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Political Influences on the Response to SARS and Economic Impacts of the Disease

OVERVIEW

As the severe acute respiratory syndrome (SARS) coronavirus spread around the globe, so too did its political, economic, and sociological repercussions. The ensuing multinational effort launched in response to SARS placed unprecedented demands on affected countries for timely, accurate case reporting; cooperation with expert teams coordinated by the World Health Organization (WHO); and the sacrifice of immediate economic interests, such as trade, tourism, and investment.

The first paper in this chapter presents an economic model of the past and projected costs of the SARS epidemic (see Lee and McKibbin). As one would expect, the model indicates that significant short-term economic losses in China resulted from a sharp decrease in foreign investment. Although the most immediate and dramatic economic effects of SARS occurred in Asia, nearly every major market was impacted directly or indirectly by the epidemic. Several agencies and experts have attempted to estimate the cost of SARS based on expenditures and near-term losses in key areas such as medical expenses, travel and related services, consumer confidence, and investment. The extent of the long-term economic consequences resulting from SARS will depend on whether—and how—the disease returns.

The chapter continues with two political analyses that reflect upon issues of both national and global governance impacted by the SARS epidemic. The first political analysis frames the issue in terms of the new rules of international engagement during the age of globalization, described by the author as the post-Westphalian era (see Fidler) in which nonstate actors such as multinational corporations and multilateral organizations have increasing influence on global governance.



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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary 2 Political Influences on the Response to SARS and Economic Impacts of the Disease OVERVIEW As the severe acute respiratory syndrome (SARS) coronavirus spread around the globe, so too did its political, economic, and sociological repercussions. The ensuing multinational effort launched in response to SARS placed unprecedented demands on affected countries for timely, accurate case reporting; cooperation with expert teams coordinated by the World Health Organization (WHO); and the sacrifice of immediate economic interests, such as trade, tourism, and investment. The first paper in this chapter presents an economic model of the past and projected costs of the SARS epidemic (see Lee and McKibbin). As one would expect, the model indicates that significant short-term economic losses in China resulted from a sharp decrease in foreign investment. Although the most immediate and dramatic economic effects of SARS occurred in Asia, nearly every major market was impacted directly or indirectly by the epidemic. Several agencies and experts have attempted to estimate the cost of SARS based on expenditures and near-term losses in key areas such as medical expenses, travel and related services, consumer confidence, and investment. The extent of the long-term economic consequences resulting from SARS will depend on whether—and how—the disease returns. The chapter continues with two political analyses that reflect upon issues of both national and global governance impacted by the SARS epidemic. The first political analysis frames the issue in terms of the new rules of international engagement during the age of globalization, described by the author as the post-Westphalian era (see Fidler) in which nonstate actors such as multinational corporations and multilateral organizations have increasing influence on global governance.

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary The second article hypothesizes that the structure and operation of China’s central government account for most of that country’s initial resistance to international collaboration at the onset of the SARS epidemic (see Huang). The author describes considerable internal and external pressures that ultimately influenced the Chinese government to declare its “war on SARS.” He identifies both improvements in the Chinese public health infrastructure and challenges the country may face if SARS reemerges. ESTIMATING THE GLOBAL ECONOMIC COSTS OF SARS* Jong-Wha Lee and Warwick J. McKibbin Korea University and The Australian National University, The Australian National University and The Brookings Institution While the number of patients affected by the SARS coronavirus and its broader impact on the global public health community have been surveyed in considerable detail, the consequences of the disease in other areas are less well calibrated. The purpose of this paper is to provide an assessment of the global economic costs of SARS. Our empirical estimates of the economic effects of the SARS epidemic are based on a global model called the G-Cubed (Asia-Pacific) model. Most previous studies on the economic effects of epidemics focus on the economic costs deriving from disease-associated medical costs or forgone incomes as a result of the disease-related morbidity and mortality. However, the direct consequences of the SARS epidemic in terms of medical expenditures or demographic effects seem to be rather small, particularly when compared to other major epidemics such as HIV/AIDS or malaria. A few recent studies—including Chou et al. (2003), Siu and Wong (2003), and Wen (2003)—provide some estimates on the economic effects of SARS on individual Asian regions such as mainland China, Hong Kong (SAR), and Taiwan. But these studies focus mostly *   This paper is adapted from an article that will appear later this year in Asian Economic Papers (MIT Press). An earlier version of the paper was originally presented to the Asian Economic Panel meeting held in Tokyo, May 11–12, 2003, and the Pacific Economic Cooperation Council (PECC) finance forum, Hua Hin, Thailand, July 8–9, 2003. We have updated that original paper to include the last known case of SARS as well as adjusting the scale of some shocks given the knowledge that the SARS epidemic lasted approximately 6 months rather than the full year originally assumed. The authors particularly thank Andrew Stoeckel for interesting discussions and many participants at the conferences, particularly Ifzal Ali, Richard Dorbnick, George Von Furstenberg, Yung Chul Park, Jeffrey Sachs, Wing Thye Woo, and Zhang Wei for helpful comments. Alison Stegman provided excellent research assistance and Kang Tan provided helpful data. See also the preliminary results and links to the model documentation at http://www.economicscenarios.com. The views expressed in the paper are those of the authors and should not be interpreted as reflecting the views of the institutions with which the authors are affiliated, including the trustees, officers, or other staff of the Brookings Institution.

