Play fair or play to win? Unavoidable cost and game theory during COVID-19

COVID-19 has emphasised the importance of working together as a global community

Understandably, there is a lot of angst around domestic policy related to COVID-19. Some are angry about the masks and the social distancing measures, for others, it's about economic impacts and unemployment. Governments were in a real lose-lose situation. No matter what governments did, people would suffer; it was just about how and how much. Reasonable electorates understand this and are rewarding governments that managed the virus competently. In New Zealand, Labour is riding high on 50% support heading into the election.

This article will discuss the extent to which the domestic economic impacts of COVID-19 were unavoidable reflecting the macro-economic nature of the crisis, and the game theory behind domestic policy.

Domestic economic costs from COVID-19 are mostly unavoidable

A clear learning from the crisis is that it was possible to avoid much of the health suffering, but not the economic suffering. People's change in behavior in response to contagion, alongside the fall in trade, migration and tourism, mean that every country is suffering economically no matter what they did. Sweden is a classic example of this. Despite implementing a relatively relaxed lockdown they are still facing a horrific economic impact. Albeit not as bad initially as many other countries.

An interesting research article published recently by Guan et al. models the global supply chain effects of COVID-19. What they find is that the supply chain losses depend on how many countries impose restrictions globally and strictness of those restrictions. Seems obvious but it has an interesting implication. Even countries not directly affected by the virus experience substantial economic losses due to disruption in infected countries. If COVID-19 had been confined to China, the United States would still have seen a 0.6% loss in GDP, or 2.2% in NZ, if a strict lockdown was implemented for 2 months. This GDP cost ramps up as the virus spreads globally and more countries impose restrictions. Lifting lockdowns in major economies (e.g. the United States) could even contribute to GDP growth of 2.5% in their smaller trade partners. Of course, this isn't a big surprise - we operate in a globalised world whether we like it or not. Domestic economic losses from COVID-19 are therefore somewhat unavoidable due to spillover costs.

This leads us to the crucial point that infected countries have an obligation to implement strict containment to reduce transmission and alleviate global economic and health suffering, even though domestic restrictions cause further economic pain. However, I appreciate it may be a bit late now.

COVID-19 is a repeating game

If countries don't play fair and implement strict containment measures, the spillover costs increase as the virus spreads and more countries respond. The game theory behind domestic lockdown is fascinating. I don't know if governments have been thinking in these terms, but it is worth exploring for interest. Lockdown is a prisoner's dilemma, at least in the short term, from an economic perspective. A prisoner's dilemma is when two players cause sub-optimal outcomes by acting in their own interest.

Lockdown measures impose massive costs within a country, and uninfected countries internationally benefit from this from the reduced transmission. To not impose restrictions could cause harm to other countries, in return for short-term domestic economic benefit. From an economic perspective in the short term, it is not in a country's economic interest to impose strict social-distancing measures.

The words "short term" and "economic interest" above are key. With COVID-19 here to stay, the game repeats. Long term, the economic impacts of coronavirus could override the short-term benefits of avoiding domestic lockdown. So while there is clear economic pain in the short term, what's becoming clearer is that lockdown is best for the economy, our health and our international neighbours. It is also more important for countries in the early stages of a pandemic to implement strict containment measures to stomp on the exponential curve.

All this raises the horrifying prospect that we actually have to work together. Pandemics are our problem globally, with the solution not belonging to any single country. If one country has a new contagious virus, the right incentives need to be in place for them to respond with strict measures for international benefit. Uninfected countries need to be willing to help infected countries with aid and health support to mitigate the infected country's domestic cost, and the global cost. Thinking of a contagious virus in another country as "somebody else's problem" simply doesn't cut it.

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© Byte Size Story 2020

A New Zealand based politics and economics blog

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