The Effect of the Bird Flu and Numerous Cases of Mad Cow Disease on Global Economics
Two of the biggest stories in the recent news involve disease. Mad cow disease is affecting the American beef industry’s trade with places such as Japan. The bird flu is rumored as being the next pandemic. These two potential diseases have the ability to impact world economics as a whole. The bird flu has a greater potential for harm due to its ability to be easily spread.
In November 2004, a top World Health Organization official warned that the bird flu virus that has plagued Asian countries might unleash a pandemic that could kill up to 50 million people (1). However, the reaction to the news was less than urgent due to the numbing of the public with the shortfall of catastrophic predictions such as SARS (Severe Acute Respiratory Syndrome) just last year. The H5N1 avian flu virus, also known as the bird flu, is a subtype of the avian influenza virus and is found in poultry. According to the World Health Organization, “unlike normal seasonal influenza, where infection causes only mild respiratory symptoms in most people, the disease caused by H5N1 follows an unusually aggressive clinical course, with rapid deterioration and high fatality.” The primary symptoms are viral pneumonia and multi-organ failure.
According to the CDC “Center for Disease Control,” a flu virus is made of a genetic material called ribonucleic acid (RNA), which is similar to DNA found in plant and animal cells. Changes to a virus' RNA, however, are critical to the flu's ability to survive. The genes of a flu virus are like a program that allows the flu virus to proliferate.
When the virus was first discovered, it was believed that the virus was impossible to transfer to humans. This idea was proven wrong when an outbreak occurred in Hong Kong in 1997 that killed 6 out of 18 people infected with the virus (1). The slaughter of millions of chickens, ducks, and other birds across Asia has been forced due to the infectious disease. There have been 44 confirmed human cases of H5N1 flu in Thailand and Vietnam, resulting in 32 deaths (1). While the virus is currently without a vaccine, it has undergone huge genetic changes and has become even more pathogenic. Experts fear that the changes will eventually become deadly to humans easily leaping between them, with ducks and pigs as likely transmitters (1). The existing technology for making vaccines is to inoculate chicken eggs, and scientists are trying to find a biotech-based vaccine in time to stop a major catastrophe. Currently, the virus has not been able to reorganize the amino acids on the shell of the egg to infect the human population (1).
The New Economist reports a statement made by the Asian Development Bank economists as measuring a “relatively mild” pandemic in Asia as killing 3 million people. This would result in either a cut in economic growth in the region for a few quarters, or it would drag the world into a recession (9). If there was limited economic impact restricted to Asia, only two quarters would be affected. However if the outbreak lasts longer, the economic impact would be more severe reducing global consumption that also impacts trade and investment. In the first scenario, the supply shock of people unable to work is $14.2 billion, and the demand shock is $99.2 billion (9). If the second scenario occurs, the supply shock will be about the same, but the demand shock would swamp the supply resulting in a total loss of $282.7 billion. Global trade of goods and services would contract by approximately $2.5 trillion, causing a world recession (9).
The potential human outbreak in the United States could cause a $675 billion blow to the economy (4). Bill Frist, the U.S. Senate Majority Leader, believes that a course of action needs to be implemented to address the potential outbreak. President Bush also believes in the formulation of a plan, and has asked Congress to allocate $7.1 billion to fund his Bird flu plan, but no measure has passed (4).
The mutation of the bird flu causing human outbreak in Asia would “slow or halt the economic growth in the region” (6). The Asian Development Bank states that an outbreak of the disease would lead to reduction of trade, especially in services, causing potential economic growth to be lower, and increasing poverty.
The World Bank, anticipating the potential of the virus, has made $500 million in loans available to help countries prepare for the possibility that their animal or human population becomes infected with the bird flu (5). The World Bank also expects a downturn in travel, as people become wary to the potential transmission of the flu from birds to humans (5). The bank also suggests that companies find other ways of doing business such as telecommuting and video conferencing. Companies need to develop plans to keep infected workers at home, ensuring sanitary work environments. Bankruptcy policies must also be reformed to facilitate reconstruction and the re-launching of companies quickly after an epidemic (5). As an opportunity cost, the companies need to look ahead and secure adequate financing to survive a severe reduction in demand for their products or services for a period of up to two years (5).
