COVID‐19 and Long‐Term Economic Growth

• Published date: 01 June 2023
• Author: Jinji Hao,Harry Gregg,Yao Yao
• Date: 01 June 2023
• DOI: http://doi.org/10.1111/1467-8462.12500

The Australian Economic Review, vol. 56, no. 2, pp. 221–237 DOI: 10.1111/1467-8462.12500

COVID‐19 and Long‐Term Economic Growth

Jinji Hao, Harry Gregg and Yao Yao*

Abstract

This article investigates the impact of the

COVID‐19 pandemic on the long‐term eco-

nomic growth of South Africa. We embed an

epidemiological model in a modified

Solow–Swan model and explore various

channels such as morbidity, mortality, un-

employment, loss of school days and capital

accumulation. We demonstrate that COVID‐

19 will lower the average annual growth rate

of GDP per capita of South Africa by 0.07

percentage points in the next four decades, a

25 per cent decline relative to the no‐COVID

benchmark. We show that human capital

losses due to school closures account for

more than half of the economic slowdown.

JEL CLASSIFICATION

E20; I18; O10; O40

1. Introduction

What are the long‐term economic consequences

of the COVID‐19 pandemic? What are the key

channels through which the disease will reshape

economic growth in the coming decades?

While the short‐term effects of infections,

lockdowns, and business closures have been

researched extensively, the long‐term economic

impacts of the pandemic are yet to be explored.

In this article, we investigate these impacts,

mainly through labour productivity and factor

accumulation, for South Africa, a developing

country that has been suffering from economic

stagnation for decades and has been the nation

worst‐hit by COVID on the African continent.

We examine the effects of COVID‐19 on

the economy with the aid of a modified

Solow–Swan model. The model incorporates

the major channels through which the pan-

demic may impact labour productivity and

factor accumulation and, subsequently, eco-

nomic growth. These include the morbidity

effect of infections on labour productivity, the

mortality effect of infections on the labour

force as well as on population, the loss of

employment caused by lockdown policies and

economic downturn, the capital accumulation

effect, and, importantly, the loss of human

capital due to school closures and impaired

school incentives (as a result of reduced

life expectancy) that can potentially damage

the productivity of the future labour force. As

the long‐term effects of COVID‐19 through

these channels may crucially depend on the

evolution of the pandemic, we also develop an

epidemiological model to project the future

* Hao and Yao: School of Economics and Finance,

Victoria University of Wellington, Wellington 6011, New

Zealand; Gregg: FNZ, Wellington 6011, New Zealand.

Corresponding author: Yao, email <yao.yao@vuw.ac.

nz>.

© 2023 The Authors . TheAustralian Economic Reviewpublished by John Wiley & SonsAustralia, Ltd on behalf of TheUniversity of

Melbourne, Melbourne Institute: Applied Economic & Social Research, Faculty of Business and Economics.

This isan open access articleunder the terms of the CreativeCommons Attribution‐NonCommercial‐NoDerivsLicense, which permitsuse

and distribution in any medium, provided the original work is properlycited, the use is non‐commercialand no modifications or

adaptationsare made.

prevalence rates of the disease. Moreover, we

take into account age, gender and cohort

differences in the health and economic

impacts of the pandemic.

By comparing the growth rates of GDP per

capita of South Africa in the decades after

2019 under the actual scenario with COVID‐

19 and under a counterfactual scenario

without COVID‐19, we find a substantial

impact of COVID‐19 on economic growth.

In the first decade, the average annual growth

rate will be lowered from 0.22 per cent to 0.14

per cent due to COVID, a growth drag of 0.08

percentage points (pp). The growth drag will

reach a peak of 0.14pp in two decades

following the pandemic. Even in four decades,

COVID‐19 will lower the average annual

growth rate by 0.07pp, a 25 per cent decline

relative to the no‐COVID benchmark, and the

cumulative total GDP loss will amount to 148

per cent of annual GDP in 2019.

We then decompose the growth drag into

contributions from different channels, in-

cluding morbidity, mortality, human capital

loss, employment loss and capital accumula-

tion. We find that, while employment loss will

be the major driver of the growth drag in the

first decade of the pandemic, human capital

losses, mainly due to school closures as part

of the lockdown policy, will materialise in the

second decade when students who lost most

school days all join the labour force. It turns

out that human capital losses will become the

dominant growth drag from then on, ac-

counting for about 58 per cent of the

economic slowdown in the four decades

following the pandemic. Moreover, dampened

capital accumulation due to a sustained

economic slowdown will in turn impede

income growth, accounting for 29 per cent

of the growth drag in four decades. In

contrast, the effects of morbidity, mortality

and employment losses are likely to diminish

rapidly after the first decade, so they will play

a relatively minor role in the long run.

Finally, we check the robustness of our

findings by conducting our analysis under

different projections of COVID‐19 prevalence

rates, and find a significant negative economic

impact of COVID‐19 under all scenarios,

including the most optimistic one in which the

virus is likely to completely disappear after

2022. The dynamic pattern of the growth drag

turns out to be qualitatively similar—it will

peak in the second decade (i.e., 2030–2040) in

all scenarios when the effect of human capital

losses kicks in. Thus, we conclude that the

loss in human capital accumulation, mainly

due to school closures, is the major channel

through which the pandemic adversely influ-

ences economic growth in the long run.

This article is closely related to the recent

literature on the medium‐and long‐term effects

of COVID‐19‐induced school closures. Jang &

Yum (2022) develop a general equilibrium

model to study the macroeconomic and dis-

tributional consequences of school closures

through intergenerational channels and find

long‐lasting adverse effects of school closures

on the aggregate economy. Fuchs‐Schündeln

et al. (2022) quantitatively characterise the

long‐term earnings and welfare consequences

on children from a COVID‐19 induced loss of

schooling, based on an intergenerational life-

cycle model. Agostinelli et al. (2022) investi-

gate the interaction of various channels of

school closures, such as peer effects and

parenting style, in a structural model of skill

formation and find a large, persistent and

unequal effect of school closures on human

capital formation.

1

While our article also emphasises the

important implications that school closures

have in the long run, it differs from these

studies in two main aspects. First, their

studies focus on the impact of school

closures, while ours focuses on the impact

of the COVID‐19 pandemic on economic

growth through various channels of labour

productivity and factor accumulation. Our

model incorporates not only the effect of

school closures but also infection‐induced

morbidity and mortality, lockdown‐and

economic‐downturn‐induced employment

loss, dampened education incentives due to

a reduced life expectancy, and impeded

capital accumulation. This framework allows

us to decompose the growth drag and to

compare the relative importance of each

channel at different horizons following the

222 The Australian Economic Review June 2023

© 2023 The Authors. The Australian Economic Review published by John Wiley & Sons Australia, Ltd on behalf of The

University of Melbourne, Melbourne Institute: Applied Economic & Social Research, Faculty of Business and Economics.