A number of East Asian economies have now successfully contained the initial outbreak, while most of the U.S. and Europe are still trying to reduce the spread and emerge from lockdown.

A number of East Asian economies have now successfully contained the initial outbreak, while most of the U.S. and Europe are still trying to reduce the spread and emerge from lockdown.

As economies across East Asia have successfully taken control of infection rates and seem to have moved beyond the worst of the pandemic, it could be helpful to look at these economies’ experiences as “test cases” for the rest of the world. Here, we will take a closer look at the examples of Mainland China, Korea, and Taiwan—all of which have flattened the curve, albeit with very different approaches. The greatest contrast is perhaps seen in their respective economic impacts. The comprehensive lockdown in Mainland China caused a more devastating slowdown in economic activity, whereas Korea and Taiwan went on different paths and suffered a less severe economic impact. 

To be clear, the COVID-19 pandemic is far from over in Asia. Japan and Singapore, for instance, have re-instituted social distancing measures after reporting a surge in new cases. And more generally, as long as the virus is prevalent somewhere, its effects will be felt around the world. But given the measures of containment that have been achieved in China and South Korea, and the recently slow pace of growth in Hong Kong and Taiwan, there may already be lessons for countries that are struggling to get ahead of the pandemic curve. Here, we look at three examples to compare different paths of controlling the outbreak:

China: stringent mobility restrictions and a comprehensive shutdown

As the first to be hit by the virus, China put in place quarantine restrictions that were among the most restrictive seen to date globally. Domestic flights, railway and intercity highway transportation were substantially reduced and subjected to many restrictions. Even within cities, mobility between neighborhoods and residential quarters was limited (the extent has varied, depending on the amount of confirmed cases in a certain neighborhood). All non-essential businesses were closed, and most of the population was under some kind of “stay-at-home” guidelines enforced or encouraged locally. 

Technology played—and continues to play—an important role in stemming the crisis. Public health officials attempted to trace nearly every one of the 80,000 confirmed cases across the country to map out transmission paths, using capabilities set up during and since the 2002-03 SARS outbreak. On a broader scale, Chinese tech giants developed colored health QR code systems in which citizens can be assigned a color code based on test results, self-reported travel records, contact history and symptoms. A green code means the person can move around freely, while those with yellow and red codes would need to self-quarantine or undergo supervised quarantine, respectively. The code is needed for access to many public facilities and office buildings, and the color is refreshed daily.

These aggressive measures allowed China to quickly flatten the curve and prevent large scale outbreaks outside of Hubei province, but they also came with massive social and economic costs. Broad economic activity fell to approximately 50% of normal activity during the lockdown, leading to an official GDP decline of 6.8% year-on-year in Q1. Unemployment rose, small businesses failed and overall business activity ground to a halt. In terms of a path back to normal, China has been gradually able to lift restrictions allowing people to resume work and daily activities, social distancing is still broadly encouraged but by many anecdotal observations life is returning to normal.

However, the effects are still being felt. Due to higher unemployment and reduced income, discretionary consumption has been weak. Indicators of production, particularly steel, as well as industrial indicators such as electricity consumption show the economy has already mostly been back to normal, however lagging consumption has held back the broader recovery. This could be partly due to two factors: with the virus still spreading globally, China’s border remains closed and precautionary savings are rising due to fear of a second wave of shutdowns. The second is that a very weak external environment is feeding through into a sluggish rebound in employment and incomes. So far most data points to economic activity is at approximately 80% of the normal range.

The China experience shows us that a full shutdown will cause severe damage, which isn’t a surprise, but that a sharp rebound is far from guaranteed. Lasting negative impact to consumer sentiment and household income, in addition to concerns around a second wave with the virus still prevalent across the globe have restrained the rebound. 

