Transcript SARS - Institute of Medicine

SARS: Estimating the Economic Impacts
Warwick J McKibbin
ANU and Brookings Institution
Presentation prepared for “Forum on Microbial Threats” Institute of Medicine, Washington DC Sept 30 – Oct 1, 2003
Based on
 Lee and McKibbin (2003) “Globalization and
Disease: The Case of SARS” forthcoming in Asian
Economic Papers, MIT Press.
 There is both an earlier version of this paper based
on April 2003 data and a revised version based on
July 2003 data
 See http://economics.anu.edu (working papers)
Goals of the Paper
 To present a framework for thinking about the likely
impacts on the world economy of a disease such as
SARS
 To present some rough empirical estimates of the
impacts of SARS on the global economy
Estimating the Likely Impact of SARS
 Short term impact
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Reduction in demand for travel and other services
Psychological impact on consumers
Increase in costs in service industries
Loss of confidence in affected economies
Increase in medical expenses
Estimating the Likely Impact of SARS
 Longer term impacts
• Worries about recurrence of diseases and their
transmission – largely from southern China
• Decrease in human capital through reduction in life
expectancy and loss of educate workers
• Increase in fiscal deficits through higher health
expenditures
Attempt to Quantify the Key Issues using
a global model
Use the G-cubed (Asia Pacific) model
version 50n
www.gcubed.com
The G-Cubed (Asia Pacific Model)
 Key features
• Based on optimizing behavior by households and firms
in each economy in a dynamic setting (expectations are
explicitly modeled)
• Short run deviation from optimizing behavior due to
stickiness in labor markets, myopia
• Substantial sectoral dis-aggregation within a consistent
macroeconomic structure
• Explicit treatment of financial assets with stickiness in
physical capital differentiated from flexibility of financial
capital
• Model has 7,400 equations with 140 jumping (co-state)
variables and 263 state variables
Countries
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United States
Japan
Australia
New Zealand
Rest of the OECD
Korea
Thailand
Indonesia
China
Malaysia
Singapore
Taiwan
Hong Kong
Philippines
India
Oil Exporting Developing Countries
Eastern Europe and the former Soviet Union
Other Developing Countries
Sectors
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

Energy
Mining
Agriculture
Durable Manufacturing
Non-Durable Manufacturing
Services
The estimates depend on the assumptions of
the model as well as the nature of the shocks
How to Design the Shocks?
 The basic shocks will differ across countries
depending on a range of factors
 We assume the shocks start in China and Hong
Kong calibrating the size of these shocks to
observed or predicted data from other experts
 We then assume that the size of the shocks across
countries will depend:
• A country’s “global exposure to SARS”
• A country’s “sectoral exposure to SARS”
How to Design the Shocks?
 For China and Hong Kong:
• Shift in the share of consumption expenditure on most affected
service sectors
 benchmarked to a 15% decline in demand for travel and retail trade in China and
H/K.
• Reduction in overall consumption demand
 Equal to the fall in demand for travel and retail trade
• Increase in costs in affected service industries
 Assumed to be 5% in China and H/K implemented as a productivity shock
• Increase in country risk
 Assumed to be 200 basis points based on a survey of financial market experts
 Shocks are scaled to 50% to capture the period of impact of
6 months rather than a year
How to Design the Shocks?
 Note that the ultimate impact on a country will
depend on the shocks within that country as well as
the way the shocks are transmitted through trade
and capital flows between countries.
How to Design the Shocks?
 Need to construct an index on the “Global exposure to
SARS”
 This will depend on
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Cumulative cases already reported
Size of tourist flows
Geographical distance from China
Sanitary conditions
Government response
Climate
Per capita income
Population density
etc
Figure 2.G lobalExposure to SAR S
1
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2
Index
1
0
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8
0
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6
0
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4
0
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2
0
How to Design the Shocks?
 Because we have an aggregate service sector we
need to scale the shocks to the service sector for
each country – (i.e. the demand shock and cost
shock).
 To do this we construct an index of sectoral
exposure to SARS which is the share of the
vulnerable service industries in the total service
sector within each country (ie travel, tourism, retail
trade, restaurants hotels etc – TRD+OTP+ATP from
GTAP)
Figure 3. Sectoral Exposure to SARS:
Share of Retail Sales and Travel Industry in Service Sector
0
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7
0
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6
0
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5
0
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4
0
.
3
0
.
2
0
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1
0
Other LDC
Other OECD
U.S.
