How to mitigate the economic impacts of infectious diseases

The COVID-19 pandemic that now dominates nearly every aspect of life across the globe is a harrowing reminder of the power of infectious disease. In addition to the devastating human toll, the economic upheaval wrought by this pandemic illustrates the inextricable relationship between physical and economic health.

In a recent paper, we reviewed literature on the macroeconomic effects of the major infectious disease epidemics of the late 20th and early 21st centuries, with emphasis on HIV/AIDS, malaria, tuberculosis, influenza and COVID-19.

Health influences economic growth via numerous mechanisms. Good health means healthy workers, which translates to greater labour productivity and higher incomes. Good health also means healthy children and a longer life expectancy, which leads to increased schooling and human capital accumulation. Increased life expectancy further translates to greater savings and investments. Finally, good health reduces fertility rates, in turn increasing the potential to invest in the education of each child and thereby expanding school enrolment and improving school quality. Lower fertility can also produce a demographic dividend (the economic growth potential resulting from a higher share of prime-age workers in a population’s age structure).

Infectious disease, conversely, jeopardises economic growth in many ways. Some diseases like HIV/AIDS disproportionately affect prime-age workers, leading potentially to a large decline in the supply of labour. Other diseases, like influenza or COVID-19, spread through casual social interaction, leading people to avoid such interactions and therefore reducing both consumption and labour supply. Yet other infectious diseases, like malaria in Sub-Saharan Africa, become endemic to a region, reducing investment in schooling and thus human capital accumulation as a result of high morbidity and mortality rates and low recovery prospects. Similarly, diseases that disproportionately affect children reduce human capital accumulation, thus compromising long-run economic growth. Financing any policy response to epidemics will disrupt the customary operations of a nation’s economy, throughout which the choices of which policies to pursue and how to finance them will reverberate.

Such choices involve tradeoffs that depend on the particular disease characteristics, the specific vulnerabilities of subpopulations, and the cross-country differences of environmental and institutional make-up. We categorize potential policy responses as lockdown and testing, treatment, and prevention and eradication. Containment, such as stay-at-home orders, can be effective depending on the transmission route of the disease, but the economic restrictions that necessarily follow can also impact lives (through, for example, the cancellation of necessary surgery or the absence of subsistence work). To impose, or not to impose, lockdowns is a double-edged sword; telling workers to stay home has an obvious and immediate negative economic impact, while not shutting down could lead to more workers getting sick or dying over a longer time period, imposing lingering economic effects. By facilitating the identification and targeted quarantine of only the infected and their close contacts, comprehensive test-and-trace measures may help reduce the number of deaths at a much lower economic cost than broad-based shut-down measures.

Effective treatment of a disease restores productivity and cuts mortality, thereby mitigating the loss in labour supply. Also, by raising the return to human capital, treatment fosters educational investments. While stockpiling reserves of medicines, hospital capacity and equipment, and other necessities carries a large upfront cost, it could reap substantial long-term dividends. Yet treatment can tax even the most robust health systems and often exacerbates underlying inequalities.

For effective prevention and eradication – to get people to actually take the medicine, in other words – vaccines may need to be subsidized, free, or even accompanied by incentive payments. Alternatively, vaccines could be mandated, but coverage (and compliance) would need to be widespread. While vaccine availability may increase risky behaviour, this can generally be combated with increased education. The research and development for vaccines is a lengthy and expensive process and when led by private companies – as is often the case – is fraught with economic complications (such as the pricing out of certain populations and the failure of regulators and health technology assessors to acknowledge the full societal benefits of disease prevention through vaccination).

Of course, any country’s policy response to an epidemic does not play out in isolation. COVID-19’s spread shows just how globally connected the modern world is. This connectivity begins with the first step of fighting an outbreak with pandemic potential; identification and reporting of the disease. Reporting of cases may be weak if a country fears it would be subject to travel bans and trade sanctions, a condition that rich countries could alleviate by providing financial assistance to poorer countries in exchange for the latter shutting themselves down. Epidemic-induced deglobalization and corporate reshoring are genuine threats, as diseases can disrupt supply chains and standard trading patterns. Such outcomes can jeopardize developing economies, which could reduce investments in health and education and create a poverty trap.

Poorer nations and poor individuals in all nations are, indeed, most vulnerable to the economic impact of infectious disease epidemics. Inequalities affect the spread and economic impact of epidemics among nations, while also hitting lower-wage individuals particularly hard. Those individuals often cannot work from home (and frequently rely on public transportation, magnifying their risk), have less access to healthcare, live in poorly-ventilated or crowded conditions, and are susceptible to a rise in automated production that would also increase global inequality. In formulating economic responses, policy-makers are advised to reduce the inequality-amplifying tendencies of epidemics.

While the macroeconomic effects of epidemics depend on disease characteristics, demographics, and cross-country wealth disparities, all infectious diseases extract potentially devastating human and economic tolls. However, early and targeted policy interventions can mitigate this loss: improved hygiene, vaccine development and distribution, enhanced surveillance and reporting protocols, targeted shutdowns and the timely elimination of unnecessary travel, and widespread testing and contact tracing can soften the blows delivered by disease epidemics. Preventive policies, containment strategies and early responses are more efficient, cost-effective and manageable than combating a full-scale infectious disease outbreak. Given the global scale of pandemics as well as the global repercussions even of more localized disease outbreaks, there is a strong case for international cooperation regarding these policies.