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary on assessing the damages by SARS in affected industries such as tourism and the retail service sector. However, just calculating the number of canceled tourist trips, declines in retail trade, and similar factors is not sufficient to get a full picture of the impact of SARS because there are linkages within economies, across sectors, and across economies in both international trade and international capital flows. The economic costs from a global disease such as SARS go beyond the direct damages incurred in the affected sectors of disease-inflicted countries. This is not just because the disease spreads quickly across countries through networks related to global travel, but also because any economic shock to one country is quickly spread to other countries through the increased trade and financial linkages associated with globalization. As the world becomes more integrated, the global cost of a communicable disease like SARS can be expected to rise. Our global model is able to capture many of the important linkages across sectors as well as countries through capital flows and the trade of goods and services, thereby providing a broader assessment of disease-associated costs. The G-Cubed model also incorporates rational expectations and forward-looking intertemporal behavior on the part of individual agents. This feature is particularly important when we are interested in distinguishing the effects of a temporary shock from those of a persistent shock. For example, when foreign investors expect that SARS or other epidemics of unknown etiology can break out in some Asian countries not just this year but persistently for the next few years, they would demand a greater risk premium from investing in affected economies. Their forward-looking behavior would have immediate global impacts. Needless to say, our empirical assessment is preliminary and relies on our limited knowledge about the disease and constrained methodology. For instance, there is speculation that SARS could reemerge in an even deadlier form in the next influenza season. There is also no consensus yet on the likely developments of any future epidemic and the precise mechanism by which SARS affects economic activities. Although a global model is better than simple back-of-the-envelope calculations, it is a coarse representation of a complex world. Nonetheless, even simple calculations are important inputs into the model. We saw this with the Asian Crisis of 1997, when the transmission of shocks in Asia to the rest of the world and the adjustment within economies in Asia were poorly predicted when only trade flows were considered.1 Thus it is important to go beyond the rough estimates that currently permeate commentary on the economic consequences of SARS. Because we take into account the interdependencies among economies and the role of confidence, our costs are larger than many of the estimates that currently appear in the media. 1   See McKibbin (1998) for a study of the Asia crisis that included the critical role of capital flow adjustment.

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary Economic Impacts of SARS Despite the catastrophic consequences of infectious diseases such as malaria and HIV/AIDS, the impact of epidemics has been considerably under-researched in economics.2 Traditionally, studies have attempted to estimate the economic burden of an epidemic based on the private and nonprivate medical costs associated with the disease, such as expenditures on diagnosing and treating the disease. The costs are magnified by the need to maintain sterile environments, implement prevention measures, and conduct basic research. Such economic costs can be substantial for major epidemics such as HIV/AIDS. According to UNAIDS (the Joint United Nations Programme on HIV/AIDS), 42 million people globally are living with HIV/AIDS. The medical costs of various treatments of HIV patients, including highly active antiretroviral therapies (HAARTs), are estimated to be more than $2,000 per patient per year. In the Southern African regions, the total HIV-related health service costs, based on an assumed coverage rate of 10 percent, ranges from 0.3 to 4.3 percent of gross domestic product (GDP) (Haacker, 2002). The costs of disease also include income forgone as a result of disease-related morbidity and mortality. Forgone income is normally estimated by the value of workdays lost due to the illness. In the case of mortality, forgone income is estimated by the capitalized value of future lifetime earnings lost to the disease-related death, based on projected incomes for different age groups and age-specific survival rates. This cost can be substantial for some epidemics. Malaria kills more than 1 million people a year, and HIV/AIDS is estimated to have claimed 3.1 million lives in 2002. Previous researchers have also focused on long-term effects from the demographic consequences of epidemics. The first and foremost impact of epidemics is a negative shock to population and labor force. However, economic theory provides conflicting predictions regarding the economic effects of negative population shocks. A disease that kills mostly children and the elderly without affecting the economically active population aged 15 to 54 can lead to an initial increase in GDP per head. Even when the disease mostly attacks prime earners, its long-term economic consequences are not unambiguous. Standard neoclassical growth models predict that a negative shock to population growth can lead to a faster accumulation of capital and subsequently faster output growth (see Barro and Sala-I-Martin, 1995). Conversely, an exogenous, one-time reduction in labor force raises the capital-labor ratio and lowers the rate of return to capital, which subsequently leads to slower capital accumulation and thereby lower output growth. Empirical studies also present conflicting results. Brainerd and Siegler (2002) show that the Spanish flu epidemic of 1918–1919, which killed at least 40 million 2   Exceptions can be found in the Commission on Macroeconomics and Health (2002).

