Friday, February 17, 2006

Lowy Institute report on economic effects of bird flu

A new report from The Lowy Institute for International Policy, an Australian think-tank, examines a range of possible economic consequences of an influenza pandemic. The scenarios go from the very mild 1968-69 version (US$330 billion loss in global economic output and 1.4 million people dead) to the catastrophically severe 1918 version (US$4.4 trillion wiped off global economic output and more than 140 million people dead). Data for the estimates were from historical pandemics and economic studies done on 2003's SARS outbreak. The biggest losers were predicted to be China, India and Indonesia.

The report assumes Asia will be the birthplace of an H5N1 pandemic since the Lowy writers assume it has been the source of all other pandemics in the last 300 years. Many believe this to be the case, but it is far from a universally accepted. In particular, there remains doubt as to the geographic origin of the 1918 pandemic. It is not clear what the consequences of this assumpition are for the estimates. The report also asserts there will be considerable regional variation in impact and even variation between neighboring countries. While probably true, it is hard to predict exactly how this variation will go.
"The composition of the slowdown differs sharply across countries with a major shift of global capital from the affected economies to the less affected safe-haven economies of North America and Europe," it said.

Under an "ultra" scenario, Hong Kong would suffer the biggest economic hit. Its economy would shrink by just over half, followed by the Philippines losing 38 percent of output. Japan would lose 16 percent and the United States about five percent.

"In some places, such as Hong Kong, the economy shrinks by more than 53 percent," the report said. "The large-scale collapse of Asia causes global trade flows to dry up and capital to flow to safe havens in North America and Europe."

Under a "mild" scenario the Phillipines would be economically hit the hardest with a drop of 1.5 percent in economic output, followed by New Zealand and then Hong Kong.

The report said that during a pandemic, equity markets would fall and bond markets would rally to differing degrees across the globe. But it also said monetary policy reponses would also play a key role in how economies respond.

"Those countries that tend to focus on preventing exchange rate changes are coincidentally those countries that experience the largest epidemiological shocks," it said.

"This is particularly true of Hong Kong, which receives the largest shocks and has the most rigid exchange rate regime," it said, referring to the territory's currency being pegged to the U.S. dollar. (Reuters Alertnet)
Whether the economies of the west will be "safe havens" or not remains to be seen. These are estimates made on the basis of a variety of assumptions. You can check what they are are in the original report, which is available here.

The Lowy Institute is relatively new, founded in 2003 with support from a billionaire Czech immigrant to Australia, Frank Lowy, now Australia's second richest person. He currently heads the global Westfield shopping mall empire. The Lowy Institute bills itself as non-partisan but would probably be classified in American terms as having a moderate liberal perspective, perhaps like The Brookings Institution in the US.

I am not competent to judge the quality of the economic analysis. Since the report is available at the link, I would welcome others with such expertise to weigh in.