The psychological effects of the bird flu on the human population have the potential to be more of a problem than the actual flu. The tourism sector will be reduced due to people staying away from infected and areas at risk (10). People will opt to stay home and not spend money at places such as retail stores. People will also minimize face-to-face interaction due to the fear of infection resulting in a demand shock for service sectors such as tourism, mass transportation, retail stores, hotels and restaurants. A supply shock will also happen due to workplace absenteeism and disruption of production processes, causing producers to shift to more costly procedures (3).
The fear of the virus is causing some to suspect we are overreacting. Fortune magazine states that focusing on a worst-case scenario has grave consequences. More than $2.2 billion of the $7.1 billion in anti-pandemic funding by President Bush is going toward stockpiling vaccines and Tamiflu, which are perishable if a pandemic does not occur in the next three years. However, the plan devotes almost the same amount to research geared toward modernizing vaccine medicines. Marc Siegel of Fortune warns of the possible massive waste without benefit from being overly cautious. The Washington Times alerts the public of the potential devastation but also gives an idea for a future plan. All the nations need to work together by educating the public and improve surveillance and reporting procedures (25). The outbreaks need to be reported early in order to be stopped, and treated quickly through containment and antiviral drugs (25). The Times warns that even if this potential epidemic passes, another virus strain could pose the same threat, requiring a global commitment to ward off future threats.
The Asian Development Bank in Manila, Asia estimated that the bird flu could reduce the global trade of goods and services by 14% (7). Leisure activities such as entertainment, retail, and restaurants will also take a big hit due to the service sector being reduced. The pandemic would disrupt international trade, which would lead to damaging shortages of goods and materials (11). The Times Online also states that “air travel would come to a grinding halt” (11). Many industries in the entertainment sector such as retailing, restaurants, pubs and cinemas would see their demand decrease due to people staying at home, away from the imminent danger. According to the Times, the supply potential will also drop, as companies suffer acute staff shortages. Then, inflation could be triggered to rise causing the central banks to worry about how to respond. Therefore, the stock market could possibly decline.
The fear factor of the flu on the public will also affect the economies of the drug market. If the flu virus was to break out, more people would be concerned with getting the drug which would push up the demand. The supply however, may not be able to match the demand of the drug because drug companies may find it difficult to increase production (2). The difficulty in increasing production comes from the limited supply of ingredients needed to make the drug, and the reduction of global trade mentioned earlier. Also, staff shortages could hinder the company’s manpower to physically oversee the production process. If a company loses money due to the virus, most investors/traders will sell the company’s shares at a lower price. The domino effect will occur from the unwillingness of buyers to purchase the stock, causing the stock price to plunge (2).
Each market is somewhat different in how it will react to the possible bird flu pandemic. In New Zealand for example, the bird flu would “hurt the economy badly” (17). The bird flu would cause a rise in unemployment, and be disastrous for the tourism industry according to Dean Ford of the Bank of New Zealand. The cost of containing the disease overall, lowers productivity. The lamb industry in New Zealand however, is seeing a increase in demand as an alternative protein source. The tourism numbers are expected to fall and the commodity prices to flatten out, leading to a downturn in the economy (17).
The same effects are expected in the Australian economy. The main disruption according to the Financial News is from the people trying to avoid catching the disease. The demand for the dollar would rise, due to increased demand for cash deposits and treasury bonds. However, the demand for commodities and energy would fall. The Financial News also stated that the “Central banks may cut interest rates to lower borrowing costs to support struggling businesses and to offset the decline in household and business consumption.” The $73 million tourism industry in Australia is expected to suffer greatly under an overseas bird flu outbreak, impacting Australia as a whole with the poultry industry representing 3.9% of its GDP (20). However, if the bird flu gets to Australia and if the poultry industry in Australia was only affected, not the humans, then only the poultry industry would be greatly affected and the overall Australian economy would survive.
China as a country has pledged to close its borders if the human-to-human transmission of the bird flu is found in its area. Chinese health officials said that they would rather prefer a slump in trade than risk aiding a global pandemic (18). Huang Jiefu, a vice minister in the Ministry of Health says that the main priority is saving lives, even if it meant a slowdown in the economy (18). Taiwan has also said that it would override patents and go into emergency production of the antiviral drug Tamiflu, if the outbreak occurs. China is the world’s biggest producer of poultry, and this makes it likely that any type of mutation might happen there. Chinese leaders are stressing the importance of detecting and reporting cases of the bird flu. The Chinese system of dealing with the disease is segmented; causing fear that human-to-human pandemic will occur due to the time it takes for responsive action to occur.
