Globalization and Disease - Ricerca sull'intelligenza artificiale specializzata al MIT

Globalization and Disease
Globalization and Disease

Globalization and Disease:
The Case of SARS*

Jong-Wha Lee
Korea University
Economics Department
Seoul 136–701
South Korea
jongwha@korea.ac.kr
E
The Australian National
Università

Warwick J. McKibbin
The Australian National
Università
Centre for Applied
Macroeconomic Analysis
Research School of Pacific &
Asian Studies
Australian National University
ACT 0200, Canberra
Australia
warwick.mckibbin@anu.edu.au
E
The Lowy Institute for
International Policy

Astratto
The purpose of this paper is to provide an assessment of the
global economic impacts of severe acute respiratory syndrome
(SARS) as well as to provide a more comprehensive approach to
estimating the global consequences of major disease outbreaks.
Our empirical estimates of the economic effects of the SARS epi-
demic are based on a global model called the G-Cubed (Asia Pa-
cific) modello. Most previous studies on the economic effects of ep-
idemics focus on the disease-associated medical costs or forgone
incomes resulting from disease-related morbidity and mortality,
but the most significant real costs of SARS have been generated
by changes in spending behavior by households and firms in af-
fected countries. This study estimates the cost of the SARS out-
break by focusing on the impacts on consumption and investment
behavior through changes in the cost and risk of doing business.
Through increased economic interdependence, these changes in
behavior have wide-ranging general equilibrium consequences for
the world economy that can lead to economic losses well in ex-
cess of the traditional estimates of the cost of disease.

* This paper is a revised version of a paper that was originally

presented to the Asian Economic Panel meeting held in Tokyo,
11–12 May 2003. We have updated that original paper to in-
clude the last known case of SARS as of July 2003, and to adjust
the scale of some shocks, given new information on the dura-
tion of the SARS outbreak. The authors thank Andrew Stoeckel
for interesting discussions and many participants at the Asian
Economic Panel meeting, particularly Jeffrey Sachs, Yung Chul
Park, George von Furstenberg, Wing Thye Woo, and Zhang
Wei, for helpful comments. Alison Stegman provided excellent
research assistance and Kang Tan provided helpful data. Vedere
also the preliminary results and links to the model documenta-
tion at http://www.economicscenarios.com. The views ex-
pressed in the paper are those of the authors and should not be
interpreted as reºecting the views of the institutions with which
the authors are afªliated, including the trustees, officers, O
other staff of the Lowy Institute for International Policy.

Asian Economic Papers 3:1

Institute of Technology

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Globalization and Disease

1. introduzione

Severe acute respiratory syndrome (SARS) has put the world on alert. The virus ap-
pears to be highly contagious and is fatal for about 10 percent of patients. Nel
6 months after the ªrst outbreak in the Chinese province of Guangdong in Novem-
ber 2002, SARS spread to at least 28 countries, including Australia, Brasile, Canada,
South Africa, Spain, and the United States. As of 14 Luglio 2003, the number of prob-
able SARS cases had reached 8,437 worldwide (table 1). By the apparent end of the
outbreak in July 2003, the death toll had reached 813, including 348 in China and 298
in Hong Kong.

Scientists do not know all the details about the coronavirus that causes SARS. IL
precise mechanism by which this atypical pneumonia is spread is still unclear. Many
countries successfully contained the SARS outbreak and local transmission, ma il
disease might recur in 2004.1 Experts predict that the likelihood of discovering a
vaccine or treatment for SARS in the foreseeable future is very low.

