THE BLOG
10/08/2014 09:00 am ET Updated Dec 08, 2014

The Economic Impact of Ebola

ASSOCIATED PRESS

The outbreak of Ebola in West Africa has claimed thousands of lives -- more than 3,000 and counting -- and it has the power to take many more. It also has the power to wreck the economies of one of the poorest regions in the world. Whether it does or not will depend on how people and governments behave.

To put things in perspective, more than half of the twenty million population of Guinea, Liberia, and Sierra Leone live in poverty -- real poverty. Their average annual incomes range from just over $400 to less than $700. They have lived through violence and civil wars. But, in recent years, thanks to a mix of mineral discoveries and better governance, they were finally beginning to climb the development ladder. Ebola is now putting all of that into question. How bad is the initial economic impact, and how bad could it get?

Answering those questions is more art than science. These countries were not flush with socio-economic data to begin with. And there is much uncertainty about how far the virus will, literally, travel. In a just-released paper, John Panzer, Francisco Ferreira, and their colleagues at the World Bank came up with some interesting estimates -- and with an interesting way to estimate. [Disclaimer: this writer was an adviser in their work.] They started by collecting information directly in the affected areas, from hotel occupancy rates and cement sales to farms that have been abandoned and mines that have been shut down. They added all this up and figured that, in 2014, the economies of the three countries will drastically slow down, but will not contract. Their rates of economic growth will be cut by about half. That is a loss of some $350 million -- large for them, but not yet catastrophic.

Still, the sudden slow-down will be more than enough to derail the finances of the three governments: they will spend a lot more on health while they will collect a lot less in taxes -- when a crisis of this sort strikes, paying taxes is the least of a citizen's priorities. The fiscal hole could be larger than what these countries spend on social assistance in normal times: from 2 percent of GDP in Guinea to almost 5 percent in Liberia. It is clear that they need immediate help, about $400 million of it. Fortunately, the rest of the world is listening and money is coming in.

However, things could get much more serious in 2015. To guess how serious, the World Bank team created an "Ebola Impact Index", based on air travel connections from and to West Africa, and on the quality of healthcare systems in countries to which West Africa is connected. It roughly tells you how likely countries in Africa, Europe, and the US are to be affected by Ebola. They then used some pretty sophisticated statistical tools to model the economic links between West Africa and the rest of the world. And finally, they built two "scenarios" for how governments and people might behave. The first scenario is one in which politicians -- African or otherwise -- act fast, in a coordinated and credible way, and contain the spread of the virus by early 2015 -- at 20,000 cases, mind you. This makes people less afraid to leave their homes and go back to work: trade, farming, construction, industrial production, even investment, all resume fairly quickly. The economy recovers, the total material loss for Guinea, Liberia, and Sierra Leone is "only" one hundred million dollars, and the rest of the world is spared the effects of Ebola.

But, what happens if politicians fail to act quickly, decisively, and together, and people panic? What happens if because the number of cases is allowed to rise to, say, 200,000, workers, investors, traders, and farmers stay home? This is the second scenario -- and it is sobering. Then the economic loss in the whole of West Africa, not just in the three initially affected countries, could climb to $33 billion. That would be a devastating blow to the region. Rich countries like the US, France, and Germany would still be spared, but the already wide wealth gap between them and Africa would grow even wider.

What makes all this very interesting is that the final economic toll of Ebola will not be driven by the direct costs of the disease itself -- expensive drugs, sick employees, and busy caregivers. It will be driven by how much those who are not infected trust their governments. If public action is not seen as containing the outbreak and fear of contagion rages, workers will not go to work, business and factories will stay closed, and the economy will collapse. This is called "aversion behavior", a term you may want to keep in mind. Note that aversion is unrelated to the actual number of deaths a disease causes: every year, malaria kills twelve times more Guineans, Liberians, and Sierra Leoneans than Ebola has killed so far. But people behave differently in pandemics. We learned this with SARS in 2003 and with H1N1 in 2009. We will soon know whether we heeded the lesson.

A final point about social dynamics. Ebola knows no class. The rich and the poor can, and do, get infected and die. But for those who can afford prevention -- from hand-sanitizer to emigration -- the chances of infection are much lower. In any scenario, the poor will bear the brunt of this outbreak, not just because they are more likely to catch the virus but because they are more vulnerable to the economic impact of the disease. The prices they care about, especially of food, will rise. They have no savings to rely on. And they have fewer transferable skills to look for safer jobs. Prepare to see more poverty in West Africa.

@Marcelo_WB