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary people worldwide and 675,000 in the United States, had a positive effect on per capita income growth across states in the United States in the 1920s. In contrast, Bloom and Mahal (1997) show no significant impact of that epidemic on acreage sown per capita in India across 13 Indian provinces. Epidemics can have further effects on demographic structures by influencing fertility decisions of households. According to the “child-survivor hypothesis,” parents desire to have a certain number of surviving children. Under this theory, risk-averse households raise fertility by even more than expected child mortality. Evidence shows that high infant and child mortality rates in African regions of intense malaria transmission are associated with a disproportionately high fertility rate and high population growth (Sachs and Malaney, 2002). Thus, the increase in fertility has a further negative impact on long-term growth. Aside from the direct demographic consequences of an epidemic, another important mechanism by which a disease has an adverse impact on the economy’s long-term growth is the destruction of human capital. Human capital, the stock of knowledge embodied in the population, is considered an important determinant of long-term growth (Barro and Sala-I-Martin, 1995). Furthermore, the decline in “health capital,” as measured in general by life expectancy, has negative effects on economic growth (Bloom et al., 2001). Epidemics also adversely affect labor productivity by inhibiting the movement of labor across regions within a country as well as across countries. Restricted mobility thus inhibits labor from moving to the places where it is most productive. Researchers simulating the effect of AIDS on growth in Southern African countries find that AIDS has had significant negative effects on per capita income growth mainly through the decline in human capital (Haacker, 2002). While previous studies have emphasized the economic cost of disease associated with private and nonprivate medical costs, this doesn’t seem to be the principal issue in the case of SARS. The number of probable SARS cases is still small in comparison to other major historical epidemics. Furthermore, unlike AIDS, the duration of hospitalization of the infected patients is short, with more than 90 percent of the patients recovering in a relatively short period, thereby rendering the medical costs comparatively very low. The SARS-related demographic or human capital consequences are also currently estimated to be insignificant. The fatality rate of the SARS coronavirus is high, but, with current estimates indicating fewer than 800 deaths from SARS worldwide, the death toll is tiny compared with the 3 million who died of AIDS last year or at least 40 million people worldwide who died in the Spanish flu epidemic of 1918–1919. Therefore, forgone incomes associated with morbidity and mortality as a result of SARS appear to be insignificant. If SARS became endemic in the future, it would substantially increase private and public expenditures on health care and would have more significant impacts on demographic structure and human capital in the infected economies. However, based on information to date, this is unlikely to happen with the SARS epidemic.

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary Although the medical expenditures and demographic consequences associated with SARS are insignificant, SARS apparently has already caused substantial economic effects by other important channels. We summarize three mechanisms by which SARS influences the global economy. First, fear of SARS infection leads to a substantial decline in consumer demand, especially for travel and retail sales service. The fast speed of contagion makes people avoid social interactions in affected regions. The adverse demand shock becomes more substantial in regions that have much larger service-related activities and higher population densities, such as Hong Kong or Beijing, China. The psychological shock also ripples around the world, not just to the countries of local transmission of SARS, because the world is so closely linked by international travel. Second, the uncertain features of the disease reduce confidence in the future of the affected economies. This effect seems to be potentially very important, particularly as the shock reverberates through China, which has been a key center of foreign investment. The response by the Chinese government to the epidemic was fragmented and nontransparent. The greater exposure to an unknown disease and the less effective government responses to the disease outbreaks must have elevated concerns about China’s institutional quality and future growth potential. Although it is difficult to measure directly the effects of diseases on decision making by foreign investors, the loss of foreign investors’ confidence would have potentially tremendous impacts on foreign investment flows, which would in turn have significant impacts on China’s economic growth. This effect is also transmitted to other countries competing with China for foreign direct investment (FDI). Third, SARS undoubtedly increases the costs of disease prevention, especially in the most affected industries such as the travel and retail sales service industries. This cost may not be substantial, at least in global terms, as long as the disease is transmitted only by close human contact. However, the global cost could become enormous if the disease is found to be transmitted by other channels such as through international cargo. Simulations Using the G-Cubed (Asia Pacific) Model Given the important linkages among affected countries in the region through capital flows and the trade of goods and services, any analysis of the implications of SARS on the global economy needs to be undertaken with a model that adequately captures these interrelationships. The G-Cubed (Asia Pacific) model, based on the theoretical structure of the G-Cubed model outlined in McKibbin and Wilcoxen (1998), is ideal for such analysis, having both a detailed country coverage of the region and rich links between countries through goods and asset markets.3 A number of studies—summarized in McKibbin and Vines (2000)— 3   Full details of the model, including a list of equations and parameters, can be found online at http://www.gcubed.com.

