The Economics of a Flu Pandemic

Apocolypse and conspiracy theories aside, the biggest fear associated with a pandemic swine flu outbreak right now is probably economic. What would really happen in a worldwide flu scenario? Top economists weigh in.

The World Bank on Bird Flu

In a 2005 report for the World Bank, Milan Brahmbhatt looked at the socio-economic impacts of avian flu. Bird, swine, it’s all the same. While Brahmbhatt’s report addresses a lot of issues specific to avian flu, he also includes plenty the non-poultry industry analysis of a worldwide flu pandemic.

Included are two types of economic costs arising from a pandemic flu outbreak:

1. The cost of increased illness and death among humans and animals.
2. The cost of the preventive, control and coping strategies adopted by the public and private sectors to avoid or reduce illness and death. 

In his potential human influenza pandemic scenario, he compared today’s outbreak potential to the Spanish flu of 1918-19. That historic illness killed 50 million, which today would translate to 150 million deaths, given today’s world population. Brahmbhatt considered this an extreme worst case scenario.

Immediate Economic Damage

In his World Bank avian flu report, Brahmbhatt pointed out that given the widespread nature of the flu, 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, noting the damage to the tourism, mass transit, retail, and hotels and restaurants sectors during the SARS scare. Add to that workplace absenteeism, disruption of production processes, and shifts to more costly procedures, and you get a severe economic strain. 

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.

He also stressed the need for an honest, transparent public information policy to quell over-reactions in the preventive actions taken by the public as well as to minimize panic and disruption, mobilize the population as a key partner in beating the disease. 

As the Flu Progresses

After the immediate economic toll, world output would be substantially reduced. Illness and death could dramatically reduce both the size and productivity of the world’s labor force. Costs of hospitalization and medical treatment would of course also continue to consume resources.

In the report Brahmbhatt uses existing studies to extrapolate that the economic cost for all high income countries, could be $550 billion. Gosh, that doesn’t sound like much in our post-bailout world now does it?

Ian Welsh on the Economics (and Politics) of the Flu

Ian Welsh takes a practical approach perspective on the impact of a worldwide flu. He picks apart the true economics, that is, how rare assets are allocated. You know – like food and medicine. In Welsh’s analysis the scenario is large enough to cause the following:

• all non-essential travel shut down
• quarantines of infected individuals and those they’ve come in contact with
• overwhelmed health systems – ie. not enough beds, ventilators, and anti-virals
• not enough enough trained medical personnel

Welsh predicts a wartime environment where the government will focus on maintaining key infrastructure: power, sewage, water, emergency services and food distribution. Cross-country travel would be discouraged and with that the closure of retail outlets. Food would be rationed, and a black market would develop.

In addition to basic advice about food, water, and other essentials, Welsh’s focus on preparation includes the following:

• stock an inventory of tradeables for the black market, including medical items such as surgical masks and OTC medicines
• make sure you have an up to date written statement of your assets every month, in case electronic records are destroyed
• don’t trade on any stock markets that may stay open for the duration of the pandemic
• shore up personal relationships with the people you live with and your neighbors

Are you completely depressed yet? Says Welsh:

In a situation with relatively light casualties, say 1% of the population, the world will go on. Everyone will know someone who lost someone, or will have lost someone themselves, but the bottom line, sad as it is, that it won’t make a huge difference. Demand will drop and thus it won’t have a huge effect of employment one way or the other; it’ll reduce GDP noticeably, but not disastrously and otherwise it’ll business as usual with sadness.

The big effect on people aged 20 to 40 will be a longer working life, decreased retirement benefits, possible worldwide depression. Once really interesting aspect of Walsh’s analysis is how a worldwide flu pandemic could cause a complete overhaul of the health care system as we know it.

If the public health system and the private health system crack under the strain and many people die who could have been saved, then the outcry is likely to be something fierce. Everything will be up for grabs – and it’s hard to say if it’ll lead to more public health care, the scalping of politicians or the weakening of drug patent laws. It could lead to an end of health insurance companies and drug companies as we know them today – or they could turn the tables and claim it was the public system that failed.

Welsh also notes that pure economics won’t really determine the ultimate economic effect. Politics will.

But let’s look on the bright side, shall we? Surely this will be a boom for those who sell facemasks, MREs, and power generators!

Image Credit: sarihuella, Flickr