Horrible trade-offs in a pandemic: Poverty, fiscal space, policy, and welfare

Ricardo Hausmann and Ulrich Schetter

World Development, 2022, vol. 153, issue C

Abstract: We analyze how poverty and a country’s fiscal space impact policy and welfare in times of a pandemic. We introduce a subsistence level of consumption into a tractable heterogeneous agent framework, and use this framework to characterize optimal joint policies of a lockdown and transfer payments. In our model, a more stringent lockdown helps fighting the pandemic, but it also deepens the recession, which implies that poorer parts of society find it harder to subsist. This reduces their compliance with the lockdown, and may cause deprivation of the very poor, giving rise to an excruciating trade-off between saving lives from the pandemic and from deprivation. Transfer payments help mitigate this trade-off. We show that, ceteris paribus, the optimal lockdown is stricter in richer countries and the aggregate death burden and welfare losses smaller. We then consider a government borrowing constraint and show that limited fiscal space lowers the optimal lockdown and welfare, and increases the aggregate death burden during the pandemic. This is particularly true in societies where a larger fraction of the population is in poverty. We discuss evidence from the literature and provide reduced-form regressions that support the relevance of our main mechanisms. We finally discuss distributional consequences and the political economy of fighting a pandemic.

Keywords: COVID-19; Lockdown; Transfers; Government borrowing constraint; Political economy; Developing countries (search for similar items in EconPapers)
JEL-codes: E62 F4 H12 I14 I18 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:153:y:2022:i:c:s0305750x22000092

DOI: 10.1016/j.worlddev.2022.105819

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