far East.

Noticeably, this was not a result of Europe being spared from the worst of the disease, but rather a consequence of the particularly high mortality rates experienced by the West at the time.

Strange as it may sound, the exceptional unhealthiness of European cities, described as “open-air graveyards” in some chilling passages, was key to ensure perpetually higher salaries, leading to positive feedbacks in consumption patterns and production techniques, and the accumulation of substantial technological advantages in many areas.

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Long-term impacts of AIDS

The present world, however, is vastly different from the one visited by the Black Death. To understand the present, the numerous studies on the long-term impacts of that modern pandemic, AIDS, may be more relevant.

Surprisingly, however, the picture remains somewhat consistent. Some researchers claim that higher mortality rates will eventually result in more sustainable long-term growth patterns, accompanied by much higher per-capita GDP growth rates. Others point to the severe and long-lasting human and medical costs of the disease.

Crucially, while the expected increase in salaries appear to have taken place in most heavy-hit African countries, this seems to also have increased the rates of pupils dropping out from education; while some are forced to work after being orphaned by the disease, most seem to be attracted by the relatively higher wages now available.

As a result, in the current economic system, higher wages may lead to a subtle but persistent reduction in the accumulation of human capital, thus counteracting the benefits attending a more sustainable demographic expansion.

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Lessons from the economic literature

While the complete long-term impact of pandemics is complex, two primary implications can be drawn by policy-makers from economic literature:

• The first is that the mechanisms of each pandemic are idiosyncratic: forecasting exercises commonly fail to account for the true scope of its effects, while the most desirable characteristic of response plans appear to be flexibility and willingness to quickly implement new solutions and approaches.
• The second is that, while the public response dominates the first phase, it is the private response that shapes the long term, as either entrepreneurial opportunities are discovered and exploited to bring about economic and institutional renewal, or the economic system struggles to recreate an old normal when surrounding conditions have changed. The effort to save and preserve must give way to the will to change and evolve.

References:

This popular article is based on two articles currently under review. Their titles are: “Pandemics and development: A literature review”, and “Entrepreneurial responses to health shocks: A literature review”. Both are authored by Christophe Feder and Beniamino Callegari.

The article is first published in Kunnskap Kristiania 2020/2021. Kunnskap Kristiania is a science Communication Magazine published by Kristiania University College.

Text: Beniamino Callegari, Researcher at School of Economics, Innovation and Technology, Kristiania University College.

Photo: Covid-19 has affected us all. What will be the long-term economic impact of the pandemic? Photo by Colin D on Unsplash.