The purpose of this paper is to provide a preliminary assessment of the global eco-
nomic impacts of SARS. We update our estimates from an earlier version of this pa-
per, dated May 2003, with ªnal information on the number of SARS cases and the
knowledge that the SARS epidemic lasted approximately 6 months rather than the
full year originally assumed. Our empirical estimates of the economic effects of the
SARS epidemic are based on a global model called the G-Cubed (Asia Paciªc)
modello. Most previous studies of the economic effects of epidemics focus on eco-
nomic costs involving the disease-associated medical costs or forgone incomes re-
sulting from disease-related morbidity and mortality. Tuttavia, the direct conse-
quences of the SARS epidemic in terms of medical expenditures or demographic
effects seem to be rather small, particularly when compared with those of other ma-
jor epidemics such as HIV/AIDS or malaria. A few recent studies, such as Chou,
Kuo, and Peng (this issue), Siu and Wong (this issue), and Hai et al. (this issue), pro-
vide some estimates for the economic effects of SARS on individual Asian countries
such as China, Hong Kong, and Taiwan. These studies focus mainly on assessing the
damages caused by SARS in affected industries, such as tourism and the retail ser-
vice sector.

Calculating the number of canceled tourist trips and the decline in retail trade, how-
ever, is not sufªcient to provide a full picture of the impact of SARS, because there

1 See Hanna and Huang (this issue) and the World Health Organization’s SARS Web site

(www.who.int/csr/sars/en/).

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Globalization and Disease

Tavolo 1. Cumulative number of reported probable cases of SARS, as of 11 Luglio 2003

Country

Australia
Brasile
Canada
China
China, Hong Kong
China, Macao
China, Taiwan
Colombia
Finland
France
Germany
India
Indonesia
Italy
Kuwait
Malaysia
Mongolia
New Zealand
Philippines
Republic of Ireland
Republic of Korea
Romania
Russia
Singapore
South Africa
Spain
Sweden
Svizzera
Thailand
United Kingdom
stati Uniti
Vietnam
Total

Cumulative
number of
casesa

Number of
deaths

Numero
recoveredb

Date last probable
case reported

Date for which
cumulative number
of cases is current

5
1
250
5,327
1,755
1
671
1
1
7
10
3
2
4
1
5
9
1
14
1
3
1
206
1
1
1
3
1
9
4
75
63
8,437

0
0
38
348
298
0
84
0
0
1
0
0
0
0
0
2
0
0
2
0
0
0
32
0
1
0
0
0
2
0
0
5
813

5
1
194
4,941
1,433
1
507
1
1
6
9
3
2
4
1
3
9
1
12
1
3
1
172
0
0
1
3
1
7
4
67
58
7,452

12 May 2003
9 Giugno 2003
9 Luglio 2003
25 Giugno 2003
11 Giugno 2003
21 May 2003
19 Giugno 2003
5 May 2003
7 May2003
9 May 2003
4 Giugno 2003
13 May 2003
23 April 2003
29 April 2003
9 April 2003
20 May 2003
6 May 2003
30 April 2003
15 May 2003
21 Marzo 2003
14 May 2003
27 Marzo 2003
18 May 2003
31 May 2003
9 April 2003
2 April 2003
18 April 2003
17 Marzo 2003
7 Giugno 2003
29 April 2003
23 Giugno 2003
14 April 2003
—

27 Giugno 2003
1 Luglio 2003
10 Luglio 2003
11 Luglio 2003
11 Luglio 2003
10 Luglio 2003
11 Luglio 2003
5 May 2003
20 May 2003
11 Luglio 2003
23 Giugno 2003
14 May 2003
19 Giugno 2003
8 Luglio 2003
20 April 2003
4 Luglio 2003
2 Giugno 2003
25 Giugno 2003
11 Luglio 2003
12 Giugno 2003
2 Luglio 2003
22 April 2003
7 Luglio 2003
31 May 2003
3 May 2003
5 Giugno 2003
13 May 2003
16 May 2003
1 Luglio 2003
30 Giugno 2003
9 Luglio 2003
7 Giugno 2003
—

Fonte: World Health Organization, CSR Severe Acute Respiratory Syndrome (SARS) home page. Available at http://www.who.int/

csr/sars/en

Note: The cumulative number of cases includes the number of deaths. As SARS is a diagnosis of exclusion, the status of a reported case

may change over time. This means that previously reported cases may be discarded after further investigation and follow-up. The start

of the period of surveillance has been changed to 1 novembre 2002 to capture cases of atypical pneumonia in China that are now recog-

nized as being cases of SARS. As of 14 Luglio 2003, WHO no longer publishes a daily table of the cumulative number of reported prob-

able cases of SARS.

