U.S. Investors, Take Note: Korea and Taiwan Show How the Virus Restrains Economic Activity - Barron's

South Korean authorities contained a major coronavirus outbreak relatively well and the country never shut down business. The economy is still struggling. Here, the scene in Seoul on an April day.

Photograph by SeongJoon Cho/Bloomberg

For a glimpse of how the U.S. economy might fare after states ease coronavirus lockdown orders and commercial activity broadly restarts, the experiences of South Korea and Taiwan should serve as a cautionary tale. Both countries contained the virus better than the U.S., yet consumers in those countries remain reluctant to spend and venture out.

The takeaway: Reopening isn’t going to be an economic cure-all.

Start by looking at Taiwan, which never needed to shut businesses or impose lockdowns. Having learned how to handle pandemics from China from its experience with SARS in the early 2000s. the Taiwanese government responded to the coronavirus outbreak by quickly banning incoming travelers, testing everyone who could have come into contact with the virus, and quarantining the sick before they infected others. The result: the country of 23 million people has had only 443 confirmed cases and just 7 deaths. (For comparison, the U.S. has about 14 times as many people and about 20,000 times as many coronavirus deaths.)

Despite this success, the Taiwanese economy is still hurting from the virus. In fact, the latest data are even worse than last month. Retail and food service spending excluding groceries and fuel in April was down 12% from last year, with spending at restaurants alone down 23%. These are the biggest declines ever.

Meanwhile, cellphone location data from Google suggest Taiwanese were about as unlikely to visit “retail and recreation” venues in May as they were in April, even if they are still far more likely to do so than Americans or Europeans.

Unlike Taiwan, South Korea had a severe outbreak of the virus that forced a sharp downturn in economic activity. Although new pockets of the virus continue to pop up, Korea largely contained its outbreak, which makes it the best the U.S. can hope for.

The latest monthly data show that Korea’s retail and services sectors are still operating well below normal, even if they’re doing better than the U.S. and Europe. Passenger rail, hotels, and “arts, sports and recreation related services” were all down by half in April compared to January.

Personal services, restaurants, bars, movie studios, and passenger land transport services were all down about a quarter. Even professional and technical services, “business facilities management and landscape services,” and “activities of employment placement agencies and provision of human resources” were all down about 10% from pre-virus levels.

Perhaps more alarmingly, Korea’s labor market has been hit hard even though the government didn’t order the kinds of business closures and movement restrictions imposed in parts of the U.S. and Europe.

As in the rest of the world, Korea saw the biggest job losses in hotels, restaurants, and recreation, with the pain concentrated on smaller businesses. Moreover, according to a new paper from economists Sangmin Aum, Sang Yoon (Tim) Lee, and Yongseok Shin, the distribution of job losses within Korea was directly related to the regional severity of the virus.

The economists compared their results to data from the U.S. and the U.K. and found that job losses in those countries were about twice as severe as in Korea even given the differences in infection rates. One interpretation is that lockdowns doubled the total number of jobs lost.

Alternatively, Aum and his colleagues believe the measures that reduced the spread of the virus helped prevent even worse job losses, because “the resulting employment losses in the absence of lockdowns would have been even larger than currently observed employment losses.”

Americans considering how to reopen the economy before the virus has been contained should bear all this in mind. The virus is the problem, not the lockdowns and social-distancing restrictions meant to slow its spread.

Write to Matthew C. Klein at matthew.klein@barrons.com

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