Introduction
SARS first broke out in November 2002 in Foshan, which is near Guangzhou, in the Chinese province of Guangdong. The virus made its way to other parts of the Pearl River Delta by February 2003. China’s Ministry of Health informed WHO in mid- February 2003 of the occurrence in Guangdong province of 305 cases of “atypical pneumonia” and reported that the spread of the illness was “under control.” (John, 2004) Local media reported the outbreak, and the news spread around the Pearl River Delta region through thousands of cell phone text messages. Hong Kong was alerted by the news that people across the border were stocking up on Chinese herbal medicines and boiling vinegar as a folk remedy to ward off the deadly unknown illness. Because the world was kept in the dark about the seriousness of the outbreak in Guangdong, Hong Kong was caught unprepared when SARS first appeared in the territory via an elderly medical doctor from Guangzhou who had been treating “atypical pneumonia” patients. (David, 2004) The doctor checked into room 911 of the Metropole Hong Kong Hotel on 21 February 2003 to attend a wedding reception, and he was admitted to a nearby hospital the next day. He informed the medical staff that he was highly infectious, and he was promptly isolated. He later died after infecting a nurse in the hospital.
The Guangzhou doctor, during his 1-day stay at the hotel, infected at least 10 other guests staying on the same floor of the hotel. All these guests were overseas visitors except for a Hong Kong resident who was visiting the hotel. The infected visitors subsequently ignited outbreaks in Vietnam, Singapore, and Toronto, and the local resident (an airport worker) became the index patient at the Prince of Wales Hospital. The airport worker developed SARS symptoms on 24 February but did not seek treatment at the hospital until 4 March. He was admitted into Ward 8A, where he infected over 100 people, including patients, visitors, medical students, nurses, and doctors. Hospital emergency services had to be suspended temporarily. (David, 2004) In mid-March 2003, the Hong Kong public was told that the outbreak was confined to hospitals and was not spreading in the community. No isolation measures were adopted; for instance. Prince of Wales Hospital was not cordoned off. The authorities had to face reality when SARS broke out in a multistoried housing estate, Amoy Gardens. On 29 March, 22 of the 45 new SARS cases hospitalized in Hong Kong were residents of Amoy Gardens. On the following day, 36 of the 60 new patients admitted to the hospital with probable SARS were residents of Amoy Gardens, bringing the cumulative total of infected residents to 213. Of these 213 patients, 107 resided in Block E of Amoy Gardens. In addition, most of them lived in flats that were oriented vertically relative to each other, which suggested that besides close person-to-person contact, SARS might have been spreading by other environmental means. (John, 2004).
The Hong Kong Department of Health issued an unprecedented quarantine order to prevent the further spread of SARS in the community. The isolation order required residents of Block E of Amoy Gardens to remain in their flats for 10 days. When the police carried out the order, they found no one home in well over half of the block’s 264 apartments. Residents had learned about the Amoy Gardens outbreak via the media and many had left their homes long before the authorities arrived. SARS was clearly spreading in the community.
Fear of the SARS virus took root in the whole city. Face masks were selling briskly and could be seen everywhere. Public places were disinfected several times a day. People washed their hands much more frequently and avoided going out to crowded places. Restaurants, shops, cinemas, and other entertainment venues were deserted. Many businesses suffered severe losses of income. Schools were finally closed to limit the spread of the virus.
All household contacts of confirmed or suspected SARS patients were required to remain isolated in their homes for monitoring and treatment, up to a maximum of 10 days. At the end of the outbreak, a total of 1,262 persons from 493 households were affected by this isolation order, and 34 of them subsequently came down with SARS (John, 2004). The government did not compensate the individuals for their confinement, but it did provide daily necessities and financial assistance. The police enforced the order by checking up on confined individuals at their homes. Violators were sent warning letters.
Since 29 March 2003, health officials have tried to identify travelers who displayed SARS symptoms at the airport and other border control points. All incoming travelers are now required to complete a health declaration form. Temperature checks for all arriving, departing, and transit passengers at the airport were implemented in mid-April 2003. Temperature screening devices were installed at other border control points in late April of that year. As of 7 September, 83 persons had been referred to hospitals for suspected SARS, and 2 of them were later confirmed to have been infected (David, 2004). Since these measures were implemented, no SARS cases have been reported as having originated from Hong Kong.
The SARS outbreak among Amoy Gardens residents and medical staff in Hong Kong peaked by late April 2003. At the final count. Hong Kong had a cumulative total of 1,755 SARS cases, accounting for 20.8 percent of the world’s total of 8,422 cases. Of Hong Kong’s total cases, 386 were health care workers, 321 were Amoy Gardens residents, and the rest were from the general community. The high number of infected health care workers suggests that to minimize the risk of exposure, all hospital staff must meticulously follow stringent infection control measures. The number of infected health care workers each day was very high during the early days of the outbreak but later declined substantially.