The effects on Thailand are catastrophic for the poultry industry. The largest poultry exporter in Thailand brings in $1.2 billion a year (29). One-third of the country’s 76 provinces have infected fowl, and well over 10 million birds have died or been culled (29). Japan and European Union, Thailand’s two biggest markets, have banned imports, which is crumbling Thailand’s exports. The profits for the two biggest poultry companies will drop by a half and a third, causing thousands of people to loose their jobs (29). Thailand’s government has a compensation scheme to restock farms and pay for lost income, but the overwhelming effect of the flu is hard to overcome. Other than the poultry sector, the other areas seem to be unaffected. The tourism has not fallen, and according to the Economist’s report, it is not expected to fall.
Surprisingly, the Asian economy is likely to escape broad flu damage according to the Wall Street Journal. Michael Spencer, the Deutsche Bank’s chief Asian economist in Hong Kong, believes this is a poultry-industry problem (24). However, he believes that if human-to-human transmission becomes possible, then travel warnings could occur forcing a virtual shutdown of airports in Asia (24). Asia’s latest outbreak of the bird flu, which has spread to at least eight countries, could do serious economic damage to individual companies and countries. Differing from the expected, “Tourists and businesspeople don’t seem to be canceling trips to Asia because of the bird flu, at least not yet” says Ben Simpfendorfer, a J.P. Morgan Chase economist who tracks tourism to Hong Kong. He suggests the bird flu is “not a new thing” to Hong Kong as being present in past years.
Donald Coxe from Harris Investment Mangement Inc. out of Chicago warns that investors need to prepare for a potential outbreak of an avian flu pandemic that could kill millions and force disruptive quarantines worldwide (30). This would put the entire global economy and financial system at risk he warns. He compares markets to humans when saying “Financial markets could be as vulnerable as unvaccinated humans” (30). He believes that pension funds should increase their cash positions to prepare for such a potential catastrophic event. First, cash would protect pension funds on the downside when the stock market declines as a result of investors worrying about a pandemic. Secondly, he says that the opportunity to buy will come about when there is a “period of enormous dislocation,” or when stocks and bonds have fallen.
On the other hand, he says that “You shouldn’t try to profit from a catastrophic event, but reduce your risk should one occur.” Mr. Coxe further states that the healthiest sectors of today’s global market are those most at risk, and could affect demand of even housing and cars plummeting prices of metals and steel, not to mention oil demand dropping due to lack of consumption (30).
In the United States, the poultry businesses are hopeful consumers won’t panic about contracting the bird flu. As the bird flu grows, awareness also grows forcing the consumers to become skeptical and react by reducing consumption (33). Susie Wolf, president of Wolfpack Communications says,
“Food retailers, restaurant chains and others will be smart to have PR plans in the can, ready to go. Do you create more of a scare by talking about it? You have to be prepared because there is going to be enough of a concern that you have to be ready to address it. That’s just human nature.”
Matt Monkiewicz director of marketing believes that the problem of the possible bird flu is out of the control of the industry. He believes that the panic has already begun. “Bush, in his speech last week, is preparing for a possible pandemic, with no mention that poultry is safe to eat” (33). He also worries where the education is that is supposed to help the industry if the bird flu becomes a problem. He further worries that with the high energy costs to food manufacturers, a demand decrease caused from the bird flu would not only cause a problem, but could be disastrous to the industry (33).
The avian flu could possibly stunt the poultry market, but it may help the beef export market according to Nation’s Restaurant News. In the January 16, 2006 issue, Japan had recently lifted its import ban on U.S. beef sending boxed beef and cattle prices higher. Japan represented 36 percent of the U.S. exports before the recent ban. Now, Japan will only import beef from cattle 20 months and younger (32). This stems from past problems with the age verification of U.S. beef. The U.S. will limit the amount of beef available for export, hoping the past problems of verification will be solved. According to the magazine, “it will take time to win back Japanese consumers and overcome the negative mad-cow related publicity.” John T. Barone the author of the article in the Nation’s Restaurant News says that the U.S. beef industry would be fortunate in 2006 to achieve even a third of the previous export levels. According to the University of Tennessee, the U.S. has also lost some of its previous export market to Australian beef producers. Since the first beef ban controversy lasted almost two years, Australian producers had the opportunity to move in and prove the all-important product quality to Japanese beef consumers.