UN. A decrease in the number of cumulative cases and the discrepancies in the difference between cumulative number of cases of the last

and the current WHO updates are attributed to the discarding of some cases that turned out not to be SARS.

B. Includes cases that are “discharged” or “recovered,” as reported by the national public health authorities.

are linkages within economies across sectors and across economies in both interna-
tional trade and international capital ºows. The economic costs from a global dis-
ease such as SARS go beyond the direct damages incurred in the affected sectors in
the disease-inºicted countries. This is not only because the disease spreads quickly
across countries through networks related to global travel, but also because any eco-
nomic shock to one country is quickly spread to other countries through the in-
creased trade and ªnancial linkages associated with globalization. As the world be-
comes more integrated, the global cost of a communicable disease like SARS is

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Globalization and Disease

expected to rise. Our global model is able to capture many of the important linkages
across sectors as well as across countries, through the trade of goods and services
and capital ºows, and hence provides a broader assessment of the costs of SARS.

The G-Cubed model also incorporates rational expectations and forward-looking
intertemporal behavior on the part of individual agents. This feature is particularly
important when one is interested in distinguishing the effects of a temporary shock
from those of a persistent shock. For instance, if foreign investors expect that SARS
or other epidemics of unknown etiology could break out in some Asian countries
not only in the current year but also persistently for the following few years, Essi
will demand a greater risk premium from investing in affected economies. Their for-
ward-looking behavior would have immediate global impacts. Because we take into
account the interdependencies among economies and the role of investor conª-
dence, our cost estimates of the SARS outbreak are larger than many of those that
have recently appeared in the media.

2. Economic impacts of SARS

Despite the catastrophic consequences of infectious diseases such as malaria and
HIV/AIDS, the impact of epidemics has been considerably underresearched by
economists.2 Traditionally, most studies have attempted to estimate the economic
burden of a widespread illness based on the private and nonprivate medical costs
associated with the disease or the demographic consequences of the epidemic.3 To
date the number of probable SARS cases is small compared with the number of vic-
tims of other major historical epidemics. Unlike that in cases of HIV/AIDS, the du-
ration of hospitalization of SARS patients is short, with more than 90 percent of the
patients recovering to full health in a short period, thereby rendering the medical
costs very low (comparatively speaking). The SARS-related demographic or human
capital consequences are also currently estimated to be insigniªcant. The fatality
rate of the SARS coronavirus is high, but considering that fewer than 1,000 people

2 An exception is the work of the Commission on Macroeconomics and Health (2001).

3 Per esempio, a standard neoclassical growth model would predict that a negative shock to
population growth can lead to a faster accumulation of capital and subsequently faster out-
put growth, but the empirical studies present conºicting results on this proposition. Brainerd
and Siegler (2003) show that the Spanish inºuenza epidemic of 1918–19, which killed 675,000
people in the United States, had a positive effect on per capita income growth across U.S.
states in the 1920s. In contrasto, Bloom and Mahal (1997) show no signiªcant impact of the
1918–19 inºuenza epidemic on acreage sown per capita in India across 13 Indian provinces.
Researchers simulating the effect of HIV/AIDS on growth in southern African countries ªnd
that HIV/AIDS has had signiªcant negative effects on per capita income growth, mainly
through the decline in human capital (per esempio., Haacker 2002).

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Globalization and Disease

have died from SARS so far, the death toll is tiny compared with the 3 million who
died of AIDS in 2002 or the (almeno) 40 million people worldwide who died of the
Spanish inºuenza epidemic over 10 months in 1918–19. Therefore, forgone incomes
associated with morbidity and mortality as a result of SARS appear to be insigniª-
cant. If SARS became endemic in the future, it would substantially increase private
and public expenditures on health care and would have more signiªcant impacts on
the demographic structure and human capital of the economies of infected coun-
tries. Based on information to date, Tuttavia, this is unlikely to happen.