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary show that the G-Cubed model has been useful in assessing a range of issues across a number of countries since the mid-1980s.4 A summary of the principal characteristics of the G-Cubed model is presented as an annex at the end of this paper. We make two alternative assumptions in generating a range of possible scenarios under this model. In an earlier analysis, we assumed in the first scenario that the shock lasted for a year. To capture the fact that the shock lasted 6 months, in reality we now scale down the shocks by 50 percent to capture the shorter duration. This is called a temporary shock. The second assumption is that the shocks are the same magnitude in the first year as the temporary shock, but are more persistent in that they fade out equiproportionately over a 10-year period. This illustrates the impact of expectations of the future evolution of the disease on the estimated costs in 2003. It also gives some insight into what might happen to the region if the SARS virus is considered the beginning of a series of annual epidemics emerging from China. Initial Shock to China and Hong Kong We first calculate the shocks to the economies of mainland China and Hong Kong (SAR), which were hit most heavily by the disease, and then work out some indexes summarizing how these shocks are likely to occur in other economies. There are three main shocks, based on observations of financial market analysts about the existing data emerging from China and Hong Kong:5 A 200 basis-point increase in country risk premium.6 A sector-specific demand shock to the retail sales sector, amounting to a 15 percent drop in demand for the exposed industries in the service sector. An increase in costs in the exposed activities in the service sector of 5 percent. These shocks are then scaled to last only 6 months rather than 1 year. We could also consider several other shocks, such as the impact on health expenditures and fiscal deficits. It is not clear how large this shock should be for the persistent shock, nor even whether the schock should have a positive or negative sign. Because SARS kills a higher proportion of vulnerable people in a very short period, it may be that the large expenditure for these people will be reduced 4   These issues include Reaganomics in the 1980s, German unification in the early 1990s, fiscal consolidation in Europe in the mid-1990s, the formation of NAFTA, the Asian crisis, and the productivity boom in the United States. 5   These are also consistent with other papers on particular countries presented at the Asian Economic Panel in May 2003. 6   In the May version of this paper we assumed a 300 basis-point shock. We follow the updated research of Australian Treasury (2003) in adjusting this shock to 200 basis points.

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary as a result of SARS. There might also be a reaction by medical authorities to substantially increase investments in public health. Given the current state of information, we would be forced to speculate concerning all of these potential effects on health expenditures. We therefore explicitly ignore such fiscal impacts of SARS in this version of the paper. Shocks to Other Countries The transmission of SARS, as distinct from the transmission of economic impacts through global markets, depends on a number of factors. We refer to this as the global exposure to SARS. The speed of spread is likely to depend on (i) tourist flows, (ii) geographical distance to China, (iii) health expenditures and sanitary conditions, (iv) government response, (v) climate, (vi) per capita income, (vii) population density, and so on. Table 2-1 presents indicators on health expenditures, tourist arrivals, and sanitary conditions for selected countries. There are more than 33 million annual visitors to mainland China. Hong Kong (SAR) has annual tourist arrivals that are more than 200 percent of the local population. Overall health expenditure as a ratio to GDP is not small in Asian countries, but health expenditure per capita is only $45 in China. With more data we could do some econometric estimation to capture these influences. Lacking that data, for the purposes of this paper we construct a rough TABLE 2-1 Health Expenditures, Tourist Arrivals, and Sanitation Indicators for Selected Countries   Health Expenditure Total (% of GDP) Health Expenditure, per Capita (current US$) Tourist Arrivals (million) Tourist Arrivals Arrivals/Population (%) Improved Sanitation Facilities (% of population China 5.3 45 33.2 3 29 Hong Kong 4.4 950 13.7 203 100 India 4.9 23 2.5 0 16 Indonesia 2.7 19 5.2 2 47 North Korea 2.1 18 n.a. n.a. 99 South Korea 6.0 584 5.1 14 63 Malaysia 2.5 101 12.8 53 n.a. Philippines 3.4 33 1.8 4 74 Singapore 3.5 814 6.7 163 100 Thailand 3.7 71 10.1 16 79 Vietnam 5.2 21 1.4 2 29 United States 13.0 4,499 n.a. n.a. 100 Japan n.a. n.a. 4.8 4 n.a. High-income OECD 10.2 2,771 377.6 n.a. n.a. World 9.3 482 696.5 n.a. 55   SOURCE: CEIC, World Development Indicators. Recited from Hanna and Huang (2003).

