The COVID-19 pandemic led governments around the world to impose unprecedented restrictions on economic activity. Were these restrictions equally justified in poorer countries with fewer demographic risk factors and less ability to weather economic shocks? We develop, validate, and estimate a fully specified model of the macroeconomy with epidemiological dynamics, incorporating subsistence constraints in consumption and allowing preferences over “lives versus livelihoods” to vary with income. Poorer countries’ demography pushes them unambiguously toward laxer policies. But because both infected and susceptible agents near the subsistence constraint will remain economically active in the face of infection risk and even to some extent under government containment policies, optimal policy in poorer countries becomes more rather than less strict. For reasonable income-elasticities of the value of a statistical life, the model can fully rationalize equally strict or stricter policies in poorer countries.
This paper was originally published in October 2020 under the title The Macroeconomics of Pandemics in Developing Countries: An Application to Uganda. It was updated in June 2022. The original version can be viewed here.
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