Although SARS-associated medical expenditures and demographic consequences
are generally considered insigniªcant, SARS has apparently caused substantial eco-
nomic effects through other important channels. We summarize three mechanisms
by which SARS inºuences the global economy.

Primo, fear of SARS infection leads to a substantial decline in consumer demand, es-
pecially for travel and retail sales services. The fast speed of contagion makes people
avoid social interactions. The adverse demand shock becomes more substantial in
regions that have much larger service-related activities and higher population densi-
ties, such as Hong Kong or Beijing. The psychological shock, Tuttavia, ripples
around the world rather than affecting only the countries suffering from local trans-
mission of SARS, because the world is closely linked by international travel.

Secondo, the uncertain features of the disease reduce conªdence in the future of the
affected economies. This effect seems potentially very important, particularly in
China, which is a key center of foreign investment. The response by the Chinese
government to the 2003 SARS epidemic was fragmented and nontransparent.
China’s greater exposure to the unknown disease and the less-than-effective govern-
ment responses to the outbreaks, compared with the case numbers and ofªcial reac-
tions in other Asian countries, must have increased concerns about China’s institu-
tional quality and future growth potential. Although it is difªcult to measure
directly the effects of diseases on the decision making of foreign investors, the loss
of foreign investors’ conªdence would have had potentially tremendous impacts on
foreign investment ºows, which in turn would have had signiªcant impacts on
China’s economic growth. The effect would also have been transmitted to other
countries competing with China for foreign direct investment.

Third, SARS undoubtedly increases the costs of disease prevention, especially in the
most affected industries, such as the travel and retail sales service sectors. These
costs may not be substantial, at least in global terms, as long as the disease is trans-
mitted only through close human contact. Tuttavia, the global costs could become

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Globalization and Disease

Tavolo 2. Countries and sectors included in the G-Cubed (Asia Paciªc) modello, version 50N

Sectors

Energy
Mining
Agriculture
Durable manufacturing
Nondurable manufacturing
Services

Countries or regions

stati Uniti
Japan
Australia
New Zealand
Indonesia
Malaysia
Philippines
Singapore
Thailand
China
India
Taiwan
South Korea
Hong Kong
Rest of OECD
Non-oil-producing developing countries
Eastern Europe and Russia
OPEC

enormous if the disease were found to be transmitted by other channels, ad esempio
through international cargo.

Given the important linkages between countries in the affected region, through the
trade of goods and services and capital ºows, any analysis of the implications of
SARS for the global economy needs to be undertaken with a model that adequately
captures these interrelationships. The G-Cubed (Asia Paciªc) modello, based on the
theoretical structure of the G-Cubed model outlined in McKibbin and Wilcoxen
(1999), is ideal for such analysis, incorporating both a detailed country coverage of
the region and rich links between countries through goods and asset markets.4
Tavolo 2 provides a list of the countries and sectors that the model covers.

The model is based on explicit intertemporal optimization by the agents (consumers
and ªrms) in each economy,5 in contrast to static computable general equilibrium
models. Tuttavia, the behavior of agents is modiªed to allow for short-run devia-
tions from optimal behavior due either to myopia or to restrictions on the ability of
households and ªrms to borrow at the risk-free bond rate on government debt.
There is an explicit treatment of the holding of ªnancial assets, including money.
The model distinguishes between the stickiness of physical capital within sectors
and within countries and the ºexibility of ªnancial capital, which immediately
ºows to where expected returns are highest. This important distinction leads to a
critical difference between the quantity of physical capital that is available at any time

4 Full details of the model, including a list of equations and parameters, can be found online at

www.gucubed.com

5 See Blanchard and Fischer (1989) and Obstfeld and Rogoff (1996).

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Globalization and Disease

to produce goods and services and the valuation of that capital as a result of decisions
about the allocation of ªnancial capital.