Channels Through Which SARS Impacts
There are a number of channels through which SARS can affect the economy. These channels involve aggregate demand, aggregate supply, and the financial market.
Firstly, SARS primarily affects economic growth through the aggregate demand side. Aggregate demand refers to the total quantity of goods and services, including consumption expenditure, investment expenditure, government expenditure, and net exports.
The tourist industry and tourism-related service sectors, including airlines, hotels, catering, entertainment, and retailing sector are to be particularly hard hit. Fewer people go to stores, supermarkets, restaurants, and entertainment venues for fear of possible infection, leading to a decline in private consumption spending. A survey by the China Economic Monitoring Center shows the occupancy of 20 four and five-star hotels in Beijing has fallen by 30 percent since April compared to the same period last year (Loh, 2004). The revenue from the seven-day Labor Day holiday usually accounts for 40 percent of the year’s total. However, the central government shortened the holiday to 5 days and called for no travel. Therefore, the travel agencies will suffer huge losses this year. It is estimated that the decision to shorten the Labor Day cost the tourist industry 20 billion yuan (US$2.4 billion). (Lai, 2003) Although the service trade contributes a tiny proportion to the GDP of China, the chain function on other related sectors, especially the negative impact on the manufacturing industry, could not be ignored.
Exports are also suffering. Although the Chinese Export Commodities Fair, or Canton Fair, was held as scheduled in Guangzhou from April 15, the number of contracts that were signed plummeted because many foreign buyers canceled their trips to China. Personal flow is the basis of international trade and investment. The travel restriction owing to SARS certainly decreases the growth of exports. As China has become a part of the supply chain for many multinational corporations, and a halt inflow of goods due to the epidemic would incur losses. In an effort to avoid such risks, multinational corporations may have no choice but to shift a part of the production to other countries. Hence, the growth of China’s export this year is likely to decline because business travels are canceled and demand for goods made in China falls. Furthermore, tourism-related service exports have been heavily hit.
The outbreak of SARS has a negative impact on investment. The investment will decline because of reduced overall demand, enhanced uncertainties, and increased risks. A decline in China’s foreign business activity means that the inflow of foreign investment will also be delayed or reduced. It is pointed out that “the SARS crisis may prompt foreign investors not to put all their eggs in one basket, possibly resulting in businesses changing their plans to invest in China” (Berger, 2004). If the outbreak persists, investors’ confidence could be further reduced, causing weaker domestic investment and foreign direct investment (FDI).
Government expenditure has to be reallocated to combat the outburst of SARS and hence affects the multiplier effect. The multiplier effect can be defined as equilibrium expenditure increases by more than the increase in autonomous expenditure. The central government and provincial governments have to increase expenditures for the improvement of medical facilities, enforcement of quarantines and other health measures, financial assistance to SARS victims among the poor and vulnerable groups, and funds for medical research. The emergency packages such as preferential tax plans to alleviate the economic fallout of the outbreak will reduce the government revenue. The diversion of some government expenditures away from investment in public services such as infrastructural projects, which have higher multiplier effects, to SARS-related expenditures will reduce the equilibrium expenditure and then the GDP. Of all the components of aggregate demand that SARS has affected, consumption expenditure has been the major part of the impact.
The second channel that SARS affects the economy is through the aggregate supply side. Aggregate supply is the sum of all goods and services that all firms in the economy plan to produce. There are three main factors that influence both long-run and short-run aggregate supply. They are the labor force, capital stock, and technology. The outbreak reduces labor productivity because of illness or precautionary measures. Therefore the outputs of both the services sectors and manufacturing industry will decrease. The possible decrease of FDI has affected China’s economic growth not only on the demand side but also on the supply side.
Finally, SARS affects the economy through financial markets. Shares in Shanghai fell and yuan forward contracts are of little chance of any currency appreciation. (Groneberg, 2004) If the outbreak cannot be contained in a short time, fear of the disease may continue to grow, weakening market confidence and depressing stock prices. The contracting wealth effect certainly reduces the consumption expenditure. Through these channels, the outbreak of SARS imposes a negative impact on China’s economy. The degree of the negative impact will be analyzed in the following part.
The limited impact of SARS
Although the outbreak of SARS has a negative impact on China’s economy, the impact will be limited and in the short run. The impact depends on the seriousness and duration of SARS, the structure of China’s economy, particularly the proportion of service sectors in GDP.
