Aiming for zero Covid-19 to ensure economic growth

Philippe Aghion, Patrick Artus, Miquel Oliu-Barton, Bary Pradelski 31 March 2021

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Eliminating Covid-19 is the cheapest path towards economic recovery. The trade-off between health and wealth has been refuted by countries that have opted for an elimination strategy. Successful pandemic management – minimising cases and fatalities as well as economic hardship – has relied on fostering Covid-free green zones, often via test, trace, and isolate (TTI) policies; travel restrictions; and timely outbreak management. Countries that opted for an elimination strategy – including Australia, China, and South Korea – have gained control over the virus, leading to reduced uncertainty and the return of economic growth. On the other hand, most European countries have followed a stop-and-go logic based on reaction over anticipation. Supposedly aligned with freedom and economic considerations, this tactic has ultimately proven more restrictive on our freedoms, more hurtful on our health, and more damaging to our economy. In particular, the stop-and-go strategy is detrimental for long-term economic growth because it prevents firms from planning ahead for the long term. Instead of investing in innovation, they accumulate cash to face the next lockdown. Instead of investing in skills, they hire on a short-time basis.  

Undoubtedly, the vaccines will play a key role in containing and eventually eliminating the virus, as has been seen already in Israel. But the delayed vaccination campaigns in Europe and the emergence of new variants – those already known and those yet to be discovered – is reducing the likelihood of controlling the virus by the end of the summer. To not test our fortunes, Europe needs to adopt an elimination strategy that is not solely based on vaccination.

Economic advantages of zero Covid-19 

Elimination has proven to be most effective to reduce health and economic damage in the mid- and long-term (Chetti et al. 2020, Dorn et al. 2020). Over a year of the Covid-19 pandemic allows us to look back and evaluate which strategies worked best. China, Australia, Cambodia, Iceland, New Zealand, Taiwan, Vietnam, Japan, Korea, Laos, and Thailand have followed an elimination strategy, with heterogeneous measures dependent on the epidemiological situation of different regions. From April 2020, in these countries, the service sector (which is most affected by health restrictions) returned to strong positive growth. It is still in recession in Europe. Still, in these same countries, at the end of 2020, the level of GDP returned to 2019Q4 levels. In Europe, it is six points lower than this. In 2021, on an annual average, GDP in zero-Covid countries will be 6.2 points higher than its 2019 level. In Europe, it will be 3.4 points lower. In total, countries pursuing ‘zero Covid’ gained ten percentage points of GDP compared to Europe (Aghion and Artus 2021).          

The advantages of elimination versus stop-and-go is particularly striking when looking at dynamic cross-country comparisons. Figure 1 shows weekly death and weekly GDP growth estimates for the four OECD member states that opted for elimination (Australia, Japan, Korea, and New Zealand) versus the four most populous EU countries (France, Germany, Italy, Spain). Note that while the former have regained stability with hardly any Covid-19 related deaths and economic growth back to pre-crisis levels, the latter remain volatile, both in terms of pandemic waves and economic decline.

The uncertainty of timing, duration, and severity of lockdowns prevents companies from making long-term plans, hampering investments, both in assets and labour. As a result, the disparity in recovery and growth may well extend beyond the pandemic itself.

Figure 1 Daily death per million (areas) and weekly GDP estimates (lines)

Sources: Areas: Roser et al. (2020); GDP estimates: OECD Weekly Tracker of economic activity, see also Woloszko (2020).

Beyond relief within a country, there would also be substantial economic benefits from creating an international network of Covid-free green zones. In Europe, for example, the tourism sector has been among the most negatively affected from the pandemic, which risks creating further economic and political divergence between the Northern and Southern European countries. The frictionless trade and movement within Europe has led to strong specialisation and fragmentation, with Mediterranean countries building on their comparative advantages in the tourism sector. Southern European economies depend disproportionately on tourism, especially during the summer season. In Italy and Spain tourism accounts for approximately 20% of GDP over the summer months. In Croatia and Greece its contribution exceeds 50% of GDP.  Across sectors, Baldwin and Evenett (2020) argue that insular policies will fail to foster economic recovery across sectors. Restoring free mobility between green zones – possibly from different countries – would not only reduce hardship, but could also allow Europe to show its strength and enable the upcoming tourist season.

