The Price of Inaction During The COVID-19 Crisis

CGD President Masood Ahmed and UN Under-Secretary-General for Humanitarian Affairs Mark Lowcock wrote a related opinion piece in The Telegraph.

The global crisis induced by the COVID-19 pandemic is unprecedented in nature. Emerging as a health crisis, the pandemic has become a threat to global prosperity and stability. Domestically, the OECD and G20 countries have responded with a large stimulus package estimated at over $11 trillion, approximately 10 percent of world GDP. In comparison, the cost of protecting the most vulnerable 10 percent of the world from the worst primary and secondary impacts of COVID-19 is $90 billion–less than 1 percent of the stimulus package.

It is better, cheaper, and more dignified to frontload responses to the pandemic and its secondary effects. Waiting and then reacting when the full impacts are already visible would be a more expensive proposition. Delaying action not only shifts the burden to the future, but the price of the response will also exponentially increase, as the crisis cascades and reverberates for years to come.

We construct a taxonomy of the direct and secondary costs arising from not acting now to contain the virus and mitigate its cascading effects in our new paper “The cost of doing nothing in response to the COVID-19 crisis”—the first comprehensive and detailed assessment of the cost of inaction in response to COVID-19. We present scenarios to showcase the differential cost of inaction. Where relevant, our analysis shines a spotlight on a subset of 32 low-income countries, where a high share of the world’s most vulnerable populations is located.^[i] The costs of inaction include:

1. The health cost of failing to contain COVID-19 domestically

The human cost of COVID-19 continues to mount, with more than half a million deaths and one million new cases every week worldwide. While Europe eases containment measures, cases have been accelerating in low- and middle-income countries. As the COVID-19 death toll in Latin America offsets the decline in Europe and the United States, the WHO Director-General warns that the world is in a “new and dangerous phase.”

The virus could infect up to 640 million, killing up to 1.67 million of the world’s most vulnerable populations in a subset of 32 low-income countries in the absence of effective suppression techniques. The direct medical costs of hospitalising 2.2 million of those infected in critical care beds amounts to an estimated $16.28 billion. Infected households are more likely to incur out-of-pocket health costs in low-income countries, compounding the risk of poverty. Moreover, peak demand for critical care beds could exceed supply by a factor of 25 in a typical low-income setting.

Addressing the pandemic has a high opportunity cost on other health services. Disrupted healthcare and resource diversion could result in at least 2 million preventable deaths due to HIV, TB, malaria, and other treatable diseases.

2. The spill-over costs of failing to contain COVID-19 internationally

The world is fundamentally interconnected. The virus does not respect borders, despite best efforts to contain it. An unmitigated COVID-19 outbreak in low- and middle-income countries could increase the likelihood of a second wave of infections elsewhere in 2020, necessitating renewed lockdowns.

A second round of lockdowns could result in an additional output loss of $1.1 trillion in OECD countries in 2020. If a second outbreak were to occur in early 2021 instead, the OECD countries could experience output loss of approximately $5.6 trillion, relative to the alternative scenario of recovery. Substantial uncertainty surrounds these scenarios. Nevertheless, it remains clear that it is in the enlightened national self-interest of high-income countries to invest in mitigating the virus worldwide.

3. The human and economic costs of increased poverty and hunger

Global GDP is projected to contract by 4.9 percent in 2020—the broadest collapse in per capita incomes since 1870.

Compared to pre-crisis levels, there was a 14 percent drop in global working hours during the second quarter of 2020, equivalent to the loss of 400 million full-time jobs. Unemployment will likely continue to rise in response to weaker external demand and domestic containment measures, especially in countries dependent on global supply chains, tourism, and remittances. Of approximately 2 billion informally employed workers worldwide, 80 percent are particularly affected by containment measures. Their earnings could decline by 82 percent in low- and lower-middle income countries.

Inducing the first rise in poverty since 1990, the COVID-19 pandemic could jeopardise gains in poverty reduction made over the past decade if sufficient action is not taken. At least 71 to 100 million people could be pushed into extreme poverty under the $1.90 international poverty line. Moreover, approximately 230 million people could become newly poor under the $3.20 poverty line and a further 230 million under $5.50. These global estimates based on annualised GDP growth figures are likely to be conservative estimates and mask the true number of households experiencing transient poverty. For instance, country-level simulations suggest that up to 132 million people may be pushed into extreme poverty in five South Asian countries alone.

