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China Covid Lockdown 2020 - empty street

Competitiveness

The great dictators and what we can learn from their handling of the pandemic

Published 16 March 2021 in Competitiveness

It will be a few years before we will be able to assess which countries’ strategies have worked best to fight the health, social and economic consequences of the COVID- 19 pandemic. The current crisis has been unique because the impact on people’s lives has not been related to the economic development of the country, its geographical position or whether the country had specific economic ties to another. Instead, this has been a global pandemic, made worse by international mobility, the lack of leadership or the wrong policies in some countries, and the quality and health of the public finances.

International assessments of countries that have done well in coping with the virus have generally included New Zealand, South Korea, Singapore and China. By contrast, observers have noted high numbers of infections in the United States, Brazil, Spain and Italy, among others. With third and possibly fourth waves looming, it is still difficult to conclusively say which countries have been hit the most by the virus: Sweden and Portugal were models, to some, of good pandemic management by the summer of 2020, only to be recast as leaders on lists of most-infected countries half a year later. 

It is more straightforward to analyze the economic, not health, impact of the pandemic. The IMF World Economic Outlook 2020, in its January 2021 update, reported an estimated GDP growth of +2.3% in China (the growth champion in 2020), and mild recessions in Russia (-3.7%), Saudi Arabia (-3.9%) and Nigeria (-2.6%). In contrast, several European countries (with Spain, Italy, and UK as the worst) have seen significant contractions of their economies, sometimes larger than –10%. 

What do the best (and worst) countries have in common? We know now that severe lockdowns have been really harmful. Some governments decided that everything had to be tried to contain the number of infections, so they shut down the economy, confined the population and encouraged remote working. Obviously, the countries whose economies depend on sectors that work only through physical contact (like tourism and manufacturing) were more affected by such lockdowns. Thailand derives 12.3% of its GDP from tourism, and its economy is expected to shrink by 6.6% in 2020. Argentina is, per the IMF estimates, one of the countries that has suffered the largest recession (-10.4%), and also one where services represent the least in GDP (54%, compared to, for example, 58% in Chile).

 

However, in some countries, lockdowns have worked pretty well

Think about China or Singapore. The case of China is interesting, since it still depends on a strong manufacturing sector: while the ratio of value-added generating by the Services sector to GDP is 54% in China, it is 70% in Singapore and 76% in the United States. The more one depends on manufacturing, the more difficult it is to confine people, since workers need to go to the factories and trucks need to move merchandise. »

What then has been the key to success? Our analysis has shown that lockdowns have worked well only in less democratic countries. We have observed that when the population is confined, tools are needed to impose restrictions that do not clash with civil liberties. Additionally, non-democratic countries may have created a culture of obedience and surrender to the common good that more democratic regimes do not have. 

This idea is illustrated very well in the graph. It shows the relationship between lockdown intensity (measured with the Oxford Stringency Index) in the horizontal axis, against the change in GDP growth in 2020 relative to 2019, from the IMF World Economic Outlook estimates, in the vertical axis. Generally speaking, we observe that, the more intense the lockdown, the more harm is done to the economy. This is reflected in the negative slope of the cloud of points, each one representing a country. 

Lockdown Intensity vs GDP Growth 2020

Our second interesting finding comes from dividing countries, depending on their democratic rights (here we use The Economist Intelligence Unit Democracy Index for 2020). Both in democracies and non-democracies, lockdowns tend to be economically painful. However, it is easy to implement lockdowns in dictatorships: China’s Stringency Index is 70 versus 50 in South Korea. On average, non-democracies were tougher when confining their people. Finally – and this is the most striking observation – in dictatorships, lock-downs have worked much better. That is, not only were they tougher, but they have also damaged the economy less.

The worst cases in our graph are democracies such as the United Kingdom, France, and Spain, that shut down their economies for months, with subsequent severe recessions. For example, Russia, with a Stringency Index similar to the one in the UK, has seen in 2020 a recession three times milder. This is the punchline: lockdowns have worked in systems that lack individual freedom, but have had terrible economic consequences when people were not willing to sacrifice their liberties for their health or for the health of others.

Why are democracies so ineffective at implementing lockdowns? Because people in these countries have not accepted such a severe limitation of their civil liberties. In some of these nations they have revolted (with demonstrations in Australia, Germany and the US and several other countries where the common motif has been, “we’ve had enough”). In some there has been resistance and avoidance of the lockdown, with violations of confinement laws in the UK, Spain, France, and others. Additionally, it has been difficult to maintain such confinements for long periods, so spells of severe restrictions have been followed by a complete release of any control measurement, only to return to lockdowns when the second and third waves made it imperative.

 

In Saudi Arabia, those found to have violated quarantine rules faced up to two years in prison

How are non-democracies making confinement effective?

It’s not just that people were forced to stay at home. One important tactic was the strong enforcement of regulations. In Saudi Arabia, those found to have violated quarantine rules could be fined up to 200,000 riyals (about $50,000) and faced up to two years in prison, while those found to have intentionally spread the virus could have faced a fine of up to 500,000 riyals and up to five years in prison. Non-Saudi offenders would also be deported and permanently barred from re-entering.

In October 2020, England increased fines for violations of confinement after realizing that only 18% of people with symptoms went into isolation. However, the amount of the fines ranged from £1,000 (about $1,400) for the first violation, to £10,000 for repeat offenders. Addition-ally, the tracing of infections was easier by an unimpeded access to personal information as part of an expansive surveillance network in China. Finally, access to information and restriction of freedom of speech was a tool to prevent the spread of anti-confinement sentiment: in Kazakhstan it was common for protesters to be imprisoned. 

Now that we know that democracies ought to have restricted their freedom in order to fight the pandemic, would people and politicians be-have in a different way the next time? It is difficult to say. But 2020 only compares probably to World War II as a period in which citizens have sacrificed the lives of hundreds of thousands in order to preserve the liberties of millions. 

Authors

Arturo Bris - IMD Professor

Arturo Bris

Professor of Finance at IMD

Arturo Bris is Professor of Finance at IMD. Since January 2014 he is also leading the world-renowned IMD World Competitiveness Center. He is Program Director of the Navigating Fintech Innovation and Disruption program.

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