The serious impact of SARS will last for the second quarter and then diminish in the third quarter of this year because of the severe enforcement of effective containment measures taken by governments. SARS seems to spread more slowly than the influenza pandemic. The incidence of the disease has decreased quickly in recent days. Fortunately, the epidemic condition is very slight in rural areas and is mainly restricted in urban cities. Thus the outbreak of SARS is serious, but the spread of SARS can be contained in a limited space and period.
The decline in consumption is temporary and small. A recent survey of several furniture malls in Beijing shows that customers are purchasing durable consumer goods in accordance with their purchase plans rather than at random (Thomas, 2007). The SARS disease won’t influence consumers’ long-term purchase plans such as buying automobiles, apartments, and luxurious furniture. The elasticity of demand for foods and daily necessities is relatively inelastic. The outbreak causes a drastic rise in the consumption of drugs and disinfectants and other SARS-related goods. The demand for telecom and online services increases due to the outbreak. As a whole, consumption expenditure will decrease, but the decline is relatively small.
The service sectors such as the tourism, catering, transportation, recreation, and exposition industries, have been the most hit by the disease, but they only contribute a small proportion of China’s GDP.
In terms of exports, the epidemic situation in most of China’s major manufacturing bases, such as the Yangtze River Delta, Shandong province, and Zhejiang province, is relatively slight. Even in Guangdong province, where SARS was first detected last November, the disease has not affected production. However, the new export orders have decreased since the outbreak. There will be a small decrease in the export this year.
The impact on foreign direct investment is relatively limited. China’s fast economic growth, low labor costs, and huge consumption market are extremely attractive for foreign investors. The Chinese economy is at a climbing stage of the economic cycle, and the economic growth is continuing in spite of some exiting deep-rooted problems. SARS may delay or cancel foreign investors visits’ to China. However, the influx of foreign investment would not be significantly changed, for SARS is not one of the determinants for investment. The determinants are the huge Chinese market volume and the low labor cost. Moreover, a slight fall in foreign direct investment (US$52.7 billion in 2002) will cause a very slight fall in China’s economic growth since China’s fixed-asset investment exceeds US$400 billion a year. (Berger, 2004).
Viewing from the overall situation, SARS’ impact on China’s economy will be quite limited. The World Bank is predicting that China’s economy will still experience growth of about 7.3 percent in 2003 (Arthur, 2006).
Measures To Reduce The Adverse Impact
There are two reasons that justify government intervention to combat SARS. The first is that the dissemination of information on SARS has the characteristics of a public good. The second is that there are negative externalities because the disease affects the third parties whose interests are not reflected in market transactions. There are market failures when there are public goods and externalities. Hence the measures taken by the government become necessary to allocate resources efficiently.
Transparent information on SARS is essential to reduce public fear, and to recover the public confidence in government, thus decreasing the economic cost of SARS. There is a lesson at the beginning of the outbreak in Guangdong that the lack of transparency in providing information caused greater panic and accelerated the spread of the disease. Therefore governments need to disseminate accurate and timely information so as to ensure rational behaviors and to restore the confidence of consumers and investors.
It is of paramount importance that governments persist in the efforts in containing the SARS outbreak. Stringent public health measures, including quarantines and travel restrictions, should be effectively enforced to control the further spread of the disease.
Some fiscal and monetary measures should be taken by governments to contain the economic fallout of the disease. The expansionary fiscal and monetary policy should continue to expand the aggregate demand. An expansionary fiscal policy, that is, an increase in government expenditure on goods and services or an increase in transfer payments, or a decrease in taxes, affects aggregate demand by increasing autonomous expenditure. It is reported that “Taxes and administrative fees levied by the Chinese Government on some industries affected by the outbreak of SARS will be waived or reduced” (Arthur, 2006). The preferential tax policies for civil aviation, tourism, catering, commerce, and other sectors heavily hit by SARS will be adopted. A group of scholars from Peking University suggests that the government take certain consumption-stimulating measures, such as providing more housing and automobile loans to spur the domestic demand (Mark, 2004).
The essential health measures and a transparent information policy adopted by governments are crucial to contain the disease and decrease the economic cost. The expansionary fiscal and monetary policy will bring substantial benefits to the economy and sustain growth.
Conclusion
SARS impacts the economy through the channels such as aggregate demand, aggregate supply, and the financial market. SARS will not possibly have a major impact on China’s economy and the disease is likely to ail China’s economy for the short term. Given the externalities related to SARS, governments should take a transparent information policy and severe health measures to contain the disease. The expansionary fiscal and monetary policy will persist to cushion the impact of the outbreak and maintain the growth of China’s economy.
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