Virginia Tech economists Shaowen Luo and Kwok Ping ‘Byron’ Tsang have completed a study showing the cost of the novel coronavirus (COVID-19) on the GDP of the Chinese and worldwide economies. Based on conservative assumptions, they show that the lockdown of Hubei province has reduced China’s GDP by 4 percent and the global GDP by 1 percent, or $40 billion (USD) and $70 billion (USD) per month, respectively.
The losses for two months of lockdown for the Chinese GDP and worldwide GDP total $80 billion and $140 billion as people in affected regions have stopped going to work or socializing, and as flights are canceled and cross-country travel is restricted. The coronavirus has rattled nerves across the globe as cases near 115,000 and total known deaths tip past 4,000 as of this past Tuesday.
The reach of the virus has resulted in cancellations of national conferences, such as the American Physical Society and the American Chemical Society, and the shuttering of the popular South by Southwest film festival. Additionally, Sony Pictures has postponed the worldwide premiere of the new James Bond thriller “No Time to Die” from April to November. Even Disney has blinked in the face of the epidemic, spiking its premiere of the live-action “Mulan” film in China from March 27 to an undetermined date. The film, thus far, is expected to open as scheduled in other countries. Still, China remains the target audience for the expensive ($200 million estimated) film.
Collegiate sports across the county have shut down. The NCAA basketball tournament has been cancelled, and colleges have been virtually united in canceling their spring sports schedules.
To get their results, Luo and Tsang combined ideas from the economics of networks with various sources of empirical data and estimates of economic impacts.
In discussing their work, Luo said, “The modern economy is connected. Locking down Hubei does not mean that we are losing the output of that province only, as Hubei is related to all other provinces in a complex web of input-output relationships. Likewise, it is not only loss of output in China, as, despite all the fuss with the trade disputes, China is still closely connected to other countries in another complex web of trade linkages. The economics of networks gives us the appropriate tool to handle all such complexities.”
Luo and Tsang call their findings on the lockdown “conservative estimates,” as they considered labor-loss-triggered output reduction due to the lockdown of just one region. Hubei, it should be noted, is a commuters’ city with people traveling to work. This creates a ripple effect in surrounding regions where travel is restricted.
In their modeling, the economists assumed a high degree of substitutability between inputs. In the real world, Luo said, given such short notice, it may not be easy for firms to switch to a different production method that uses less labor. Also, to keep the analysis manageable, Luo and Tsang considered the lockdown of one province — Hubei — and ignored similar policies that are adopted elsewhere. Moreover, to keep the study simple and clean, they didn’t incorporate demand-side disruptions. Therefore, actual GDP losses will likely be far greater.
Shaowen Luo said about the outlook for the future, “With the disease spreading across the world and increasingly looking like a pandemic, we will see more countries following China’s footstep and restricting activities to different extents. Schools may close, workers may be told to work from home, and travels may be restricted. Our study will give us a sense of the economic costs of such measures, both for the domestic economy and the rest of the world.”
