The Covid-19 pandemic is not the first global shock to hit hard almost every country in the world. The 1918 Flu Pandemic, the Great Depression and World War II were similar events that required tremendous efforts by governments to overcome their adverse effects. These crises hold three important lessons for today: (i) social distancing and masks make a large contribution to stem the spread of the virus; (ii) safeguarding the banking system and keeping trade open are vital for the survival of economies; and (iii) governments should reallocate resources to strategic sectors by collaborating efficiently with the private sector.
| In Nepal a drone is used to monitor quarantine rules. Past crises illustrate the importance of using new technology and innovative solutions. Photo: ADB |
1918-20 Flu Pandemic: Social distancing and masks work
During the 1918-20 global flu pandemic, the world, with its rudimentary knowledge on viruses, was exposed to a deadly virus with no medical treatment at hand. The most efficient public health intervention proved to be social distancing. Back then “social distancing” was called “crowding control” and included interventions like today’s mask laws, business-hour restrictions, and the closing of schools, theaters, churches, and dance halls. Recent scientific studies find that cities that acted earliest and most forcefully, like St. Louis, which imposed a near total lockdown within two days of its first case, had lower peak death rates than cities that started late, like Philadelphia.
The 1918 pandemic hit prime age workers between 20 and 40 years old the hardest. Yet, economic historians estimate that the 1918 flu led to only a 0.5% decline in annual output in the US. The reason was that more people worked in jobs that did not require close social contact, such as farming, and workers could seldom afford to stay home and had to continue to work. Another reason was that the flu lockdowns were relatively short (around 6 weeks). As today, lockdowns were perceived as an ordeal such that upon its conclusion, residents of cities like San Francisco gathered in the streets to celebrate. It took the virus less than three weeks to be back, in some cities the second wave was more deadly than the first. Having social distancing measures in place for too little time and allowing many businesses to continue as usual came at a high cost. In the US alone 657,000 persons died from the virus. In conclusion, social distancing should not be considered as a panacea to fight a pandemic, but it can make a very important contribution. Fast-forward to 2020, it is critical to maintain lockdowns for long enough and make them “smarter” through testing, tracing, and isolation.
Great Depression: Keep the financial system afloat and trade open
The Great Depression was deep and long because the financial system collapsed. It caused one-third of all banks to vanish and led to a contraction of money supply by 35 %. The subsequent price drop of 33% started a vicious circle of deflation and growing over-indebtedness. In the current crisis, central banks need to be ready to bail out banks so that they can keep on lending and restore confidence.
The Great Depression worsened as countries started a tit-for-tat trade war which led to a collapse of international trade. Global trade shrank to less than a third of its pre-crisis level. Today, we witness several countries that have started to impose export bans on strategic goods to fight the pandemic, such as medical equipment and certain food items. However, the extent is much lower compared to the Great Depression partly thanks to the conviction in most countries that open trade regimes are an important cornerstone of economic activity. However, countries should ensure that trade remains fully open and ports continue to function.
World War II (WWII): Reallocate resources while giving the private sector room to adjust
During WWII, a large reallocation toward armaments took place in all countries involved in the war. In the Covid-19 case, the analogy would be in relation to ensuring the production and procurement of critical medical equipment, medicine and vaccines; as well as of testing and tracing capacity.
During the war, in most belligerent countries the military decided on the equipment of the troops, while a centralized board planned and coordinated the production. Similarly, the centralized institution should coordinate all measures to fight the pandemic. The response should be adopted to the prevailing conditions at the lower level of administration. However, strategic decisions on the production, procurement and distribution of critical means should be taken at the central level.
Interestingly, during WWII the US government did not decide to nationalize companies critical for the war efforts, but instead provided incentives to firms to switch production ranging from faster access to inputs to purchasing agreements. Today, with guarantees for some and adequate support for others, the government could collaborate with the private sector to reallocate resources and respond to needs of a new environment.
During World War II governments were also successful in redeploying and bringing together the smartest minds to work successfully on strategic projects. In the current fight against Covid-19, tapping into the ideas and knowledge of the best brains could again help. For example, in the area of telecommunication many developing countries in Asia are very advanced. In a joint effort across industry and academia new digital solutions should be developed to facilitate the testing and tracing of people.
Authors:
Matthias Helble is Economist, Economic Research and Regional Cooperation Department, ADB.
Aimee Hampel is Economist, Economic Research and Regional Cooperation Department, ADB.