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary measure of the intensity of exposures to SARS, based on the above information and the cumulative number of cases of SARS for each country. This index of “global exposure to SARS” is contained in Figure 2-1. This will be used to scale down the country risk shocks calculated for all other countries. For example, if a country has an index of 0.5, the country risk premium shock will be the Chinese shock of 2 percent adjusted by the “global exposure to SARS” index, which gives a shock of 1 percent. For the shocks to the service industries, before applying the global exposure index to each country, we need to adjust the sector-specific shocks. Because we only have an aggregate service sector in the model, we need to take account for structural differences within the service sectors of each country. We do this by creating an “index of sectoral exposure to SARS.” This index is assumed to be proportional to the share of industries affected by SARS within the service sector. Industries such as tourism, retail trade, and airline travel have been impacted severely. We use the GTAP5 database to calculate the share of exposed sectors to total services for each country.7 We define the exposed sectors based on GTAP definitions as wholesale and retail trade (TRD, including hotels and restaurants), land transport (OTP), and air transport (ATP). The “index of sectoral exposure to SARS” is shown in Figure 2-2. This index is applied to the sector-specific shocks we developed for the Chinese economy. We then apply the “global exposure to SARS” to the resulting shocks. The direct impact on any economy will be a function of a number of factors. An important aspect of the impact will be the size of the service sector in the economy as well as the relative indexes of exposure. Figure 2-3 shows the size of the service sector relative to total output in each economy in the model. Simulation Results We apply the shocks outlined in the previous section to the global economy. We begin the simulation in 2003, assuming in 2003 that the SARS outbreak was completely unanticipated. Both the temporary and persistent shocks are assumed to be understood by the forward-looking agents in the model. Clearly this is problematic when it comes to a new disease like SARS, when there is likely to be a period of learning about the nature of the shock. In this case, rational expectations might not be a good way to model expectations. Yet an alternative approach is not clear. In our defense, it is worth pointing out that only 30 percent of agents have rational expectations and 70 percent of agents are using a rule of thumb in adjusting to contemporaneous information about the economy. Table 2-2 contains results for the percentage change in GDP in 2003 as a result of the temporary and permanent 7   For more information on this database, see the website of the Global Trade Analysis Project at http://www.gtap.agecon.purdue.edu/.

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary FIGURE 2-1 Global exposure to SARS.

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary FIGURE 2-2 Sectoral exposure to SARS: share of retail sale and travel industry in service sector. FIGURE 2-3 Share of service sector in total output. SARS shocks as well as the contribution of each component (i.e., demand decline for services, cost increase for services, and country risk premium). The full dynamics of adjustment will be outlined shortly. Focusing on the GDP results, it is clear that there are interesting differences among the various components of the overall shock as well as between the temporary and permanent shocks. The temporary shock has its largest impact on China and Hong Kong

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary With the SARS outbreak wreaking havoc and shaving an estimated seven-tenths of a percentage point off China’s gross domestic product for 2003, the government appears to have drawn some important lessons from the crisis, including the need for coordinated development. When interviewed by the executive editor of the Washington Post, Premier Wen Jiabao said that “one important inspirational lesson” the new Chinese leadership learned from the SARS crisis was that “uneven development between the urban and rural areas, and imbalance between economic development and social progress” were “bound to stumble and fall (Renmin ribao, 2003d).” On various occasions since the crisis, central leaders have emphasized the importance of public health, especially rural health care (Renmin ribao, 2003e,f,g; Ministry of Health, 2003). The government has also provided more funding to public health. It earmarked billions of dollars to SARS prevention and control, and recently it invested 6.8 billion yuan ($US 850 million) for the construction of a three-tiered network of disease control and prevention (Guangming ribao, 2003). While a nationwide SARS training program is underway, the government has initiated an Internet-based disease reporting system which allows local hospitals to directly report suspected SARS cases to the Chinese CDC and the Ministry of Health (Zhongguo xinwen wang, 2003b). Moreover, as China emerges from the shadow of SARS, Chinese leaders appear to be showing a new, more proactive attitude toward AIDS. Since summer 2003, the government has started offering free treatment for poor people with HIV/AIDS, and it plans to expand the program next year until free treatment is available for all poor HIV carriers and AIDS patients (Chang, 2003; Yardley, 2003). The government has also allocated 11.4 billion yuan ($US 1.42 billion) for strengthening the AIDS medical assistance system and training more health personnel for AIDS prevention and treatment (Jiankang bao, 2003). On December 1, Premier Wen Jiabao appeared on state television shaking hands with AIDS patients and called on the nation to treat them with “care and love.” This event was significant because until then, no senior Chinese leader had even discussed the disease in public. These measures reflected the increased efforts of the Party to cultivate a new image for its leadership. It wants citizens to see the leaders as being in touch with the people and committed to their best interests. More attention has thus been paid to the basic needs of China’s farmers and workers. On August 17, the government promulgated Regulations on the Management of Village Doctors, promising more professional training for rural health personnel (Xinhua news, 2003c). In September, Premier Wen indicated that a majority of the increased health funding will be used to support rural public health. He also reaffirmed his commitment to a new medical insurance scheme in the countryside (Renmin ribao, 2003h). Given that rural areas were viewed as the weakest link in containing the spread of SARS, such measures are expected to strengthen the ability of the public health system to respond to a future disease outbreak. Equally important, the government seems to have learned that in an era of the Internet and cell phones, a complete information blackout is not only impossible

