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Number 1 Shimbun

The Long-living Economic Legacy of Pandemics and Plagues





With lockdowns against Covid-19 easing and infection and death rates declining it would be nice to think we can breathe a sigh of relief and begin to put the pandemic behind us. But that may be way too soon when it comes to the economic legacy even assuming no major ‘second wave’ of infections.

The U.S. Federal Reserve has listed the problems that pose a major challenge to the world's biggest economy in the short to medium term, and they are by no means unique to America. Just a few include a potential wave of business failures, continuing high unemployment plus lower wages — and a trade slump.

Other analyses suggest that the legacy of the coronavirus will persist well beyond the medium term, and that it could extend into unexpected areas of the global economy and into the financial system also. It may take one or even two decades — a generation in effect — for the economic stagnation and price declines which have historically been associated with such terrible episodes to abate completely, according to research published by the International Monetary Fund (IMF) in Washington.

And, contrary to what many stock markets appear to be anticipating as they leap joyfully back to pre-pandemic highs (even as the pandemic continues to rage), the IMF notes that “the great pandemics of the past millennium have typically been associated with subsequent low returns on assets.”

Quoting a new paper by researchers Jorda, Singh, and Taylor, the IMF focuses on events in the aftermath of 15 large pandemics that each caused over 100,000 deaths in Europe (where data has been recorded to varying degrees) since the Black Death that lasted from 1331 to 1353.

Even if the world is lucky enough to escape from the corona-virus with only a fraction of the deaths caused by past plagues, the impact of the Covid-19 in economic and financial terms could prove to be longer-lasting and more profound even than was the case during those terrible events.

Research on the economic fallout ofCovid-19 has so far focused on short-term impacts, the IMF says. “However, as governments engage in large-scale counter-pandemic fiscal programmes, it is important to understand what the economic landscape will look like in the years and decades to come.”

That landscape “will shape monetary and fiscal policy in ways that are not yet fully understood."

Historical studies have typically focused on single events in one country or region and have traced outcomes a decade at most, the IMF notes. But with major pandemics effects will be felt across economies because the infection is widespread or trade integration propagates the economic shock.

“The rapid and unprecedented collapse of production, trade, and employment may be reversed as the pandemic eases but historical data suggest that long term economic consequences could persist for a generation or more. The toll on economic activity so far is only the beginning of the story,” that IMF warns.

Wars and plagues are often ranked as equally disastrous but as the IMF notes they are very different in terms of economic impact. Wars destroy a country's capital stock but trigger reconstruction once peace returns whereas plagues destroy a nation’s human capital and so no reconstruction boom follows.

What’s more, we can expect the continuation of low or zero (negative even perhaps in some cases) interest rates for the foreseeable future. While that may sound like good news for borrowers it also implies stagnant economic activity as business and household demand recovers only very cautiously.

Analysis shows that the “natural” or neutral rate of interest (the equilibrium level that can keep the economy growing at its potential rate with stable inflation) typically declines for 20 years after a pandemic and then takes a further 20 years to recover its original level. 



Italian Plague doctor in full kit

The IMF describes this as “staggering” and suggests that it “speaks to the large economic effects pandemics have had over the centuries.” The analysis makes use of “newly available data on yields of long-term sovereign debt stretching back to the 14th century.”

The natural rate of interest,” is an important economic barometer, it notes. “As populations become more frugal, the relative supply of savings increases; when the underlying pace of growth wanes, investment becomes less attractive, in both cases the natural rate declines to restore equilibrium.”

Still, the IMF adds.” one piece of good news is that sustained periods of low borrowing costs are associated with higher real (inflation adjusted) wages and create room for governments to finance stimulus measures to counteract economic damage.” They will need all of that room - and maybe more.


The Pandemic Progress of the “Grim Reaper” Over Centuries


One thing that has made the coronavirus (Covid-19) appear so scary is the sheer amount of publicity it has created. Past epidemics or plagues have been far more terrible in terms of the number of people they killed, owing to inability of societies to respond effectively at the time, the IMF says.

■ The “Black Death” which originated in Asia in 1330 and went on to kill around a third of Europe’s then population or some 75 million people (according to data compiled by Wikipedia from various sources) makes the coronavirus (some 430,000 deaths as of mid June) look relatively benign so far.

■ And the “Spanish Flu” in 1918 in turn outstripped the Black Death as a killer disease, causing some 100 million deaths. None of the other 13 big pandemics noted by these sources comes anywhere near to matching the grim record of the Great Plague and the Spanish Flu.

■ Partly owing to its geographical and cultural isolation over many centuries Japan has suffered relatively less than from plagues than have other nations.

■ The so-called Spanish flu which erupted in 1918 at the end of the First World War and persisted until 1920 is the worst epidemic that Japan has suffered until the present and the death toll was infinitely greater.

■ According to official figures quoted in a Nichibun monograph, “the epidemic which stormed Japan for about half a year from autumn 1918 to spring 1919 affected 21,168,000, leaving more than 257,000 dead.” That compares with some 890 Covid-19 deaths in Japan as of the beginning of June.

■ The Japanese smallpox epidemic during the years 735 to 737 (Tenpyo era epidemic) afflicted much of Japan, killing approximately one third of the population at that time. It had significant social, economic, and religious repercussions throughout the country.


ANTHONY ROWLEY is a former president of the FCCJ. He is a co-author of Sustainable Investment — Impact in Asia, published jointly by Asia Asset Management and the United Nations Development Program (UNDP).

Published in: July 2020

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