3. Designing the simulations

We make two alternative assumptions in generating the range of scenarios. In our
original paper we assumed in the ªrst scenario that the SARS shock lasted for a
year. To capture the fact that the SARS outbreak actually lasted 6 months, we now
scale down the shocks by 50 percent to capture this shorter duration. This is called a
temporary shock. In the second scenario, the assumption is that the shocks in the
ªrst year are the same magnitude as the 6-month temporary shock, but they are
more persistent and fade out equiproportionally over a 10-year period. These as-
sumptions permit us to determine the impact of expectations (concerning the future
evolution of the disease) on the estimated costs in 2003 and to provide some insight
into what might happen to the region if the SARS outbreak is the beginning of a se-
ries of annual epidemics emerging from China.

We ªrst calculate the shocks to the Chinese and Hong Kong economies and then
work out some indexes that indicate how these shocks are likely to occur in other
economies. There are three main shocks, based on observations of ªnancial market
analysts about the existing data emerging from China and Hong Kong. These
shocks are consistent with those identiªed in the papers presented at the Asian Eco-
nomic Panel meeting in May 2003 that focused on the impacts of SARS on particular
countries.

3.1 Initial shock to China and Hong Kong
In the model we specify three broad shocks to China and Hong Kong:

1. Increase in country risk premium: 200 basis points.6
2. Sector-speciªc demand shock to retail sales sector: 15 percent drop in demand in

the exposed industries of the service sector.

3. Increase in costs in the exposed activities in the service sector: 5 per cento.

These shocks are scaled to last 6 months rather than 1 year.7

6 In the May 2003 version of this paper we assumed a 300-basis-point shock. We follow the up-
dated ªgures in the Economic Roundup Winter 2003 of the Commonwealth Treasury of Aus-
tralia in adjusting this shock to 200 basis points.

7 We could also consider several other shocks, such as the impact on health expenditure and
ªscal deªcits. Because it is not clear how to estimate the magnitude of such shocks, or even

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Globalization and Disease

Tavolo 3. Health expenditure, tourist arrivals, and sanitation indicators for selected countries
and regions

Total health
expenditure
(% of GDP)

Health
expenditure per
capita (current
US$) Tourist arrivals (million) Tourist arrivals/population (%) Adequate sanitation facilities (% of population) 5.3 4.4 4.9 2.7 2.1 6.0 2.5 3.4 3.5 3.7 5.2 13.0 n.a. 10.2 9.3 45 950 23 19 18 584 101 33 814 71 21 4,499 n.a. 2,771 482 33.2 13.7 2.5 5.2 n.a. 5.1 12.8 1.8 6.7 10.1 1.4 n.a. 4.8 377.6 696.5 3 203 0 2 n.a. 14 53 4 163 16 2 n.a. 4 n.a. n.a. 29 100 16 47 99 63 n.a. 74 100 79 29 100 n.a. n.a. 55 Country or region China Hong Kong India Indonesia North Korea South Korea Malaysia Philippines Singapore Thailand Vietnam United States Japan High-income OECD countries World Source: CEIC, World Development Indicators: Asian Economic Outlook and Strategy. Data in this table are re-cited from parts of table 1 in Hanna and Huang (this issue, P. 108). Note: n.a. not available. 3.2 Shocks to other countries We refer to the person-to-person transmission of SARS, as distinct from its economic transmission through global markets, as the global exposure to SARS. The speed of spread is likely to depend on (1) tourist ºows, (2) geographical distance to China (and Hong Kong), (3) health expenditure and sanitary conditions, (4) government response, (5) clima, (6) per capita income, E (7) population density. There are more than 33 million annual visitors to China. Hong Kong’s annual tourist arrivals amount to over 200 percent of the local population. Total health expenditure as a percentage of GDP is not small in Asian countries, but health expenditure per capita per annum is only US$45 in China, compared with US$585 in South Korea, US$814 in Singapore, and US$950 in Hong Kong. Tavolo 3 presents indica-
tors on health expenditure, tourist arrivals, and sanitary conditions for selected
countries.

