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“The only thing necessary for these diseases to the triumph is for good people and governments to do nothing.”

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Avian Influenza: Economic and Social Impacts

Milan Brahmbhatt
World Bank Lead Economist for East Asia and the Pacific
Washington,DC, September 23, 2005


My job is to provide some context for today’s discussions by looking at the socio-economic impacts and costs of avian flu and of a potential human influenza pandemic. Before getting into those impacts in a bit more detail, let me start by outlining some broad and perhaps obvious features of the problem, and what these may imply for the strategies we pursue.
First, there are two distinct but closely linked levels of potential impacts and costs, associated with the potential stages of the disease.  There is the current situation, with animal-to-animal and limited animal-to-human transmission of the H5N1 avian flu virus, which, however, as it continues, also increases the probability of a second stage, with human-to-human transmission and a global influenza pandemic, with enormously greater costs.  Animal and human health considerations are thus closely linked.

Second, economic and social considerations are an intrinsic part of the problem. Broadly speaking there are two types of economic costs arising from this as from other infectious diseases.  There is the cost of increased illness and death among humans and animals, and there is the cost of the preventive, control and coping strategies adopted by the public and private sectors to avoid or reduce illness and death.  The benefits of the response strategies are the illness and death that they help avert.  Given that all governments and nations face budget constraints, there is a natural role for economic cost-benefit analysis in helping frame response strategies.  In addition, for response strategies to be successful they often have to take account of their effect on economic incentives facing agents, as we will see in the case of compensation paid to farmers.  Both the disease itself and the response strategies are also likely to have significant distributional, equity and other social implications that need to be explicitly addressed.

Third, while avian flu is currently concentrated in East Asia, it is already spreading to other regions such as South Asia and Central Asia as a result of wild bird migration.  A human influenza pandemic would also rapidly spread all over the world.  Stopping or controlling avian flu is therefore a true global public good, which all countries have an interest in acquiring.  Lastly, we are addressing this problem under conditions of highly imperfect information, with many gaps in our understanding of the epidemiological, health and economic issues at play.

Several policy implications can be drawn from these general considerations. 
First, the response to the influenza threat needs an integrated cross-sectoral approach, bringing together animal and human health, areas of rural development and agriculture, economics, finance and planning, among others.  This is true of the types of partnership needed at both global and national levels.

Second, there is certainly a priority on curbing the disease “at source”, in the agricultural sector, thereby reducing the probability of a human epidemic.  But it is also important to strike a balance between short and long term measures.  Avian flu is becoming endemic in parts of East Asia and will require a long effort to suppress.  Meanwhile a human pandemic may still emerge from some quite different strain of flu virus. Other zoonoses and pathogens continue to emerge. Thus it makes sense to also undertake broader long term measures to strengthen the institutional, regulatory and technical capacity of the animal health, human health and other relevant sectors.

Third, while country level leadership and engagement is essential for success, it must be backed by global resources.  Even though the benefits of containing a pandemic are overwhelming, individual governments may still be daunted by the social, political and economic costs of various policy measures, especially when these measures are in the nature of global public goods that benefit many more than just the people of that nation. 

Lastly, there is a critical role for research to fill some of the gaps in knowledge we face, as well as for mechanisms to share information with experts, policymakers and the global public at large.  As will be seen, honest public communication will be critical.
Potential Human Influenza Pandemic Scenario

Let me now turn to socio-economic impacts and costs in slightly more detail, starting with everyone’s central concern, a potential human flu pandemic.  There are great uncertainties about the timing, virulence, and general scope of a future pandemic.  The Spanish flu of 1918-19 killed 50 million, which today would translate to 150 million deaths, which, while an extreme scenario, gives an indication of the huge potential costs in a worst case scenario.  Given the gaps in our knowledge, at this point, here we only try to sketch some main channels of impact and broad orders of magnitude.

Interestingly, the most immediate economic impacts of a pandemic might arise not from actual death or sickness but from the uncoordinated efforts of private individuals to avoid becoming infected.  This at least was the experience during SARS, when people tried to avoid infection by minimizing face-to-face interactions, resulting in a severe demand shock for services sectors such as tourism, mass transportation, retail sales, hotels and restaurants, as well as a supply shock due to workplace absenteeism, disruption of production processes and shifts to more costly procedures.  This led to a an immediate economic loss of perhaps 2% of East Asian regional GDP in the second quarter of 2003, even though only about 800 people ultimately died from SARS.  Note that a 2 percent loss of global GDP during a global influenza pandemic would represent around $200 billion in just one quarter (or $800 billion over a whole year), and it is fair to assume the immediate shock during a flu epidemic could be even larger than in SARS. 