The import limitation of beef from the U.S. can be seen by some as protectionist. The public is being protected, along with Japan’s own domestic beef market. The Japanese government is trying to establish a beef market that can be trusted by its citizens. Also, the risk if infection of its own cattle herds forces the government to stop all beef imports from the U.S.
On January 20th, 2006 Japan reinstated a ban on U.S. beef that affects both suppliers and exporters. The state of Florida is one of the major suppliers (12th largest) of calves to states such as Texas and Colorado where the cows are fed, fattened, and later sold for beef (16). A portion of this beef goes to Japan, which is why the ban will affect Florida. The cattle industry has about a $4 million impact on the state’s economy, mentions Jim Handley, executive vice president if the Florida Cattlemen’s Association in Kissimmee, Florida. The entire U.S. beef industry will take a hit, eventually reaching Florida according to Liz Compton, a spokeswoman for the Florida Department of Agriculture and Consumer Services (16). Japanese Prime Minister Junichiro Koizumi is quoted in the article as saying, “We will stop importing beef from the U.S., it’s disappointing as we just started” (16). He is referring to Japan stopping imports of beef from the United States for two years due to mad cow disease. During this ban on U.S. beef, more than 60 nations also banned the beef, threatening the $3.8 billion in annual exports.
Mad cow disease caused the two year ban after inspectors found banned cattle parts in shipment, disrupting trade that resumed in December 2005. Japan had resumed imports December 12th, after concluding that the risk of mad-cow disease in U.S. beef was small, providing certain conditions were met. The most recent ban comes from 3 of 41 boxes of beef from New York-based Atlantic Veal & Lamb Inc. containing spinal cord, a portion blamed for spreading the human variant of mad-cow disease (16).
The Tampa Tribune defines mad-cow disease as a “brain-wasting livestock illness that scientists say is spread in cattle by tainted animal feed. Eating contaminated meat from infected animals can cause a fatal human variant that has been blamed for the deaths of 151 people in the United Kingdom, where it was first reported in the 1980s.” The United States’ meat supply is at risk of mad cow disease according to Consumer Affairs. The U.S. Agriculture Department’s Inspector General warns that beef inspectors are not strictly following the cattle screening rules. Therefore, the risk of mad-cow disease is increasing. The rules at slaughter houses are being broken, or ignored. Twenty-nine suspect cows were slaughtered at two dozen meatpacking plants, following an audit by the U.S. Agriculture Department. The slaughtered animals were unable to walk, and at least 20 that fell into the category of “downer” cows, or animals whose condition could not be explained from injury (13). The “downer” cattle are considered to be at the highest risk of mad-cow disease, therefore banned for human consumption.
The United States Department of Agriculture’s (USDA) record keeping is in need of improvement, showing the risk of suspect cattle entering the food supply. The USDA’s Food Safety and Inspection Service, which is responsible for slaughter house inspections, is going to clarify its policy for slaughtering “downer” cattle and issue a new guidance to its 6,000 plus inspectors as soon as possible (13). The “downer” cow regulation came after the first case of mad-cow disease was discovered in the U.S. in December 2003.
The U.S. is doing everything it can to help promote free-trade with other nations, especially concerning the beef industry. It has opened negotiations with countries such as Malaysia, Thailand, and Australia. The U.S. is especially concerned with improving economic ties in Southeast Asia. On Tuesday March 9th 2006, Malaysia agreed to re-open imports of beef from the U.S. for the first time since 2003. President Bush is quoted as saying "a U.S.-Malaysia Free-Trade Agreement will advance our commitment to opening markets around the world and expanding opportunities for America's farmers, ranchers, workers and businesses."