For the purposes of this paper we construct a rough measure of the intensity of ex-
posure to SARS, based on the above information and the cumulative number of
cases of SARS in 2002–03 for each country. These “indexes of global exposure to
SARS” are shown in ªgure 1. They are used to scale down the country risk shocks
calculated for China and Hong Kong to apply to all other countries and regions. For

how to determine what the sign of the shocks should be, we have ignored the ªscal impacts
of SARS in this paper.

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Globalization and Disease

Figura 1. Index of global exposure to SARS: Intensity of transmission

esempio, if a country has a global exposure index of 0.5, the country risk premium
shock will be the Chinese shock of 2 percent adjusted by the index of its global ex-
posure to SARS, which gives a shock of 1 per cento.

For the shocks to the service industries, before applying the global exposure index
to each country, we need to adjust the sector-speciªc shocks. Because we have only
an aggregate service sector in the model, we need to take account of the structural
differences within the service sectors of each country. We do this by creating “in-
dexes of sectoral exposure to SARS.” These indexes are assumed to be proportional
to the share of service sector industries that were affected by the 2002–03 SARS epi-
demico. Industries such as tourism, retail trade, and airline travel were hit severely in
that outbreak. We use the Global Trade Analysis Project (GTAP) version 5 database
to calculate the share of exposed sectors in the total services sector for each country.
We deªne the exposed sectors based on GTAP deªnitions: wholesale and retail
trade, hotels and restaurants, land transport, and air transport. The relative values
of the indexes of sectoral exposure to SARS for several countries and regions are
shown in ªgure 2. These indexes are applied to the sector-speciªc shocks we devel-
oped for the Chinese economy. We then apply the index of global exposure to SARS
to the resulting shocks. Per esempio, the shock applied to costs in the service sector
in Singapore is the shock of 5 percent increase in costs, multiplied by 0.31 for the

121

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Figura 2. Index of sectoral exposure to SARS: Share of retail sales and travel industry in
service sector

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sectoral exposure to SARS, multiplied by 0.5 for the global exposure to SARS. Questo
gives a shock to costs in the service sector in Singapore of 0.775 per cento.

4. Simulation results

4.1 Baseline business-as-usual projections
The ªrst step is to make base case assumptions about the future path of the model’s
exogenous variables in each region. For all regions we assume that the long-run real
interest rate is 5 per cento, tax rates are held at their 1999 levels, and ªscal spending is
allocated according to 1999 shares. Population growth rates vary across regions ac-
cording to 2000 World Bank population projections.

The baseline assumption in the G-Cubed (Asia Paciªc) model is that the pattern of
technical change at the sector level is similar to the historical pattern for the United
States (where data are available). In regions other than the United States, Tuttavia,
the sector-level rates of technical change are scaled up or down in order to match
the region’s observed average rate of aggregate productivity growth over the previ-
ous 5 years. This approach attempts to capture the fact that the rate of technical
change varies considerably across industries, while also accounting for regional dif-
ferences in overall growth.

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Globalization and Disease

4.2 Results of the simulation
We apply the shocks outlined in the previous section to the global economy. We be-
gin the simulation in 2003, assuming that the SARS outbreak in 2003 was completely
unanticipated. Both the temporary and persistent shocks are assumed to be under-
stood by the forward-looking agents in the model. Clearly this is problematic when
it comes to a new disease such as SARS, because there is likely to be a period of
learning about the nature of the shock. Yet what alternative approach might exist
and be viable is not clear. In our defense it is worth pointing out that only 30 per cento
of agents have rational expectations and 70 percent of agents are using a rule of
thumb when they adjust to contemporaneous information about the economy.

Tavolo 4 shows the model’s predictions for the percentage change in GDP in 2003 as a
result of the temporary and permanent SARS shocks, as well as the contribution of
each component (cioè., demand decline for services, cost increase for services, E
country risk premium). Focusing on the GDP results, it is clear that there are inter-
esting differences among the various components of the overall shock as well as be-
tween the temporary and permanent shocks. The temporary shock has its largest
impact on China and Hong Kong, as expected. The loss to Hong Kong of 2.63 per-
cent of GDP is, Tuttavia, much larger than the corresponding loss of 1.05 percent for
China. This primarily reºects the larger role of the service sector in Hong Kong, IL
larger share of impacted industries within the service sector, and the greater reliance
on trade. Taiwan is the next-most-affected region, losing 0.49 percent of GDP in
2003, followed closely by Singapore, with a loss of 0.47 percent of GDP. For Hong
Kong, the increase in costs in the service sector is by far the largest contributing fac-
tor to the loss of GDP. In China it is evenly spread across the three factors.