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary but also counterproductive. There are signs suggesting that the crisis is forcing the government to take steps to establish an image of a more open and transparent government. For example, an April 28 Politburo meeting obviously made the decision to publicize a submarine accident that same month that cost 70 lives. News of the tragedy was reported by the official Xinhua news agency on May 2. This marks a significant departure from the traditionally secretive approach taken to the nation’s military disasters. If this new openness continues in the post-SARS era, it will not only create conditions for a government that is more accountable to its people but might also provide considerable incentives for sharing knowledge of an outbreak with the international community as early as possible. As evidenced by the government campaign against SARS, an infectious disease can potentially trigger the party-state to organize a political campaign to reach deep into the hinterlands and snap people into action. This government capacity to mobilize against a disease outbreak is enhanced by a more institutionalized crisis management system. The Regulations on Public Health Emergencies issued by the State Council in mid-May, for example, require setting up an emergency headquarters right after a public health emergency is identified. It has also been reported that the government plans to set up an Emergency Response Bureau, which would draw on the example of the U.S. Federal Emergency Management Administration to tackle future health crises and natural disasters (Wiest, 2003). Problems and Concerns These changes are worth applauding, but will they suffice to effectively contain future epidemics? Here, one of the major problems is a public health system in China that has been compromised by a lack of sufficient state funding. The portion of total health spending financed by the government has fallen from 34 percent in 1978 to less than 20 percent now (Huang, 2003), and a lack of adequate facilities and medical staff shortages compromised early government efforts to contain SARS. For example, hospitals in Guangdong reportedly faced shortages in hospital beds and ambulances, and even among the 66,000 health care workers in Beijing, less than 3,000 (or 4.3 percent) were familiar with respiratory diseases (Renmin ribao, 2003c). Apart from imposing severe constraints on the government’s ability to respond to a public health crisis, the shortage of affordable health care also impacted the ability and willingness of patients to seek out treatment. The Washington Post reported a SARS patient who fled quarantine in Beijing because he did not believe that the government would treat his disease free of charge, and some hospitals are reported to have refused to accept patients who had affordability problems (Washington Post, 2003). More broadly, according to a recent report by the Chinese Consumer’s Association, about 50 percent of people who are sick do not see a doctor because of the extremely high out-of-pocket payments (Zhongguo jingji shibao, 2003). All of these factors sow the seeds for a larger and more catastrophic disease attack.

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary We should also keep in mind that SARS is not the sole microbial threat confronting China. The country faces challenges from other major infectious diseases such as the plague, cholera, HIV/AIDS, other sexually transmitted diseases, tuberculosis, viral hepatitis, and endemic schistosomiasis (Renmin ribao, 2003i). These multiple public health challenges require China to build on the anti-SARS momentum and integrate a comprehensive epidemic control plan into the national socioeconomic development agenda. While the health sector is now receiving increased attention at high levels, the government so far has placed top priority only on preventing the return of SARS. The top leaders have been generally silent on other major infectious diseases. Despite official recognition of the seriousness of HIV/AIDS, China does not have a comprehensive national program for disease prevention and control to help stop the epidemic. In rural areas hard-hit by AIDS, local governments continue to harass public health activists, devote few resources to educating people about the disease, and sometimes even meet the demands of the villagers with violence (Pan, 2003). Furthermore, there has been no fundamental change in the government’s development agenda. The central government still equates development with economic growth and uses that as a yardstick in measuring local government performance. In addition, it is worth noting that the apparent policy transparency has not been accompanied by significant state relaxation of media control. On May 12, the very same day that Premier Wen Jiabao released the new regulations to promote openness, the Beijing Morning News carried an article on how people who spread “rumors” about SARS could be jailed for up to 5 years. While the newly promulgated Regulations on Public Health Emergencies stipulate that government officials make timely and truthful reports about any such emergencies, they do not enshrine the public’s right to be informed in the same manner. Indeed, a recent speech by Vice Premier Wu Yi reiterated state control over the media in order to “strictly prohibit the spread of rumors and other harmful information (Wu Yi, 2003).” While feedback from the public may matter more for the government than it used to, government officials ultimately remain responsible not to the public but to the higher authorities. Hence, the government will always be more sensitive to pressure that comes top down, rather than bottom up. Ironically, the likelihood of deception has increased as a result of the spread of some government measures in fighting SARS, such as the practice of holding bureaucratic officials personally accountable for local SARS cases through a “responsibility pledge” (junling zhuang) without giving due consideration of actual local conditions (e.g., the public health infrastructure). If indeed an outbreak is imminent, a local government official concerned about his post may well choose to lie. Manipulation of SARS-related data remained a serious problem even after April 17—among other things, a pattern could be easily identified in the government war against SARS in which when upper-level leaders demanded a reduction of SARS cases, their orders would be reflected in statistics afterwards (Wong, 2003).

