Globalization and Disease: The Case of SARS

Jong-Wha Lee and
Jong-Wha Lee Professor of Economics - Korea University
Warwick J. McKibbin
Warwick McKibbin
Warwick J. McKibbin Former expert - Economic Studies, Center on Regulation and Markets, Distinguished Professor of Economics & Public Policy - Crawford School of Public Policy, The Australian National University

February 1, 2004


SARS (severe acute respiratory syndrome) has put the world on alert. The virus appears to be highly contagious and fatal. In the six months after its first outbreak in China in Guangdong province last November, the SARS disease has spread to at least 30 countries/regions including Australia, Brazil, Canada, South Africa, Spain, and the United States. By the apparent end of the outbreak on July 14 2003, the number of probable cases reached 8,437 worldwide (see Table 1 and Figure 1). The disease kills 10 % or so of those infected. The death toll reached 813 including 348 in China and 298 in Hong Kong.

Scientists still do not know details about coronavirus that causes SARS. The precise mechanism by which this atypical pneumonia is spread is still unclear. Many countries have successfully contained the SARS outbreaks and local transmission, but the disease may reoccur later this year. 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 an assessment of the global economic impacts of the SARS disease. We update our estimates from the earlier version of this paper dated May 2003, with final 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-Pacific) Model. Most previous studies on the economic effects of epidemics focus on the economic costs involving the disease-associated medical costs or forgone incomes as a result of the disease-related morbidity and mortality. However, the direct consequences of the SARS epidemic in terms of medical expenditures or demographic effects seem to be rather small, in particular compared to other major epidemics such as HIV/AIDS or malaria. A few recent studies including Chou, Kuo and Peng (2003), Siu and Wong (2003), and Wen (2003) provide some estimates for the economic effects of SARS on individual Asian countries such as China, Hong Kong, and Taiwan. But, these studies focus mostly on assessing the damages by SARS in affected industries such as tourism and retail service sector.

However, just calculating the number of canceled tourist trips and declines in retail trade etc is not sufficient to get a full picture of the impact of SARS because there are linkages within economies across sectors and across economies in both international trade and international capital flows. The economic costs from a global disease such as SARS goes beyond its direct damages incurred in the affected sectors in the disease-inflicted countries. This is not just because the disease spreads quickly across countries through networks related to global travel, but also any economic shock to one country is quickly spread to other countries through the increased trade and financial linkages associated with globalization. As the world becomes more integrated, the global cost of a communicable disease like SRAS is 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 flows, and hence provide a broader assessment of the costs.

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 we are interested in distinguishing the effects of a temporary shock from those of a persistent shock. For instance, when foreign investors expect SARS or other epidemics of unknown etiology can break out in some Asian countries not just this year but persistently for the next few years, they would demand a greater risk-premium from investing in affected economies. Their forward-looking behavior would have immediate global impacts.

Needless to say, our empirical assessment is preliminary and relies on our limited knowledge about the disease and constrained methodology. With the SARS epidemic apparently over for now it is worth evaluating the cost. There is speculation that even if it diminishes in the Northern Hemisphere summer, it could re-emerge in even more deadlier form in the next influenza season. There is no consensus yet on the likely developments of the epidemic and the precise mechanism by which the SARS affects economic activities. Although a global model is better than simple back of the envelope calculations, it is a coarse representation of a complex world. Nonetheless the simple calculations are important inputs into the model. We saw that with the Asian Crisis of 1997 where the transmission of the shocks in the Asia to the rest of the world and the adjustment within economies in Asia were poorly predicted when only trade flows where considered. Thus it is important to go beyond the rough estimates that currently permeate the commentary of economic consequences of SARS. Because we take into account the interdependencies between economies and the role of confidence, our costs are larger than many of the estimates that currently appear in the media.