A persistent SARS shock, according to the results, is even more serious for Hong
Kong and China. The primary impact is from the persistence in the rise of the coun-
try risk premium. Although this risk premium is the same in 2003 as it is for the
temporary shock, the persistence of the country risk premium causes much larger
capital outºows from China and Hong Kong than from other regions studied. Questo
capital outºow, which causes real interest rates to rise, affects short-run aggregate
demand through a sharp contraction in investment and leads to a persistent loss in
production capacity through a resulting decline in the growth of the capital stock.
The extent of capital outºow is discussed below.

È interessante notare, when SARS is expected to be more persistent, the difference in GDP
loss in 2003 distinguishes two groups of countries. China, Hong Kong, Malaysia, IL
Philippines, Singapore, and Taiwan experience a larger loss, and the OECD econo-
mies and others experience a smaller GDP loss. This reºects the greater capital
outºow from the most affected countries into the least affected countries, Quale

123

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Globalization and Disease

would tend to lower the GDP of those countries losing capital and to raise the GDP
of those countries receiving capital. The countries in the ªrst group that are less af-
fected by SARS are nonetheless worse off when a more persistent outbreak is ex-
pected because of their trade links with Hong Kong, China, and Singapore.

The various linkages have many dimensions, but a global model is able to help un-
tangle some of the more important factors. The results for GDP illustrate how the
estimated costs of SARS in 2003 can be very different depending on expectations of
how the disease will unfold. It is also interesting to examine the change in economic
impacts over time. We present three ªgures, each containing six charts (ªgures 3–5).
The variables in each chart are expressed as deviations from the underlying baseline
of the model projections. They show how key variables change relative to what
would have been the case without SARS. On the left-hand side of ªgures 3 E 4,
the results of the temporary SARS shock are shown, and on the right-hand side of
these ªgures, the impacts of the more persistent SARS shock are presented. This en-
ables one to compare the impacts of the two shocks on real GDP, investment, ex-
ports, capital ºows, trade balance, and exchange rates. Figura 5 presents the results
for the ªnancial and sectoral impacts of a persistent SARS shock.

Figura 3 shows the results for the effects on real GDP, investment, and exports of
both the temporary and persistent SARS shocks. The loss in GDP from the tempo-
rary shock is largely conªned to 2003. The persistent shock not only has a larger im-
pact on GDP in 2003, because of expectations about future developments, but also
has a persistent impact on real GDP for several years. Investment falls more sharply
In 2003, when compared with the temporary shock, even though the shock in 2003 È
the same for both the persistent and temporary shocks. This larger fall in investment
is the source of the larger GDP loss.

The results for exports are particularly interesting. In the case of the temporary
shock, exports from Hong Kong fall sharply. Yet, in the more persistent case, exports
from Hong Kong fall by less in 2003. The reason for this difference is that the more
persistent the shock, the larger the capital outºow from affected economies. A capi-
tal outºow will be reºected in a current account surplus and a trade balance sur-
plus. For this to occur, either exports must rise or imports fall, or both. This can be
seen clearly in ªgure 4.

In the case of the temporary SARS shock, the net capital outºow from China and
Hong Kong (relative to the baseline projection) is around 0.3 percent of GDP by the
second year of the shock. When the shock is more persistent, Tuttavia, this capital
outºow (top left panel) rises sharply to 1.4 percent of GDP for Hong Kong and to
0.8 percent of GDP for China by the second year. This capital outºow is reºected in

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Figura 3. Predicted impacts of temporary versus persistent SARS shocks on real GDP,
investment, and exports

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Figura 4. Predicted impacts of temporary versus persistent SARS shock on capital ºow,
trade, and exchange rates

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Globalization and Disease

Figura 5. Predicted ªnancial and sectoral impacts of a persistent SARS shock

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Fonte: G-Cubed (Asia Paciªc) modello, version 50N.