South Korea: minimal mobility restrictions but massive testing and tracking

The spike of cases in South Korea began on February 18. Within 15 days, confirmed cases spiked from 31 to 7,500. However, an early response by the Korea Center for Disease Control and Prevention (KCDC) enabled adequate testing capacity in advance of the outbreak. Instead of a lockdown, South Korea went on a path of minimal mobility restrictions and business closures, counting on a “trace, test and treat” strategy to contain the outbreak. So far, South Korea’s handling of the virus has been exemplary: mass, indiscriminate testing and innovations, such as drive-through testing and technological contact tracing, allowed the country to suppress outbreak flare-ups with minimal economic damage. According to the KCDC, Korea has tested over 608,000 people as of April 28, among the highest testing per capita across the world. Furthermore, transparent communication efforts may have further reduced economic damage by providing accurate location-specific information of the confirmed cases. Korea exhibited little hoarding, and in many neighborhoods without serious outbreaks, life continued with as much normalcy as could be expected.

This strategy has worked so far. The infection curve started to flatten in early March, and has fallen since then. While we would note that South Korea is a relatively small country that has experience combating infectious diseases (i.e. MERS, SARS), there are certainly lessons to learn for how effective containment can be done without substantial economic costs. A quick reaction, widespread testing, and adopting technology to trace contacts will all be lasting lessons learned from the Korean strategy.

The Korean strategy bears watching as a template for how to handle an outbreak with less severe economic consequences. Minimal mobility restrictions or forced shutdowns have allowed for limited economic costs. Korea’s Q1 GDP fell 1.4% from the previous quarter and still managed to grow in year-on-on year terms, despite combating a full blown outbreak. Notably, while in-store retail sales unsurprisingly fell, the widespread adoption of e-commerce allowed online sales to make up for the downfall. Industrial production, imports, and business sentiment were all stable. Employment numbers weakened, but the overall unemployment rate stayed steady. The government’s targeted policy managed to keep the public from panicking and support “normal” levels of economic activity in areas less affected. In contrast, China saw consumption fall dramatically, even in areas with no known cases. Furthermore, this policy is sustainable in that this form of social distancing could be maintained as long as COVID-19 is a threat, without having to revert to on-off lockdowns in the event of future waves of new cases. Of course, as an export-dependent economy, Korea is not immune to the broader slowdown occurring in Europe or the United States. Weaker exporters will likely weigh significantly on growth in the coming months. 

Taiwan: early response to prevent a massive outbreak

Similar to South Korea, Taiwan has imposed minimal mobility restrictions and almost no business suspensions, except for extending the winter break for schools and prohibiting non-residents from entering. Taiwan represents an interesting example not of suppressing an outbreak, but of preventing one. As of April 28, the territory of 23 million people, including one million working in Mainland China, has reported only 429 confirmed cases and six fatalities. Furthermore, the vast majority of those cases were imported.

The early response was credited for Taiwan’s success in effectively preventing an outbreak. The island’s Center for Disease Control (CDC) contacted mainland authorities and the World Health Organization (WHO) about the then-unidentified virus as early as December 31. It then started to require inbound passengers and crew members from Wuhan flights to undergo health checks. It also received permission to send two experts to Wuhan and announced the possibility of human-to-human transmission on January 15.  A response mechanism was then set up to monitor all individuals who had traveled to Wuhan within 14 days and had suspicious symptoms. The mechanism helped track down its first confirmed case on January 21. Border control was then imposed on January 25, closing access to visitors from Mainland China, Hong Kong and Macau.

Taiwan’s experience demonstrated that an early response is one of the keys to preventing an outbreak from happening. Unsurprisingly, as Taiwan has not resorted to shutting down the economy, it has suffered less economically. In some respects it actually benefitted from shifting production when China’s factories were shut down. Although similar to Korea, with global demand cratering Taiwan faces strong headwinds in the coming months. 

What can we learn from the different approaches?

