Opening-up for a strong economic recovery: Lessons from the first wave of COVID-19

When the COVID-19 pandemic first hit countries of Europe during March-April 2020, little information was available about the nature of the pandemic, and the outcomes of projected scenarios were highly uncertain. As in a ‘fog of war,’ the initial policy response was based on experiences with similar communicable diseases, without the benefit of knowledge and experience for refined solutions.   Once the first wave of the pandemic started to wane, governments gained a better understanding of the pandemic’s impacts and the public health response on the economy, and countries started opening up. 

In our recent paper “Opening-up Trajectories and Economic Recovery: Lessons after the first wave of the COVID-19 pandemic,” we provide evidence on the effects of different reopening trajectories, their timing, and speed of reopening on economic activity, using high-frequency data on electricity consumption.  As this paper was being written in early fall 2020, another wave of the pandemic hit the region, forcing many countries to introduce another round of restrictions.  Despite the recent arrival of vaccines and new treatments, the virus continues to present a serious health threat, and the experience with reopening after the first wave of the pandemic can provide useful guidance on how to improve the process this time.  

In response to the first wave, most countries of Europe went into national lockdowns almost simultaneously in the second half of March 2020. The reopening policies of early summer 2020 did not follow such a uniform script, however, with countries following quite different reopening paths.  To illustrate this, Figure 1 plots the median value and 25th and 75th percentile of a stringency index and its distribution at every point of time in 45 countries in Europe and Central Asia. The stringency index represents an aggregate of countries’ policy responses to the pandemic and ranges from 0 (no restrictions on everyday activities) to 100 (complete lockdown of the country) (Hale et al., 2020). The difference between 25th and 75th percentiles was at its minimum on April 11-12, 2020, when more than 90 percent of the countries had implemented a full lockdown. That difference more than doubled by mid-June 2020 – some countries were still under strict social distancing measures while others had removed restrictions to most activities. By fall, some countries opened up further, while others scaled back the reopening measures in light of the second wave of COVID-19 cases. 

Figure 1 – Oxford Stringency Index for countries in Europe and Central Asia

The sequence in which different social and economic activities restart their normal operations is an important dimension of the reopening process. Figure 2 plots the share of countries that had in place a specific type of non-pharmaceutical intervention (NPI) at every point in time. Most countries shifted from having a full lockdown to a partial lockdown during the late spring of 2020 and then removed lockdown measures altogether – keeping in place school closures and restrictions on public events. Schools were gradually reopened, and many countries also lifted the ban on public events. As of early September 2020, about 12 percent of countries were in full lockdown, 18 percent had partial lockdowns. Schools remained fully closed in 20 percent of countries, and restrictions on public events remained in about half of them.

Figure 2 – Implementation of NPIs over time

Another important dimension of the reopening process is its timing in relation to the pandemic’s evolution. We define the reopening wait as the number of days between the first peak of deaths and the first date when the stringency index decreased from its maximum value (the start of the reopening process). A short wait is associated with an early opening that started soon after the peak of the outbreak, with the negative wait values suggesting that the reopening process took place before the peak was reached.  In contrast, a long wait is associated with a later reopening that starts long after the outbreak’s peak. Some countries spent a long time in full lockdown and started to undo some of the restrictions only when COVID-19 cases had decreased considerably. Other countries began reopening when the infection rates were still high or were not decreasing. The median wait in our sample of countries is 11 days after the peak of the outbreak. A quarter of the countries started relaxing their restrictions before the first peak. Russia initiated the earliest reopening, only one week after implementing a full lockdown and almost two months before its COVID-19 deaths peaked. In contrast, Sweden took the longest time to scale back its restrictions, 57 days after the peak of COVID-19-related deaths, but it never implemented severe restrictions in the first place. 

Finally, another dimension of interest is the speed of the reopening process – how fast the restrictions were lifted. Analyzing the changes in the stringency index provides a daily measure of the speed of reopening. For each country, Figure 3 plots the average speed of reopening against the stringency index at the beginning of their reopening process. On average, countries with a higher stringency index at the start of the process eventually reopened their economies faster than the countries with lower levels of restrictions, but the dispersion is large. For example, Italy and Ireland had similar levels of restrictions at the peak of the pandemic, but the average reopening speed for Ireland was about four times faster than that for Italy.

Figure 3 – Average speed at reopening and the stringency index at the start of reopening for countries in Europe and Central Asia

 
In the paper, we analyze the effects of different dimensions of the reopening process on economic recovery using a panel-data econometric model. The primary outcome variable in the analysis and the proxy for economic activity is the log difference between the observed and counterfactual (with no pandemic) electricity consumption. Our results suggest that countries that adopted a gradual and staged reopening experienced stronger economic recovery compared to countries that rushed into lifting restrictive measures. Transitioning from a full lockdown to a partial one, then to no lockdown appears to be a more effective strategy of lifting the restrictions than a direct move from full to no lockdowns. Similarly, economic activity seems to react positively to partial school reopenings, compared to full school reopenings. 

The timing of reopening, defined as the number of days countries wait after the first peak of deaths before they start reopening, also matters. Our findings suggest that when countries reopen before the peak, economic activity will decline, while delaying the opening past the peak leads to faster recovery. However, when this decision is modeled based strictly on epidemiological considerations, it has no effect on the path of economic recovery.  Finally, we see that countries that gradually lifted the stringency measures rather than lifting them faster also experience a more robust economic recovery.  

Trust in government institutions is generally an important determinant of the effectiveness of policies on economic outcomes. In this case, high levels of trust in government (and interpersonal trust) are likely to be associated with better compliance with social distancing measures. In the paper, we also explore the effects of trust in government and people’s perceptions about the pandemic on the recovery process using data from the 2018 round of the European Social Survey and the 2016 Life in Transition survey. We see that governance, particularly trust in government institutions, is an essential determinant of economic recovery. Specifically, our results show that a higher level of trust in government is associated with a faster recovery among countries that carried out a gradual reopening process.  The analysis also shows that fear and anxiety about the spread of the pandemic may hinder the recovery of economic activity as countries reopen. There is also suggestive evidence that providing people with objective information and data about the status of the pandemic could be an effective policy instrument in promoting faster recovery, even though causality is difficult to establish.

The findings of this paper have important policy implications for the second wave of COVID-19 pandemic that is currently sweeping Europe and other parts of the world. Given the “pandemic fatigue” and growing public exhaustion and frustration with restrictions, public officials in many countries have been more reluctant to introduce strict intervensions this time, fearing their economic impact. As the second wave of the pandemic worsened, they quickly found themselves with few other options. When the countries start to reopen for the second time, our results suggest that a careful, gradual, and transparent reopening process is likely to be optimal in both minimizing the health costs of the pandemic and increasing the chances of a faster recovery.  

For an analysis of the economic impacts of restrictions in Europe and Central Asia during the initial phase, see the working paper:  The Sooner, the Better : The Early Economic Impact of Non-Pharmaceutical Interventions during the COVID-19 Pandemic.