SARS: The Economics of Fear

Asian Development Bank chief economist Ifzal Ali explains the basic scheme, “When SARS hits an economy, it causes uncertainty generated by fear and this has direct and indirect effects like a loss of consumer confidence, tourism suffers, investment drops and government revenue also drops.”

The fact that the dreaded disease has struck hardest at China is most unfortunate for the big economic picture, according to a report in Business Week. If and when a consumer implosion of the magnitude that has hit Hong Kong (50 percent fall) takes root on the Chinese mainland, the ripple effect will travel far and fast. Slower growth on the mainland could hurt everyone from Japanese machinery makers to Korean electronics producers to Australian mining concerns, warned the report.

All of this is because China with its huge population and burgeoning markets has become vital to the world economy. Foreign investors poured $52 billion into China’s economy last year – a figure that could slump to $30 billion this year if companies decide to shift some production to less SARS-ravaged countries such as Mexico or the Philippines.

Citigroup economist Cheng Cheng-mount forecasts that neighboring Taiwan will hold its 2003 GDP growth at above three percent so long as the spread of SARS does not extend beyond the current quarter. But the economist has been looking at the big picture and suggests that there is more than just a regional problem afoot -- with a prolonged SARS crisis potentially dealing a blow to the economy of the world.

“One can easily imagine how the U.S. economy would be affected when and if flows of commodities from Asia, particularly mainland China, were disrupted because of the epidemic wreaking more havoc.”

So far, however, Cheng-mounts doomsday scenario has not come about. Foreign companies in China have been hanging tough – hoping that the SARS phenomenon will -- on the books -- represent but an unfortunate wrinkle in a single fiscal quarter.

According to a report in Fortune International, even U.S. software maker Sybase temporarily shutting its offices in China, citing SARS as the reason, has not dimmed the overall entrepreneurial spirit. Such good thoughts are not just the product of Pollyanna optimism.

The reason: China’s cheap labor and the bottomless-pit Chinese market. No one wants to abandon the golden goose at this stage of the game.

At Motorola, the SARS outbreak has had “absolutely no impact whatsoever” on investment plans, said spokeswoman Mary Lamb. At GM’s auto plant in Shanghai, “it’s business as usual,” said spokeswoman Daphne Zheng. Wal-Mart said it is not reconsidering relationships with China suppliers, according to Fortune International.

But such stalwart confidence could erode quickly if SARS’s impact on the mainland rivals that which has already trampled Hong Kong.

ING Barings economist Tim Condon put it best when he told Fortune: “But at some stage members of the board are going to sit down and say, ‘Whoa! Maybe we should rethink all this. Why is it that we’re piling so much of our operation into a country that is a giant breeding ground for super-germs?’”