The thorough (and thoroughly disruptive) lockdowns used in mainland China, and now in the U.S. as well as across Europe, are effective at controlling an outbreak—but inevitably at a huge economic cost. The cases of South Korea and Taiwan, however, demonstrate the possibility that COVID-19 can be effectively contained without resorting to a highly disruptive lockdown. This has implications for how countries are able to limit the economic impact and how quickly they are able to rebound following the lifting of restrictions.

The experience across Asia also suggests the key to containment is early response, widespread testing and isolation, as well as broadly changing peoples’ behaviors, not necessarily forcing stay-at-home measures. Widespread adoption of social distancing practices – wearing of masks, avoiding crowded places, hygiene – have been sufficient to dramatically slow the spread of the virus even after a community outbreak. Furthermore, in the event the virus continues to spread globally and risks of imported cases remain, such a policy represents a sustainable solution.

As economies around the world are now looking at how to restart the economy, it will be important to understand the lessons from experiences in Asia. Essentially, early response, encouraging a broad adoption of social distancing practices, massive testing, aggressive contact tracing and isolation, and adoption of technological solutions to trace the spread and enforce quarantines could allow countries to suppress an outbreak without resorting to a full scale shutdown.

What economic lessons from China can be applied to the West?

Much of the U.S. and Europe have followed China’s path of strict social distancing measures and partial or full lockdown. In this sense, China could potentially provide a roadmap, given the pandemic has started to economically impact the country in late January, almost two months ahead of the U.S. and Europe. Although differences in institutional and cultural setups suggest what happened in China may not translate directly to other countries, some general lessons could be discerned:

  • Government imposed lockdowns come with severe economic costs: The hit to the Chinese economy was huge, with activity 30-50% lower year-over-year across many industries. Service sectors and discretionary consumption have been hardest-hit.
  • Restarting the economy will be a gradual process: In China, service sector companies are still exploring how to restart while minimizing risks and applying social distancing. Companies are allowing work from home setups, while employees with symptoms are told to stay home. Only essential travel is allowed. Interestingly, the Chinese professional basketball league (CBA) could act as a template. As they explore how to resume their season, the league is exploring operating out of one or two arenas, fully testing all players/coaches/referees, and playing games with no fans. But even with those expected measures, the CBA has not yet been able to finalize a date or process for resumption.
  •  An uneven economic recovery: In late February, Chinese policymakers began to shift their focus toward restarting the economy, approximately ten days after the number of new cases peaked. Since then, we have observed that production came back more quickly than consumption, as consumers have been slow to spend.
  • Deflationary risks are building: COVID-19 led to both supply disruption and demand contraction. For goods such as food, where demand is sticky, prices increased initially due to transportation bottlenecks. However, the sharp rebound in supply and lagged demand could put further downward pressure on prices in China going forward. This matters for the world. Disinflation in China is relevant for global prices, and China’s experience with weak demand highlights the risks developed countries will likely have with disinflationary pressures once they begin to restart their economies. 

Does early success matter if global spread is still a concern?

If the virus is still spreading around the world, what will the impact be on countries that have successfully contained their “first wave”? Well, there is a chance that such countries will be required to keep closed borders and function in a state of social distancing until the virus ceases.

One key factor will likely be emerging markets. Unlike the infection curves seen in East Asia or developed markets, new case numbers are rising in most ex-East Asia emerging market economies. Given their often fragile health systems and weaker governance capacities, it is still unclear if the emerging world has capacity to control the viral outbreak now occurring within its borders. India will be a key test case given the extensive lockdown currently underway. India’s ability to reverse the upward rise in cases will provide insight into how the broader developing world can cope with this crisis.

It seems likely that if the virus is an issue somewhere, it will have ripple effects across the world. That being said, if a portion of the EM population cannot effectively control the outbreak, it could lead other parts of the world—like China, Europe, and the U.S.— to keep their borders closed. This, in turn, increases the risks of an ongoing global recession. Furthermore, the risk of a second (or third) wave of the virus in such a situation remains present, and would likely dramatically impact the global movement of goods and people—even in those countries that were the first to contain their outbreaks.