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the trade balance surplus in both countries. This shift in the trade balance is
achieved by means of the capital outºow’s substantially depreciating the real ex-
change rate of both China and Hong Kong.

For this model we assume that the monetary authorities in both economies maintain
a tight peg to the U.S. dollar. Figura 5 shows that the inevitable real exchange rate
depreciation is achieved through falling prices (again relative to the underlying
baseline projection) that are induced by very high real interest rates. In order to
maintain the interest parity condition, the expected depreciation in turn induces
high real interest rates. This is similar to what occurred in the aftermath of the 1997
Asian crisis in Hong Kong and in the aftermath of the bursting of the asset bubble in
Japan in the early 1990s, when the lack of nominal yen depreciation against the U.S.
dollar (through policy intervention) induced the required real economic adjustment
through a fall in prices, Quale, through persistent policy errors, developed into
deºation.

We see in ªgure 5 that both South Korea and Singapore experience nominal ex-
change rate depreciations that limit the extent of price declines in those economies,
even though China is experiencing falling prices. One important lesson from these
results is that the popular myth, particularly prevalent in Japan, that China is the
cause of global deºation involves a complete misunderstanding of the difference be-
tween the change in relative prices and the change in overall prices within econo-
mies and among economies. Deºation within an economy reºects the decisions of
the monetary authorities of that country and not the change in prices within other
economies. This is not just a curiosity from the model but is perfectly consistent
with the observation that countries such as Canada, Australia, and New Zealand,
which trade extensively with China, can have inºation while Japan and Hong Kong
experience deºation. This phenomenon cannot be explained by low-cost Chinese
production.

We also see in ªgure 5 that the problems in the service industries in China and Hong
Kong are reºected in the share market valuations in the manufacturing sectors in
these economies (lower-right-hand chart, summarized in Tobin’s q). The SARS out-
break is predicted to have widespread economic impacts beyond the declines in the
most-affected service industries.

5. Conclusione

The impact of SARS on the economies of China and Hong Kong, as estimated by the
G-Cubed (Asia Paciªc) modello, is large. This impact is not a consequence of the dis-
ease itself for the affected people but is rather the effect of the disease on the behav-

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ior of many people within these economies. The economic impact of SARS depends
on the adjustment of expectations about the disease, reºected in integrated real and
ªnancial markets. The more persistent the SARS outbreak is expected to be, IL
larger are the expected negative economic impacts in 2003, and the smaller the ex-
pected impacts in countries outside the core countries.

An important aspect of the costs estimated in this paper is the ªxed-exchange-rate
regimes in China and Hong Kong, which increase the costs of SARS. The real depre-
ciation induced by SARS occurs through lower prices in these economies, Quale,
through sticky labor markets, results in increased unemployment. The regional im-
pacts are also signiªcant as a result of trade linkages as well as through the direct
transmission of the disease.

These results support the point that the true cost of disease is far greater than the
cost to a health budget for treatment of patients. The more persistent shock in this
paper can be thought of as the 2002–03 SARS epidemic’s having lasted longer than
anyone feared, but it can also be interpreted as a recurring series of annual epidem-
ics emerging from China and infecting the world through increased globalization.
Such annual outbreaks would not be a new phenomenon: inºuenza viruses have
been emanating from China since at least 1918–19, when the Spanish ºu spread
worldwide. If the threat of recurring SARS or SARS-like diseases from China is real,
then the estimated risk to economic activity in the region and the world, as calcu-
lated in this paper, could be very large. The estimates of our model suggest that
there is a strong economic case for direct intervention in improving public health in
China and other developing countries in which there is inadequate expenditure on
public health and insufªcient investment in research on disease prevention to avoid
the future outbreak of a major pandemic.

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