The dynamic association between cross-country COVID-19 prevention policies and

industrial productions

Motivation

The outbreak of the COVID-19 pandemic in early-2020 has resulted in significant economic
slowdown and costs to society. To date, the number of infected people worldwide has reached
approximately 630 million, resulting in approximately 6.6 million deaths. Initially, many countries
implemented restrictions on mobility, such as keeping social distance, suspension of domestic
public transport and lockdown policies (Brodeur et al., 2021). Those lockdown policies worked to
prevent more people from infection. For instance, to date, China has a relatively low proportion of
confirmed cases because of a continuation of the prevention and control policy. However, those
restricting policies have caused other problems. For example, according to Hermosilla et al. (2020),
the lockdown policies due to COVID-19 have crowded out other healthcare demands, deemed
equivalent to a 10% decrease in non-COVID-19 healthcare capacity at peak. Google Trend data
shows that many people experience mental health problems such as loneliness and sadness during
the lockdown period (Brodeur et al., 2021). In addition, the lockdowns and distancing policies
have also partially caused a prominent rise in unemployment (Rojas et al., 2020). Many factories
were not allowed to produce due to lockdown or experience a loss of productivity due to the
business uncertainty these policies have created.

Currently, each country is changing their policy along with its environment and medical research.
Many economies have relaxed their prevention policies while COVID-19 is spreading in
communities. For example, the UK government guided people can live with COVID-19 (The UK
Cabinet Office, 2022), and countries such as the USA and Singapore no longer require masks
(except in some medical settings). Prime Minister of Singapore Lee Hsien Loong (2022) states that
economic consideration is essential, and the loosened policies are based on financial sustainability
requirements and vaccination rates. Admittedly, a few countries, such as China, still maintain strict
restrictions to prevent the spread of COVID-19. Different from countries with liberal policies, the
Chinese government believes that the costs of a ‘dynamic zero-covid policy’ are relatively small
and beneficial to economic development. To summarize, the lockdown-related and distancing
methods significantly lowered COVID-19 cases, but these expended government budget and
decreased productivity. With the development of vaccines and medicines, policymakers should
find a balance between production and pandemic control.

Research Question:
It has been almost three years since the first COVID-19 case was confirmed. Both researchers and
politicians are concerning connection between the prevention policy and economic development.
This proposal is trying to come up with research questions: What is the extent of the slowdown in
industrial production is caused by the pandemic induced containment and lockdown policies? Does
the prevention policy affect industrial production, or do they both have dynamic interdependence
on each other? If so, how does the bi-causal dynamic relationship informs future policy direction?

Literature Review:

There is a burgeoning number of studies that have attempted to measure the economic impacts
of social distancing policies. Brodeur et al. (2021) provide an extensive review of these studies
and argued that lockdowns and social distancing measures have resulted in more economic
damage than the spread of the virus itself. In relation to the cost analysis, Miles, Stedman and
Heald (2020) found that the cost of a three-month lockdown in the UK outweighed the benefits
and could affect future public health resources. Similarly, Lally (2022) conducted a cost-benefit
analysis and found that the cost per Quality Adjusted Life Year saved by lockdown is estimated at
11 times of health interventions benchmark, which is not justified. These cost analyses are similar
to accounting approaches and compare restriction costs and social welfare. However, evaluating
mathematical models may help to make more precise policy decisions.

