The Economic Consequences of Chinese Pandemic Un-Preparedness

The population of China plays a significant role in the world economy.  Low cost manufacturing in China drives the larger economies of many other nations.  As a benchmark for this influence, recent reports put 80% of Walmart's manufacturing capacity in China. (Though the folks Newsweek, unsurprisingly, can't make up their minds and corrected an original report to say only 6%.)  While not every global firm relies so heavily on China, a bit of everything we buy is made there, or was made using machine tooling produced there. 

The health and productivity of workers responsible for China's manufacturing power is therefore of critical interest.  On a longer timescale, as China grows into a market on which western companies depend, the health of more than a billion consumers will also play a crucial role in the world economy.  These observations set up a series of questions about the capabilities of China‚Äôs public health system.  The answers to those questions in turn, through the role of the Chinese population as manufacturers and consumers, help determine the impact on the global economy of a pandemic Avian Flu outbreak within China.

I've just returned from a scenario planning exercise run by the GBN called "China's Choices".  I was able to ask journalists, professors, and corporate planners with experience in country about some of these issues.  The answers were not encouraging.  I will get into the details below, but there is already cause for concern.

Over at Recombinomics, Henry Niman continues to bang the drum about human cases of the Avian Flu in Asia, now citing local reports from China about a number of unexplained deaths that he asserts are due to the Flu.  He is evidently unsatisfied with the WHOs correspondence with the Chinese government in which all reports of human cases are denied.  Given Niman's language, I have to wonder if he is fanning the flames of panic.  But if there is in fact the beginnings of an outbreak in China then everyone had better pay attention right now.  However, I have a feeling that even in the event of a real outbreak it will take quite a while for anyone to figure out what is going on.  One of the things to come out of "China's Choices" is that even the central government can't trust data coming in from rural areas, and that you have to be on the ground gathering your own information.  This is primarily because China is an enormous country, and local officials are now rewarded based on what they report to be true about local conditions and production levels, rather than rewarded based upon standard metrics.  Can the Chinese government know to trust local reports of human cases of Avian Flu, let alone trust the denials?

We can at least try to get an idea of how they might handle an outbreak.  Worldwide flu vaccine production capacity is only a few hundred million doses per year, concentrated primarily in Western Europe and the U.S.  It is truly hard to dig up numbers for how much flu vaccine is produced and administered in China, but as far as I can tell, Chinese domestic flu vaccine production is no more than 10-20 million doses.  China Daily reported at the end of 2003 that demand for flu vaccines was only 15 million doses that year, growing at 15% annually.  Most of the vaccine used in the country is purchased from the US and Europe, as reported last summer in the China Chemical Industry News;

In 2003, the 13 Chinese domestic vaccine business only shared 30 per cent of the market. And the remaining 70 per cent of flu vaccine was imported from France, America and other countries. Huge technique differences exist between China vaccine manufacturers and their foreign counterparts.

Because the vast majority of humanity is immune naive for H5 viruses, the consensus seems to be that two doses of any vaccine will be required to generate an immune response.  This means there is probably only enough vaccine to take care of Beijing, or perhaps a selected population in many of the big cities.  Where does that leave the rest of the population?  At "China's Choices" last week, it was pointed out that when the rural population starts to revolt regimes tend to change in China.  Launching completely into the realm of speculation, I am led to wonder if the lack of a flu vaccine might be another tipping point.  Everything depends on the response of the government, and I don't think anyone -- inside or outside China -- is prepared to deal with a pandemic.

Keep in mind that WHO hasn't been getting samples of recent human H5N1 isolates from Asia, the vaccine takes some months to produce once samples are shipped and a strain is identified, and a vaccine based on that strain (modified, in this case, to be less lethal) may not actually confer immunity.  It is thus unlikely that China will have effective vaccine ready to go anytime soon, and they can't expect help from us because we don't have one either.

So much for setting the stage.  What happens if a flu pandemic hits China?

Inside the country, areas may be quarantined and people may stay away from populations centers to avoid infection, thereby depriving manufacturers of labor.  If the outbreak is severe, enough people may be sick that productivity is seriously impacted.

Outside the country, even if governments understand that quarantines will only marginally slow the spread of the  virus, populations will likely demand limitations on travel and trade.  Estimates of the economic costs of SARS range from USD 50 Bn (Bio-ERA) to 150 Bn (CDC) in lost trade and tourism revenues, while less than 800 people succumbed to the disease.  Thus fear of the disease caused considerably more economic damage than did the disease itself.  There is no reason to expect the response to an Avian Flu pandemic will be less severe.  Whether or not production of goods is actually slowed within China, shipping probably will be.  That is, the manufacturing capacity relied on by much of the global economy may go dark for up to several years.

While the domestic impact of a Chinese Flu pandemic depends on factors such as the availability of vaccines and anti-viral drugs, the stability of the public health system, and the willingness of the government to communicate with its citizens and the outside world, the global impact of a Chinese Flu pandemic depends on when it happens.  Aside from issues of whether the virus might escape the borders and find its way into other countries, aside from whether the Chinese government learned from the SARS outbreak and shares epidemiological information, the global impact of a pandemic confined entirely within China's borders could be severe.  If an outbreak happens soon, the consensus of folks I spoke to at the GBN meeting was that investment would move elsewhere, diversifying manufacturing capacity into India, for example.  There would be short term pain, but not that much economic damage would result.

But if the pandemic hits at point when the consumer market within China is significant, then it won't just be low cost manufactured goods that go missing; a reduction in shipping could mean the sudden loss of hundreds of millions of consumers.  We live in a globalized economy wherein goods and services are provided based on the availability of credit and upon cash flow.  If western economies start to rely on capital flow out of China, a pandemic could be far more severe than people are planning for now.

In the short term, if this system starts to break down, it just isn't clear that critical products -- gloves, surgical masks, disposable plastic lab ware -- are going to make it where they are needed.  What fraction of the medical disposables we use are manufactured in China?  If a pandemic flu outbreak occurs in China, do we have reserves or replacement capacity? 

Masks were in short supply during the SARS crisis, and I wonder if all the right people are making sure masks and similar necessities are not only stockpiled for the next crisis, but that the manufacturing and supply lines will remain open.  A flu outbreak could come in multi-month long waves, with the challenge to the global system of health care providers, critical goods manufacturers, and the overall economy lasting several years.

These questions point the way to considering how restriction in trade with China may begin to impact local economies to the point that they have difficulty mounting domestic responses to a pandemic.  I have no answers after all of this, just more questions.