Japan
India
Australia
Taiwan
Korea
Indonesia
Thailand
Philippines
Malaysia
Singapore
Canada
Hong Kong
China
Key factor
 The composition of the service sectors in each
country matter for how the shocks are fed into the
model
 The role of services in the overall economy will be
an important factor in the size of the impacts
Figure 4. Share of Service Sector in Total Output
0
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9
0
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8
0
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7
0
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6
0
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5
0
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4
0
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3
0
.
2
0
.
1
0
Other LDC
Other OECD
U.S.
Japan
India
Australia
Taiwan
Korea
Indonesia
Thailand
Philippines
Malaysia
Singapore
Canada
Hong Kong
China
The Simulations
 After constructing the country specific shocks as
outlined we then apply to each country’s shocks the
index of “global exposure to SARS”
How to Design the Shocks?
 Two scenarios
• A single year shock
• A shock that decays proportionately over 10 years
The Results
The Scenarios
 1) Baseline 2002
• Assumptions about
 population growth by country
 Productivity growth by sector catching up by 2% per year to US leading
sector
 Given tax rates, monetary growth rates etc in all countries
• Solve for the full path for the future of the global
economy
 2) apply the temporary shock
 3) apply the persistent shock
Table 4: Percentage Change in GDP in 2003 Due to SARS
Temporary Shock
Total Effects Demand Shift Cost Rise
Country Risk
United States
-0.07
-0.01
-0.06
0.00
Japan
-0.07
-0.01
-0.06
0.00
Australia
-0.07
0.00
-0.06
0.00
New Zealand
-0.08
0.01
-0.08
0.00
Indonesia
-0.08
0.01
-0.09
0.00
Malaysia
-0.15
0.01
-0.16
0.00
Philippines
-0.10
0.04
-0.14
0.00
Singapore
-0.47
-0.02
-0.45
0.00
Thailand
-0.15
0.00
-0.15
0.00
China
-1.05
-0.37
-0.34
-0.33
India
-0.04
0.00
-0.04
0.00
Taiwan
-0.49
-0.07
-0.41
-0.01
Korea
-0.10
-0.02
-0.08
0.00
Hong Kong
-2.63
-0.06
-2.37
-0.20
ROECD
-0.05
0.00
-0.05
0.00
non Oil Developing countries
-0.05
-0.01
-0.04
0.00
Eastern Europe and Russia
-0.06
-0.01
-0.05
0.00
OPEC
-0.07
-0.01
-0.05
0.00
Source: G-Cubed (Asia Pacific) Model version 50n
Table: Percentage Change in GDP in 2003 Due to SARS
United States
Japan
Australia
New Zealand
Indonesia
Malaysia
Philippines
Singapore
Thailand
China
India
Taiwan
Korea
Hong Kong
ROECD
non Oil Developing countries
Eastern Europe and Russia
OPEC
Temporary
Persistent
-0.07
-0.07
-0.07
-0.06
-0.07
-0.06
-0.08
-0.08
-0.08
-0.07
-0.15
-0.17
-0.10
-0.11
-0.47
-0.51
-0.15
-0.15
-1.05
-2.34
-0.04
-0.04
-0.49
-0.53
-0.10
-0.08
-2.63
-3.21
-0.05
-0.05
-0.05
-0.05
-0.06
-0.05
-0.07
-0.09
Source: G-Cubed (Asia Pacific) Model version 50n
Real GDP - Temporary SARS
Real GDP - Persistent SARS
(% deviation)
(% deviation)
0
0
-1
-1
-2
-2
-3
-3
-4
-4
Hong Kong
China
Japan
Singapore
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
1
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
1
Hong Kong
China
Japan
Singapore
Investment - Temporary SARS
Investment - Persistent SARS
(%GDP deviation)
(%GDP deviation)
0.5
0.5
0
0
-0.5
-0.5
-1
-1
-1.5
-1.5
-2
-2
Hong Kong
China
Japan
Singapore
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
1
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
1
Hong Kong
China
Japan
Singapore
Conclusion
 SARS is estimated to have had an significant effect
on China and Hong Kong
 It is not the disease per se that has the largest
impact, but the affect on expectations and the
behavior of consumers and investors
 The cost of SARS is not just the number of cases
multiplied by the cost of each case
Conclusion
 We have considered a temporary and persistent shock.
 It is not unreasonable to argue that although SARS might be
temporary, there could be a perceived increase in the
likelihood of a series of these types of diseases emanating
from China and being transmitted globally.
 Thus the temporary SARS shock might indeed be a
permanent disease transmission shock which through
expectations might have significant economic implications
for the Asian region – a different kind of contagion.
Background Papers
www.gcubed.com
www.sensiblepolicy.com