Following the empirical study, König and Winkler (2020) use panel regression and illustrate that
lockdown stringency is an essential driver of GDP growth during the first half of 2020. Evidence
on GDP growth in 42 countries over the first three quarters of 2020 shows that while introducing
lagged variables, a more stringent measure will lead to lower GDP growth in the same quarter but
may cause upward change in the next quarter (König and Winkler, 2020). Regarding industrial
production, in a Cholesky VAR model consistent with monthly US data, it is found that uncertainty
shocks of COVID magnitude predict a 12-19% decline in peak US industrial production (Altig et al.
2020). Additionally, Deb et al. (2021) use the OLS regression and Vector Autoregressive (VAR)
model to estimate the containment policy impacts equivalent to about 10% loss of industrial
production within 30 days; highly efficient methods such as closing workplaces and restricting
international travel are the costliest on the economic. Panel data study from the firm level
demonstrates the influence of COVID-19 on firm production while showing that regulation and the
rule of law can positively impact production performance (Hu and Zhang, 2021). Nevertheless,
this research only focuses on COVID-19 cases and does not incorporate a containment policy into
the model. In summary, empirical models have been widely used to define the COVID-19 issue
related to the economic sectors. However, many studies emphasized that restriction measures
lead to economic recession but rarely consider those restrictions are motivated by the downtrend
production. This paper will build on these findings and further explore the link between restrictions
and economic development using updated data.

Brief Data Description (Research objectives)

The COVID-19 prevention policy stringency score (STR) is collected from Oxford COVID-19
Government Response Tracker (OxCGRT). Hale et al. (2020) used policy indicators to calculate
the stringency score, including but not limited to ‘cancel public events’ and ‘stay at home
requirements’. The daily score calculated is an ordinal scale varying from 0 to 100, and this
research is considered to calculate a monthly average score to match the industrial production
index. Regarding industrial production, the monthly industrial production index (IPI) is chosen
from the Organization for Economic Co-operation and Development (OECD) database. Notice that
due to unavailable data in Australia, Colombia, Costa Rica, Iceland, Mexico, New Zealand and
Switzerland, 31 out of 38 countries’ data are employed. Industrial production indicators measure
the volume of production output such as manufacturing, gas and industrial establishments (OECD,
2022). Either STR or IPI data cover the target 31 regions and the time interval of January 2020
to July 2022.

Variable Description Time Period (Month) Data

STR Stringency Jan2020-Jul2022(31) Scale (0-100)
IPI Industrial Production Jan2020-Jul2022(31) Index (2015=100)
Index

Methodology

The Panel Vector Autoregression (PVAR) model is considered to apply to this study. In terms of
the PVAR itself, it assumes that all variables are endogenous and interdependent (Canova and
Ciccarelli, 2013), adding a cross-sectional dimension that enables consideration of the effects of
individual heterogeneity between regions (Wu et al., 2015). Regarding consistency with what was
studied, COVID-19 is a global public health event that is still spreading across all regions, and
therefore multi-country data are available. In addition, national prevention and control policies
continue to change over time, and the Oxford researchers tracked the stringency data as
mentioned above. Meanwhile, the short time series required by the PVAR model is consistent with
the reality of COVID-19 transmission times (Liu and Du, 2014). Therefore, an initial PVAR model
can be represented as:

yit = 𝛼i + 𝛽0 + ∑𝑝𝑗=1 𝛽jyi,t-j + ui,t

where i=1,2,3,…31 , t=1,2,3,…31

For the equation above, yit is a column vector that includes {STRit, IPIit}, where i represents each
OECD country, t represents the month, and p presents the estimated lag. On account of cross-
country data, 𝛼 i is added to represent the individual fix effect. The ui,t stands for the error term.

Possible issue of the research

1. The data may have to be modified. As Deb et al. (2021) mentioned in their research, stringency
is simplified and ranging 0-1 and creates another stringency indicator that is calculated by the
original stringency number.
2. Considering adding another feasibility-relevant indicator. For example, net export data and
vaccination rate.
3. The necessity of adding OLS with instrumental variables.

Following Research Plan

Start Duration End Task

11/07/22 20days 11/27/22 Further literature review
11/27/22 20days 12/17/22 If additional data is required (Test current data)
12/17/22 40days 01/27/23 Model construction and coding
01/27/23 36days 03/06/23 Analysis and discuss
03/06/23 49days 03/06/23 Dissertation writting

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