A practical elimination strategy for Europe

As Europe is both epidemiologically and economically interconnected, it would be most effective if not indispensable to opt for a joint strategy. To this end, we argue in favour of adopting a coordinated (but decentralised) elimination strategy based on ‘green zoning’ (Pradelski and Oliu-Barton 2020). By dividing countries into smaller zones, a faster exit can be reached and worst-in-class measures avoided. Regions, provinces, or even cities are labelled green as soon as the virus circulation is sufficiently low. This means that local-level test, trace, and isolate measures can effectively prevent further uncontrolled spreading of infections in the zone. Green zones can progressively return to normal life: schools, restaurants, tourism and other businesses can fully reopen, with travellers moving freely within and between green zones. Importantly, to protect green zones from re-importations of the virus, travel restrictions need to be implemented. The access to green zones should be limited to travellers coming from another green zone and to travellers who can present a valid vaccination or immunity certificate, or a recent negative test. In fact, a ‘Green Pass’ has been proposed by several EU member states and has recently gained support from the Council of the European Union (2021a).

The EU member states have already agreed to common objective criteria to determine the epidemiological situation of each region, and to adopt harmonised travel restrictions for zones where the virus incidence is particularly high (Council of the European Union 2020, 2021b). The capacity for EU coordination is promising, but the strategy urgently needs to shift its focus to the protection of green zones. If EU member states cannot agree on a joint elimination strategy, they should at least support those who opt for zero Covid. In particular, this could enable Mediterranean countries to save the summer tourism season, a key factor to the viability of their economies.

A safe path towards recovery 

After multiple waves of infections, lockdowns and re-openings, the delayed vaccination campaigns leave Europe in dire need of a convincing exit strategy from the Covid-19 pandemic. The medical and economic arguments for an elimination strategy are overwhelming. While the impact of vaccination is still limited, aiming for zero Covid nonetheless offers the safest route to ensure a return to normality as soon as possible. This of course should not serve as a pretext not to accelerate the vaccination campaign. On the contrary, vaccines remain a vital part of the strategy.

References

Aghion, P and P Artus (2021), “La stratégie zéro Covid a montré sa supériorité sur les plans sanitaire et économique”, Le Monde, 24 January.

Baldwin, R and S J Evenett (2020), COVID-19 and Trade Policy: Why Turning Inward Won’t Work, CEPR Press.

Chetty, R, J N Friedman, N Hendren, M Stepner and The Opportunity Insights Team (2020), “The Economic Impacts of COVID-19: Evidence from a New Public Database Built Using Private Sector Data”, NBER, working paper 27431.

Council of the European Union (2020), “A coordinated approach to the restriction of free movement in response to the COVID-19 pandemic”, Interinstitutional File: 2020/0256(NLE), 13 October.

Council of the European Union (2021a), “Statement of the Members of the European Council”, File SN 18/21, 25 March.

Council of the European Union (2021b), “Amending Council Recommendation (EU) 2020/1475 of 13 October 2020 on a coordinated approach to the restriction of free movement in response to the COVID-19 pandemic”, Interinstitutional File: 2021/0021(NLE), 28 January.

Dorn, F, S Khailaie, M Stoeckli, S C Binder, B Lange, S Lautenbacher, A Peichl, P Vanella, T Wollmershäuser, C Fuest and M Meyer-Hermann (2020), “The Common Interests of Health Protection and the Economy: Evidence from Scenario Calculations of COVID-19 Containment Policies”, medRxiv.

Orsini, K and V Ostojić (2018), "Croatia’s Tourism Industry: Beyond the Sun and Sea", Economic Brief 36, European Commission.

Pradelski B S R and M Oliu-Barton (2020), “Green bridges: Reconnecting Europe to avoid economic disaster”, VoxEU.org, 30 April.

Roser M, H Ritchie, E Ortiz-Ospina and J Hasell (2020), “Coronavirus Pandemic (COVID-19)”, Our World in Data.

Woloszko, N (2020), “Tracking GDP using Google Trends and machine learning: A new OECD model”, VoxEU.org, 19 December.

Endnotes

1 Tourism flows from Eurostat (2019). GDP data for direct and indirect contribution to tourism for Spain from WTTC (2019), Italy from the OECD (2015), Greece from SETE (2018), and Croatia from Orsini and Ostojić (2018).

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Topics:  Covid-19

Tags:  COVID-19, zero Covid, green zones, vaccine passports, green zoning, Covid recovery

Professor, College de France and London School of Economics; CEPR Research Fellow

Chief Economist, Natixis

Associate Professor, Paris-Dauphine University - PSL Research University

Associate Professor, CNRS; Associate Member, Oxford-Man Institute

CEPR Policy Research