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary To the extent that upward accountability and performance-based legitimacy will cause problems in agenda setting and policy making, the lack of effective civil society participation reduces government effectiveness in policy enforcement. In initiating many anti-SARS projects during the crisis, the government did nothing to consult or inform the local people. Chinese non-governmental organizations (NGOs), if anything, were absent in the war against SARS (21st Century Economic Herald, 2003). Instead, the government relied on the extensive array of mobilization vehicles installed in the Mao era—village party branches, street sub-district offices, former barefoot doctors—to take temperatures, quarantine people, trace infections and round up laggards. To be sure, party leaders undertaking the anti-SARS measures differed from their predecessors by emphasizing “science” and “rule by law.” Yet the absence of genuinely engaged civil society groups as a source of oversight and information, coupled with the increasing pressure from higher authorities, easily created a results-oriented implementation structure that made nonscientific, heavy-handed measures more appealing to local government officials. They found it safer to be overzealous than to be seen as “soft.” Until June 2, for example, Shanghai was quarantining people from the regions hard hit by SARS (such as Beijing) for 10 days even if they had no symptoms (Pomfret, 2003c). The government’s heavy reliance on quarantine during the epidemic also raises a question about the impact of future disease control measures and the worsening of the human rights situation in China. This question, of course, is not unique to China—even countries like the United States are debating whether it is necessary to apply mandatory approaches to confront health risks more effectively. The Model Emergency Health Powers pushed by the Bush administration would permit state governors in a health crisis to impose quarantines, limit people’s movements and ration medicine, and seize anything from dead bodies to private hospitals (Kristof, 2003). While China’s Law on Prevention and Treatment of Infectious Disease did not until recently explicate that quarantines apply to the SARS epidemic, Articles 24 and 25 authorize local governments to take emergency measures that may compromise personal freedom. The problem is that unlike democracies, China in applying these measures excludes the input of civil associations. Official reports suggested that innocent people were dubbed rumor spreaders and arrested simply because they relayed some SARS-related information to their friends or colleagues (Xinhua News, 2003d). According to the Ministry of Public Security, public security departments have investigated 107 cases in which people used Internet and cell phones to spread SARS-related “rumors (Renmin wang, 2003d).” Some Chinese legal scholars have already expressed concerns that the government, in order to block information about epidemics, may turn to more human rights violations (ChineseNewsNet, 2003). The lack of engagement by civil society in the policy process could deplete the social capital that would be so important for future government outbreak control efforts. In the case of SARS, the government’s failure to publicize the out-

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary break in a timely and accurate manner and the ensuing rapid policy turnaround eroded the public’s trust and contributed to the spread of rumors even after the government adopted a more open stance toward information on the epidemic. In late April, thousands of residents of a rural town of Tianjin ransacked a building, believing it would be used to house ill patients with confirmed or suspected SARS, even though officials insisted that it would be used only as a medical observation facility to accommodate people who had close contacts with SARS patients and for travelers returning from SARS hot spots. Opposition to official efforts to contain SARS was also found in a coastal Zhejiang province, where several thousand people took part in a violent protest against six people being quarantined after returning from Beijing (Kuhn, 2003). Here again, the lack of active civilian participation exacerbated existing problems of trust. In initiating the project in Tianjin, the government had done nothing to consult or inform the local people (Eckholm, 2003). Finally, the mobilization model for confronting public health crises also suffers from a problem of sustainability in the post-Mao era. By placing great political pressure on local cadres in policy implementation, mobilization is a convenient bureaucratic tool for overriding fiscal constraints and bureaucratic inertia while promoting grassroots cadres to behave in ways that reflect the priorities of their superiors. Direct involvement of the local political leadership increases program resources, helps ensure they are used for program purposes, and mobilizes resources from other systems, including free manpower transferred to program tasks. Yet in doing so, a bias against routine administration is built into its implementation structure. While personal rewards of private life (e.g., medals, higher pay, extra credits for medical workers’ children attending the college entrance exam) were provided for activism in the anti-SARS campaign, decades of reforms have eroded state control and increased the opportunity cost of participation. While the government demonstrated in this case a continued ability to spur people to action in even the most remote villages, in a post-totalitarian context it is generally difficult to sustain a state of high alert across the country for an extended period. Conclusions The pattern of the Chinese government’s response to SARS was shaped by the institutional dynamics of the country’s political system. A deeply ingrained authoritarian impulse to maintain secrecy, in conjunction with a performance-based legitimacy and an obsession with development and stability during political succession, contributed to China’s initial failure to publicize the outbreak. Meanwhile, an upwardly directed system of accountability, a fragmented bureaucracy, and an oligarchic political structure hampered any effective government response to the outbreak. In spite of these problems, interactions between the state and society unleashed dynamics that prompted the central party-state to

