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

May 20, 2003

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 28
countries including Australia, Brazil, Canada, South Africa, Spain, and the United States.
The number of probable cases reached 7,919 worldwide by May 20 (see Table 1 and
Figure 1). The disease kills 10 % or so of the patients. To date the death toll has reached
over 660 including 294 in China and 253 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
is still ravaging China and Taiwan.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 economic
impacts of the SARS disease. 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 diseaseinflicted
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. Currently the SARS
epidemic still continues in its course. 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 thecommentary 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.