If no action is taken, these poverty traps are likely to become permanent due to the aggregate nature and sheer size of the shock. Irreversible losses start to occur when households adjust to income losses and/or higher prices by selling productive assets. An eight-week blanket lockdown in sub-Saharan Africa could reduce the population’s savings by 30 percent, with 45 percent of households losing all savings—a key buffer to future shocks. The ongoing crisis is likely to erase the progress made on the Sustainable Development Goals in the last five years, amounting to $2.5 trillion in budget costs spent on health, education, and social protection.

The number of people who are acutely food insecure is projected to increase by 82 percent—or 121 million people—to 270 million people by the end of 2020, if no action is taken. The COVID-19 crisis is placing significant stress on food security by undermining physical and economic access to food through income losses, disrupted supply chains, and price hikes. Child undernutrition is the underlying cause of 35 percent of infant mortality and has severe long-term effects on school attendance, productivity, and output.

4. The economic costs of protracted containment measures on education

A protracted school shutdown of five months could generate learning losses that have a present value of $10 trillion globally. The COVID-19 pandemic could result in a loss of between 0.3 and 0.9 years of schooling, depending on whether school closures last for three, five, or seven months. Without remediation, the average student losing out on five months of education could face a reduction of $16,000 in lifetime earnings in present value terms. At a macro scale, 16 percent of investments made in the basic education of the current cohort could go to waste. School closures also lead to significant work absenteeism and lost productivity for working caregivers.

Even when temporary, school closures carry high economic and social costs that fall inequitably on vulnerable populations. Firstly, low-income households are most likely to benefit from the educational boost to productivity and least able to adapt to learning disruptions and distance learning. Secondly, school closures threaten not only education, but also nutrition. For example, school closures have reduced the food intake of almost 7 million children enrolled in Nigeria’s national school feeding programme. Thirdly, in response to the severe economic downturn, permanent dropouts are likely to increase by 7 million students in primary and secondary schools, affecting girls more. In addition, school closures make girls more vulnerable. For example, during the 2014-2016 Ebola epidemic, school closures saw an increase in teenage pregnancies by 10.7 percentage points in Sierra Leonean communities.  

5. The cost of increased global instability and conflict

An additional 13 countries are projected to experience new conflicts between 2020 and 2022 relative to pre-pandemic forecasts in response to government responses and the global economic downturn. If this forecast materialises, global instability would peak relative to the past 30 years. Moreover, school closures remove some protection against the recruitment of children into military or criminal activity.

The minimum cost incurred during an average civil war to both host and neighbouring countries is approximately $60 billion. The costs of civil wars range from 1.6 to 2.3 percentage of GDP per year of violence. For the average country, these costs that compound over time can be equivalent to up to 30 years of missing GDP growth.

Refugee outflows would likely increase. For each 1 percentage increase in acute hunger, refugee outflows have increased by 1.9 percent, according to the World Food Programme. If no action is taken, acute hunger is projected to increase by 81 percent, highlighting the scale of global displacement that could occur.

Concluding thoughts

In conclusion, these projections highlight the exponentially increasing price of inaction. In sharp contrast, the G20 could mobilise a substantially cheaper amount now—an estimated $90 billion—through the multilateral institutions to help mitigate some of the worst primary and secondary effects of the COVID-19 pandemic on the world’s most vulnerable populations.

However, there is reason to be optimistic that additional resources can be generated, even in the current circumstances. After the financial crisis of 2008-2009, fundraising for UN coordinated humanitarian appeals increased by more than 40 percent by 2010. In addition, the Heavily Indebted Poor Countries Initiative and related Multilateral Debt Relief Initiative programmes had relieved 37 participating countries of more than $100 billion in debt by 2018. These initiatives were in addition to official development assistance, currently amounting to more than $150 billion per year. They were the result of human generosity and empathy, but also a calculation of national interest in donor countries.

It is cheaper, better, and more dignified to act now. That these real human costs could have been avoided if the world chooses inaction would be the ultimate tragedy.

This blog post draws on an extensive list of excellent resources to construct the taxonomy of costs. Please refer to our paper here for references.

Dirk-Jan Omtzigt heads the Humanitarian Financing Strategy and Analysis at United Nations Office for the Coordination of Humanitarian Affairs (OCHA).

Ashley Pople is currently a PhD student in Economics at the University of Oxford and consulting for United Nations OCHA.