The effect of COVID-19 on the economy: evidence from an early adopter of localized lockdowns

Abstract

AbstractBackgroundGovernments worldwide have implemented large-scale non-pharmaceutical interventions, such as social distancing or school closures, to prevent and control the growth of the COVID-19 pandemic. These strategies, implemented with varying stringency, have imposed substantial social and economic costs to society. As some countries begin to reopen and ease mobility restrictions, lockdowns in smaller geographic areas are increasingly being considered as an attractive policy intervention to mitigate societal costs while controlling epidemic growth. However, there is a lack of empirical evidence to support these decisions.MethodsDrawing from a rich dataset of localized lockdowns in Chile, we used econometric methods to measure the reduction in local economic activity from lockdowns when applied to smaller or larger geographical areas. We measured economic activity by tax collection at the municipality-level.FindingsResults show lockdowns were associated with a 10-15% drop in local economic activity, a two-fold reduction compared to municipalities not under lockdown. A three-to-four-month lockdown had a similar effect on economic activity than the year of the 2009 great recession. We found that costs are proportional to the population under lockdown, without differences when lockdowns were measured at the municipality or city-wide levels.ConclusionsOur findings suggest that localized lockdowns have a large effect on local economic activity, but these effects are proportional to the population under lockdown. Our results suggest that epidemiological criteria should guide decisions about the optimal size of lockdown areas; the proportional effects of lockdowns on the economy seem to be unchanged by scale.JEL codesI10, I15, I18, H2