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Almost exactly a century ago, another respiratory virus wrecked havoc across the world. In 1918 and 1919, the “Spanish Flu” (there is no consensus regarding where the virus originated), caused by a H1N1 virus with genes of avian origin, killed almost 50 million people worldwide. That included 675,000 deaths in the U.S., where it was first identified in military personnel in spring 1918.
The 1918 pandemic, though brief, had a catastrophic impact on people’s lives. Numerous predictions being made today on the economic and social costs of the COVID-19 pandemic are based on the impact of the influenza pandemic of 1918, hence it is worthwhile to study it.
(Image: CDC)
The years 1918 and 1919 also marked the peak of U.S. involvement in World War I, which exacerbated the spread and magnitude of the pandemic. It is estimated that WW-I resulted in deaths of roughly 10 million civilians and 9 million troops. The movement of troops across the world exacerbated the spread of the disease.
Influenza typically tends to be the greatest threat for children and the elderly. However, the distinctive feature of the 1918 influenza was that mortality rates were the highest for the segment of the population aged between 18 to 40, and more so for males than females of this age group. A study by Cambridge University reports that out of 272,500 male influenza deaths in 1918 (from a sample of 30 states), nearly 49 percent were aged 20-39, whereas only 18 percent were under age 5 and 13 percent were over age 50. This significant loss of the prime working-age population had serious economic consequences for businesses.
Also, a high degree of positive correlation was found between population density and 1918 mortality rates in the US, which substantiates the claim that influenza deaths were, on average, greater in a state’s cities than in the rural areas of the state.
Economic Impact of the 1918 Pandemic
The World Economic Forum research yields that areas that were more severely affected by the 1918 Flu Pandemic saw a sharp and persistent decline in real economic activity. More importantly, the cities that implemented early and extensive Non-Pharmaceutical Interventions (NPIs, such as social distancing) suffered no adverse economic effects over the medium term. On the contrary, cities that intervened earlier and more aggressively experienced a relative increase in real economic activity after the pandemic subsided.
More severely affected areas experienced a relative decline in manufacturing employment, manufacturing output, bank assets, and durable goods consumption. The manufacturing output showed an 18% decline for a state at the mean level of exposure. Exposed areas also saw a rise in bank charge-offs, reflecting an increase in business and household defaults. Implying that pandemics depress economic activity through reductions in both supply and demand. The decline was persistent in all outcomes and more affected areas remained depressed relative to less exposed areas from early 1919 to throughout 1923.
Empirical evidence indicates that influenza mortalities had a direct impact on the short-run real wage rates in the manufacturing sector. Cities and states having greater influenza mortalities experienced a greater increase in manufacturing wage growth over the period 1914 to 1919. A decrease in the supply of manufacturing workers (labour) that resulted from influenza mortalities would have increased the marginal product of labor and capital per worker thus increasing real wages. In the short term, labour immobility across cities and states is also likely to have prevented wage equalization across the states, and a substitution away from relatively more expensive labour to capital is unlikely to have occurred.
(Image: CDC)
The local economic impact of public NPIs during the influenza is a highly debated issue. While one school of thought believes NPIs constrain social interactions and thus dampen any economic activity that relies on such interactions, many economists remark that economic activity is also reduced in the absence of such measures, as households reduce consumption and supply less labor in order to reduce their risk of becoming infected. Thus, while NPIs lowered economic activity, they solved the coordination problems associated with fighting disease transmission and mitigated pandemic-related economic disruption.
Studies show that reacting ten days earlier to the arrival of the pandemic in a given city increased manufacturing employment by around 5 percent in the post-pandemic period. Similarly, implementing NPIs for an additional fifty days increased manufacturing employment by 6.5 percent after the pandemic.
Lessons for a More Globalized World
Various studies indicate that the economic effects of the 1918 influenza pandemic were short-term. Many businesses, especially those in the service and entertainment industries, suffered double-digit losses in revenue, while businesses that specialized in health care products experienced an increase in revenues. Manufacturing and agriculture were less vulnerable to the pandemic than retail and other businesses that relied on customer traffic. It was the apprehension of contracting the virus that restricted economic activities rather than the government-imposed lockdowns. A similar state of affairs can be observed a century later today.
Research also suggests that the 1918 influenza pandemic caused a reduction in human capital and a shortage of labor that resulted in higher wages (temporarily) for workers, though no reasonable argument can be made whether this benefit outweighed the cost of loss of life and overall economic activity.
Substantially it is the pandemic and the associated spike in mortality that constitute the shock to the economy. And since NPIs (social distancing, wearing a cloth mask, etc.) are a means to attack the root of the problem, spread of disease, they can also save the economy.
These general effects in 1918 can be used to extrapolate the potential economic impact of the COVID-19 pandemic. The current economy is more sensitive to the pandemic than the 1918 economy due to global supply chains, most of which originate in China. The pandemic has caused companies to move towards a ‘self-sufficient’ economic model with localized supply chains. Transitioning to a new, more sturdy supply chain which would be a costly affair. Another thing to note is that both consumers and businesses are more leveraged than they were a century ago, and that debt may combine with the economic shock of the pandemic to magnify the economic cost.
A new global economic structure is on the charts in the post-COVID-19 era, with the expectations of the ‘Survival of the Fittest'.
Kanica Goel is a final-year M.A. Economics student at Jamia Millia Islamia and holds a B.A. (Hons.) Economics. She has previously interned at ASSOCHAM India and IIFT New Delhi Knowledge Centre.