There is evidence that during SARS the costs arising from panic and disruption were magnified by an initial lack of public information, contributing to a large over-estimation by private individuals of the perceived probabilities of infection and death, a fact documented in opinion survey data.  This could have led to over-reactions in the preventive actions taken by the population at large.  A key policy question for government is therefore how to win the trust and confidence of the population, minimize panic and disruption and indeed mobilize the public as a key partner in beating the disease.  Here an honest, transparent public information policy is likely to be critical.

In addition to these immediate costs of disruption, a global flu pandemic would also entail a sizeable loss of potential world output through a reduction in the size and productivity of the world labor force due to illness and death.  The effect of disease on the size of the labor force would depend on the virulence and spread of the disease and on how it affected different age groups, among other factors.  There would also be a general decline in labor productivity due to illness among the labor force at large, as well as costs of hospitalization and medical treatment. 

There is a dearth of detailed studies of what these costs of a flu pandemic might amount to at a global level.  However one 1999 study of the United States calculated that, based on past patterns, a flu pandemic could lead to between 100000 and 200000 deaths in the US, together with 700000 or more hospitalizations, up to 40 million outpatient visits and 50 million additional illnesses.   The present value of the economic losses associated with this level of death and sickness was estimated at between $100 and $200 billion for the US alone (in 2004 dollars).  If we extrapolate from the US to all high income countries, there could be a present value loss of $550 billion.  The loss for the world would of course be significantly larger, because of the impact in the developing world.  Note also that these estimates for the US arose from a projected mortality rate of less than 0.1% of the US population, much lower than the 0.5% mortality rate in the US in the 1918-19 pandemic, or the 2.5% mortality rate for the world as a whole at that time.

By any account, the benefits of preventing or even mitigating or delaying a global influenza pandemic are likely to be large indeed

Recent Situation

Let me finally turn to where much of the focus of attention is right now. With the principal transmission of the virus occurring among poultry and other birds, the main economic impacts are occurring in the rural areas of several East Asian economies.

At the overall macroeconomic level, costs so far have been fairly limited, but could rise significantly going forward, and have already been high for specific sectors and communities.

Economic costs that need to be considered include direct costs such as losses of poultry due to the disease and to culling, with impacts extending not only to farmers but also to upstream and downstream sectors such as poultry traders, feed mills, breeding farms etc.  The largest declines have occurred in Vietnam and Thailand, where they were equal to 15-20% of the stock of poultry in 2003, before the epidemic.  Other but relatively smaller losses of poultry have also occurred in other economies such as Indonesia, China, Cambodia and Lao PDR. 

The size of the poultry sector in the national economies of the region before the epidemic ranged from around 0.6% of GDP at the low end in countries like Vietnam and Thailand, to a high of a little over 2% in the Philippines, with most countries centering a little over 1% of GDP.  In an economy like Vietnam, where poultry output is down by around 15%, this part of economic loss is worth about 0.1% of GDP or about $50 million.  If similar declines in poultry numbers were to occur in an economy like Indonesia where the poultry sector plays a somewhat larger part in the economy, these direct costs could amount to 0.2% of GDP, which for Indonesia would represent about $500 million. 

These losses, while perhaps limited in overall macroeconomic terms, have been severe in the poultry sector and on associated input and distribution channels. In economies like Vietnam where the bulk of poultry production is still by backyard producers, the impact has been felt by individual rural households, and has only partly been offset by government compensation to farmers.  Survey data show that in Vietnam the poorest quintile of households relies more than 3 times as much on poultry income than does the richest quintile, so there are also adverse distributional effects. On the other hand, in economies like Thailand and Indonesia, where production is largely undertaken by industrial and large commercial producers, the impact may be felt in greater unemployment of wage laborers and in corporate bankruptcies.

Secondary or indirect economic costs could also arise, for example, if there is a fall in international tourism because of disease fears.  This does not appear to have occurred so far, with tourist numbers continuing to grow in 2004 and so far in 2005.  But this could change, since it only recently that global media have started prominent reporting on avian influenza.  We estimate that were a 5 percent drop in tourist and business arrivals to occur, it would reduce GDP in Vietnam by perhaps 0.4 percent.

Finally, the costs of prevention and control also need to be taken into account, including costs to the government of purchase of poultry vaccines, medications and other inputs, hiring workers for culling and cleanup, surveillance and diagnosis, hire of transportation etc. Governments also face the need to pay compensation to poultry owners, which is important in inducing owners not to conceal that a bird flu outbreak has occurred.  While such payment is in the nature of a transfer payment for the economy as a whole, it can impose a significant fiscal burden on the government.

Looking forward, there is indeed a major policy agenda in the affected countries to strengthen or build well-integrated, cost effective systems for surveillance, assessment, prevention, containment, information dissemination and longer term technical capacity building in terms of both animal and human health.  These are issues to be taken up in more detail in the rest of this seminar.  Clearly the benefits of such an agenda will be both global and very large.  A well integrated and resourced global initiative to support it is thus a very sensible investment to make.