Since the January 2006 ban on U.S. beef, Japan has decided to send its own inspectors to the United States. Japanese inspectors will visit facilities in Arkansas and Kansas among others, most notably a Tyson food plant in Kansas (14). Kansas is the nation’s second-largest producer of red meats and hides. The beef contributes about $3 billion a year to the Kansas economy. An example of the importance of beef for Kansas, in 2003 Kansas exported $871 million worth of meat and animals. The year after Japan banned U.S. beef, the number fell to $343 million (14). On the other side of the argument, the Japanese government has been accused of failing to inspect U.S. meat plants before resuming trade with the United States (14).
A story out of the northern island of Japan named Hokkaido, reports forty-five cows are suspected of having mad-cow disease and will be destroyed. This comes as a shock since Japan was very protective when dealing with the disease affecting U.S. trade. On January 24th 2006, a cow that died on the farm was confirmed to have mad-cow disease (12). This case was the twenty-second known in Japan. Following the death of the cow, the Hokkaido government banned the movement of any of the farm’s cows. Also, 43 adult cows and two calves are suspected of having mad-cow disease and will be incinerated (12). The cow that died of the disease, was not raised for beef and posed no danger to the country’s food supply (12). The cow was fed meat-and-bone meal, which was the first known use of such feed in Japan since it was banned in 2001 (12).
In general, the bird flu may cause a slight up-turn for the beef industry that is facing a ban by Japan. Certain states will be devastated if the ban continues, since their economies are based in beef exports. The overall American beef industry is taking a downturn, which is slowly being resolved by new practices such as Japanese inspectors checking U.S. packing plants. The U.S. is trying to improve its trade situation and resolve the beef issue along with others as fast as possible.
Money Week magazine brings forth a different view of the bird flu issue. They have reviewed the situation and have concluded that there is no immediate sign of the virus building into a pandemic. They do warn of the consequences if the flu does turn into the pandemic as some predict, but are not worried that it will happen. Even though humans have gotten the disease, there is no case that deals with human-to-human contraction. There are also no incidences of human sufferers infecting health workers with whom they come into direct contact (8).
The recent reports on the virus have caused sufficient hysteria to result in increased demand for the existing flu vaccination. The magazine goes on to say that “not only has the workforce spent fewer days sick over the latter part of 2005, but stock shortages have increased the pressure on product producers to increase the speed at which product can be made available.” The economic impact if viewed this way might be seen as positive to this point.
The medical response to the bird flu comes in the form of an existing vaccine. The vaccine is named Tamiflu, and Roche Holding AG a Swiss drug manufacturer, owns the rights.(34) Dr. David Reddy is the head scientist in the Tamiflu project at Roche Holding AG. He says, “Having this drug is a significant responsibility, given the role this drug could play.” Roche agreed to donate three million doses to the WHO (World Health Organization), who did not have any Tamiflu stockpiled. Recently, Roche agreed to an additional two million doses to the WHO emergency stockpile. Tamiflu prevents viral replication by repressing a key protein on the surface of the flu virus. The vaccine was originally developed to treat regular seasonal flu, but has been found to be effective at reducing the symptoms of the bird flu. Roche can make about 55 million treatment courses a year, but promises to boost output to 150 million this year and to 300 million by early 2007 (34).
According to the CDC website, Tamiflu is a neuraminidase inhibitor. The surfaces of flu viruses are dotted with neuraminidase proteins, which are characteristic of each flu strain. Neuraminidase, which is an enzyme, breaks the bonds that hold new virus particles to the outside of an infected cell. Once the enzyme breaks these bonds, this sets free new viruses that can infect other cells and spread infection. The CDC site goes on to mention that neuraminidase inhibitors basically prevent the enzyme from doing its job and trap the virus inside the cell, preventing new virus particles from being released and limiting the spread of infection.
Overall, the bird flu has the potential to cause damage of unknown proportions. The first market to be affected would most likely be Asia, possibly causing a world recession. Economic growth would all but halt and world trade would see a downturn, along with goods and services such as travel, restaurants, and entertainment. The fear of the virus has the potential to cause a mild affect of the actual flu pandemic. The public, out of fear, will take precautions to not become infected, and actually benefit the economy in the short run.
The international trade downturn could cause shortages in goods and services, due to infected workers staying home under quarantine. Decreased demand would result in certain industries, and supply potential of economies would also decrease due to staff shortages. Inflation could result causing the stock market to go down, possibly benefiting pensions and investments. The drug market is most likely going to increase whether the virus turns into a pandemic or it stays avian.