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary intervene on society’s behalf. The direct involvement of the Party strengthened authority links, increased program resources, and maximized the potential for interdepartmental and intergovernmental cooperation. In this manner, the party-state remains capable of implementing its will throughout the system without serious institutional constraints. The government’s capacity for crisis management has been further enhanced by a series of measures taken in the post-SARS era. However, this does not mean that the government is ready for the next disease outbreak. In the absence of fundamental changes in the political system and a comprehensive epidemic control plan, not only is the same pattern of cover-up and inaction likely to be repeated, but the government will find it increasingly difficult to control the multiple public health challenges it is now facing. The above analysis clearly points to a need for the Chinese government to significantly enhance its capacity to combat future outbreaks of SARS and other infectious diseases. Given that a public health crisis reduces state capacity just when ever-increasing capacity is needed to tackle the challenges, purely endogenous solutions to build capacity are unlikely to be successful, and capacity will have to be imported from exogenous sources such as massive foreign aid (Price-Smith, 2002). In this sense, building state capability also means building more effective partnerships and institutions internationally. International actors can play an important role in creating a more responsible and responsive government in China (Huang, 2003). First, aid from international organizations opens an alternative source of financing for health care, increasing the government’s financial capacity in the health sector. Second, international aid can strengthen bureaucratic capacity through technical assistance, policy counseling, and personnel training. Third, while international organizations and foreign governments provide additional health resources in policy implementation, the government increasingly has to subject its agenda-setting regime to the donors’ organizational goals, which can make the government more responsive to its people. The agenda shift for SARS to a large extent was caused by strong international pressures exerted by the international media, international organizations, and foreign governments. There are also indications that the Internet is increasingly used by the new leadership to solicit policy feedback, collect public opinions, and mobilize political support. Starting February 11, Western news media were aggressively reporting about SARS and about government cover-ups of the number of cases in China. It is very likely that Hu Jintao and Wen Jiabao, both Internet users, made use of international information in making decisions concerning the epidemic. In other words, external pressures can be very influential because Chinese governmental leaders are aware of weaknesses in the existing system for effectively responding to a crisis and therefore have incentives to seek political resources exogenous to the system. From the perspective of international actors, helping China to fight future epidemics also helps themselves. Against the background of a global economy, diseases originating in China can be spread and transported globally through trade,

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Learning From Sars: Preparing for the Next Disease Outbreak - Workshop Summary travel, and population movements. Moreover, an unsustainable economy or state collapse spawned by poor health will deal a serious blow to the global economy. As foreign companies shift manufacturing to China, the country is becoming a workshop to the world. A world economy that is so dependent on China as an industrial lifeline can become increasingly vulnerable to a major supply disruption caused by disease epidemics. Perhaps equally important, if future epidemics in China result in truly global health crises, the unwanted social and political changes will be felt by even the most powerful nations. As every immigrant or visitor from China or Asia is viewed as a potential Typhoid Mary, minorities and immigration could become a sensitive domestic political issue in countries such as the United States and Canada. An incident in New Jersey during the SARS outbreak, in which artists of Chinese background were denied access to a middle school, suggests that when SARS becomes part of a national lexicon, fear, rumor, suspicion, and misinformation can jeopardize racial harmony in any country (Newman and Zhao, 2003). Given the international implications of China’s public health, it is in the interest of the United States and other industrialized nations to expand cooperation with China in the areas of information exchange, research, personnel training, and improvement of public health facilities. Meanwhile, these countries could send clear signals to the Chinese leadership that reform-minded leaders in the forefront of fighting epidemic diseases and supporting public health will be supported. The world’s interests will be well served by continuing to support a Chinese government that is increasingly more open and interested in international engagement. It should also not miss this unique opportunity to help create a healthier China. REFERENCES Arhin-Tenkorang D, Conceiçao P. 2003. Beyond communicable disease control: health in the age of globalization. In: Kaul I, Conceiçao P, Le Goulven K, and Mendoza RU, eds., Providing Global Public Goods: Managing Globalization. New York, NY: Oxford University Press. Pp. 484-515. Australian Treasury. 2003 (Winter). Economic Roundup. Canberra, Australia: Commonwealth Government. Bagnoli P, McKibbin W, Wilcoxen P. 1996. Future projections and structural change. In: Nakicenovic N, Nordhaus W, Richels R, Toth F, eds., Climate Change: Integrating Economics and Policy. CP 96–1. Laxenburg, Austria: International Institute for Applied Systems Analysis. Pp. 181-206. Barro R, Sala-I-Martin X. 1995. Economic Growth. New York, NY: McGraw-Hill. Beech H. 2003. Unhappy returns. Time 162(22). [Online] Available: http://www.time.com/time/asia/magazine/article/0,13673,501031208-552154,00.html. Blanchard O, Fischer S. 1989. Lectures on Macroeconomics. Cambridge, MA: MIT Press. Bloom DE, Canning D, Sevilla J. 2001. The Effect of Health on Economic Growth: Theory and Evidence. NBER Working Paper #8587. Cambridge, MA: National Bureau of Economic Research. Bloom DE, Mahal AS. 1997. AIDS, flu, and the Black Death: impacts on economic growth and well-being. In: Bloom DE, Godwin P, eds., The Economics of HIV and AIDS: The Case of South and South East Asia. Oxford, UK: Oxford University Press. Pp. 22-52.

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