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Wednesday, May 27, 2020

Lives versus livelihoods: cost-benefit analysis of lockdown needs to be done before opening up

Given the myriad benefits and costs of mitigating COVID-19 and the uncertainty surrounding them, policymakers in India face a tough decision on how long the restrictions can be kept in place.

Written by Priyaranjan Jha | Published: May 22, 2020 8:29:03 pm
Lives versus livelihoods: cost-benefit analysis of lockdown needs to be done before opening up The poor in India are going to take the chance of a COVID-19 infection over the certainty of starvation. But they don’t have to if the lockdowns last only a few months.

Are the mitigation efforts (population level social distancing by restricting economic activity and the mobility of people) undertaken to slow the spread of COVID-19 worth the economic cost? This is a question that is being asked in all countries affected by the pandemic as the huge economic costs of the mitigation efforts are becoming obvious. China reported a 6.8 per cent decline in GDP in the first quarter of 2020 and the US economy is losing jobs at an unprecedented rate, with the unemployment rate jumping to 15 per cent in April, a number not seen since the Great Depression. The Indian economy is also expected to experience a significant slowdown in output growth if not an absolute decline for the year 2020. How do these economic costs stack up against the benefits of the mitigation efforts?

The main benefit of the mitigation efforts comes from the lives saved. According to one estimate in an influential paper by Neil Ferguson and co-authors of Imperial College London, enhanced social distancing of the type adopted in India could potentially save 2 million lives compared to the case without any mitigation efforts.

How does one evaluate the economic benefits of 2 million lives saved? For obvious reasons, there is a general reticence amongst common people to monetarily quantify the value of human life. However, for policymakers who are tasked with adjudicating what is best for society, a cost-benefit approach is inescapable.

One approach is to use the concept of Value of a Statistical Life (VSL) to quantify the economic benefits of the lives saved. The VSL is computed based on how much money people are willing to pay to lower the probability of death. For example, if they are willing to pay $1,000 to reduce the probability of death by 1 per cent, then the VSL is $1000/.01 = $100,000. The US Environmental Protection Agency recommends a VSL of $9.3 million (in 2019 dollars). Some back-of-the-envelope calculations can provide a rough guide to the economic benefits of the mitigation efforts in India. Since the US per capita income in 2019 was roughly 30 times that in India, if we use 1/30th of the VSL in the US as the VSL for India, we obtain a figure of $0.31 million. This would put the benefit from 2 million lives saved at $620 billion.

The calculation above treats all lives saved as the same and uses an average VSL. A more sophisticated exercise would consider the quality-adjusted life years saved and thereby accord a greater value to a young life saved in comparison to old life saved. Alternatively, one could simply compute the amount that an average person would earn over their lifetime and add a non-pecuniary cost of death to come up with an estimate for value of life. In a recent MIT working paper, Economist Daron Acemoglu and co-authors have used this approach to evaluate alternative lockdown policies for the US.

If social distancing policies are not well executed, as evidenced by the government’s handling of the migrant worker crisis in India, the number of lives saved and the concomitant benefits will be reduced considerably. More importantly, concerns have been raised regarding the mitigation efforts that reduce the economic activity of the poor, potentially resulting in deaths due to hunger and starvation. The poor in India are going to take the chance of a COVID-19 infection over the certainty of starvation. But they don’t have to if the lockdowns last only a few months. Currently, India has a huge stockpile of food grains and a well-developed public distribution system, which can prevent starvation if aid to the poor can be delivered in a timely manner. However, if the government fails to deliver, and the mitigation efforts cause deaths due to starvation, the net number of lives saved will be smaller.

Among auxiliary benefits of social distancing are reductions in deaths from road accidents, crime, and pollution. In India, about 150,000 thousand people die in road accidents every year. Data from Maharashtra reveals a 70 per cent decline in road deaths in April 2020 compared to April 2019. India also has some of the most polluted cities in the world. There is currently ample anecdotal evidence of reduction in pollution emerging from India. Pictures of the Dhauladhar mountain range clearly seen from 250 kms away have gone viral. Reduction in pollution is likely to reduce the incidence of lung disease and other respiratory diseases.

On the cost side, the bulk of the economic cost comes from a reduction in GDP. Before COVID-19 struck, the International Monetary Fund expected India’s GDP in 2020 to grow by $267 billion. If the mitigation efforts reduce the growth in GDP to zero in 2020, then the short-run economic cost of saving 2 million lives would be $267 billion. But if the GDP declines, as it seems more likely now, then the cost could be even higher. The long-run cost could be much higher if the recovery is slow and unemployment stays high for several years. Unemployment also has long-term consequences for the unemployed in terms of reduced life-time earnings and lower life expectancy, which adds to the overall economic cost.

Among other costs, poor children in India suffer the most from school closures because they do not have access to distance learning. Additionally, lack of adequate nutrition can cause long-lasting effects by impeding their brain development. There is also evidence from developed countries that isolations have led to increases in child abuse, domestic abuse, and mental health issues.

Given the myriad benefits and costs of mitigating COVID-19 and the uncertainty surrounding them, policymakers in India face a tough decision on how long the restrictions can be kept in place. However, any decision on re-opening the economy or extending the lockdown should be informed by a comprehensive cost-benefit analysis.

(The writer is professor of Economics, University of California, Irvine)

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