Economic Impact of Global COVID-19 Pandemic and Policy Implications: A Global-Regional Integrated Framework

Abstract

The COVID-19 outbreak in the global scale has raised the concern about severe economic effects caused by the pandemic disease. Extant literature on global pandemic mainly focuses on the direct and indirect economic costs of the disease. However, the global outbreak of public health emergencies should not only be assessed by a partial equilibrium approach by merely focusing on the health sector or disease-related costs. A comprehensive approach of assessment is essential to evaluate the overall economic impacts of the global pandemic. In this sense, the episode of global COVID-19 does not fit into the standard approach, as this wide-spread disease has caused economy-wide shocks to both supply and consumption sides. The disruption of global supply chains and shrinking demand of consumption has tremendously damaged global economy, which also caused spillover effects on China’s regional economy through the globalized value chains and international trade.

To measure the global economic impacts of the pandemic on China’s regional economy as well as to provide practical policy suggestions for economic recovery, this paper applies and integrates the global and regional computable general equilibrium (CGE) models to conduct an economy-wide analysis, taking into account the changes in morbidity, labor supply, consumption, international trade, shocks to global tourism and oil demand. The research set four scenarios to capture the nature of the pandemics in different stages: (S1) the outbreak within China; (S2) the spread of the disease to advanced countries and regions; (S3) the escalation of the pandemic in the global scale; and (S4) the second wave of the pandemics. As a focal point of China’s regional planning and opening-up policies, the Guangdong-Hong Kong-Macao Greater Bay Area entails greater attention amid the pandecmic. This study provided an insight into challenges and opportunities the local economy faces in dealing with the pandemic and in economic recovery.

The standard GTAP framework is unable to capture the unevenness of regional economies inside the country. In the meantime, the regional CGE model is inadequate to analyze the interaction of the regional economy and the global economic system. Therefore, it is essentially important to build an integrated framework to address the dynamic interaction between the regional and global economic systems and to acutely assess the global shocks to local macroeconomics and industries. To achieve this goal, this study builds an integrated global-regional framework that links the GTAP model to the regional TERM model and transmits the shocks of global pandemics to the regional model.

The results show that: (1) The global pandemic has significant negative effects on China’s economy and industries, especially on China’s export-oriented industries such as automotive, machinery and electronic sectors; (2) China’s trade with the key trade partners including the United States, the EU, Japan, Korea and ASEAN has been significantly affected due to the economic shocks, which may cause restructuring of global value chains in the post-pandemic era; (3)For the Greater Bay Area, cities relying on export-oriented economy and manufacturing industries have greater damage on their economic growth; (4)The inter-regional flow of commodities has been obstructed by the pandemic, which will further generate negative spillover effects on the regional industrial clusters within the area.

To strengthen the local governance in dealing with the pandemic and in steering the long-term economic reforms, the government should pay more attention to the reform in the public health system as part of the supply-side structural reform. In terms of the industrial reforms, the efforts of moving up the value chain is essential in building a high-quality mode of economic growth and in pushing for the restructuring of global value chains. Cross-regional cooperation mechanism should be put forward by leveraging “New Infrastructure” projects and consumption-driven economic policies. In short, the property of the Greater Bay Area is not only important for local economic recovery but also for deeper integration of Hong Kong and Marco into China’s economic development.