Financial contagion

It was the 1997-1998 Asian currency crash that began in Thailand, devastated Asian economies, triggered a financial collapse in Russia, and then carried the U.S. much closer to the brink than most recognized at the time.

It took many months for the great flu epidemic to move around the world in 1918. Now the SARS virus can get anywhere in the world within 24 hours.

This time, the contagion is medical. But the threat of severe economic repercussions from the SARS epidemic is very real.

Although public health authorities may finally be stemming the pace of the outbreaks in some countries, even as new cases are reported in others, SARS continues to pose a serious danger to the world economy as we head toward the summer of 2003.

Analysts are already trying to measure how many tens of billions of dollars of GDP have been lost — and how much higher the costs may go.

A common threat

Both the 1997 Asian financial crisis and SARS reveal a common threat — how globalization, despite its considerable benefits, also brings with it unanticipated risks.

But we can also learn from these crises what are the right prescriptions for dealing with the ailments that come with an increasingly interconnected world.

Globalized disease

The first crisis was transmitted through the world’s interconnected financial linkages in 1997-98. At every stage, the speed and the virulence of the crisis were underestimated.

Just when confidence in the global economy should be coming back, SARS has delivered a new economic shock.

In assessing the impact of the SARS disease, one of China’s top doctors recently remarked that the medical authorities (like the financial authorities last time) underestimated the impact of globalization.

Twenty years ago not many people had ever heard of Guangdong province, and very few bought anything from it.

New opportunities, new vulnerabilities

Now it has become one of the world’s great manufacturing centers, turning out shoes, clothes, bicycles, toys, auto parts, electronics, more and more high tech — and much else.

Guangdong, Hong Kong, and the rest of “Greater China” are much more integrated into the U.S. economy than most Americans realize.

Global transmitters

Globalization also means big increases in the movement of people internationally. In less than twenty years, the number of passengers flying between Asia and North America had increased almost six-fold.

Guangdong, Hong Kong, and the rest of “Greater China” are much more integrated into the U.S. economy than most Americans realize.

And, just as the financial system transmitted the currency virus, so this time the transmitter is the global travel network.

The movement of the great flu epidemic after World War I was measured in many months. Now a SARS virus, aboard an infected person, can get half way around the world in a matter of hours.

Health threats

This new contagion continues to pose a danger to the health of the world economy. Although China registered a blistering 9.9% GDP growth in the first quarter of 2003, the World Bank is now warning that East Asia is entering a period “as troubled and uncertain as any since the 1997-98 financial crisis.”

As was found after September 11, disruption of the travel industry delivers a major blow to the overall economy. It is worsening the plight of airlines not only in Asia, but also North America, which have counted on their trans-Pacific routes to generate profits that other routes do not. The seats are now going empty, and flights are being cancelled.

Financial infections

The disruption is already hitting other businesses. Only skeleton crews are coming into many offices in China and Hong Kong.

Both Asian contagions reveal a common threat — how globalization, despite its considerable benefits, also brings with it unanticipated risks.

Business travelers in North America are canceling trips and postponing decisions. Conferences, trade shows, and face-to-face meetings are not happening.

This means that designs — whether of clothes or electronics — and purchases and investment are all put off.

International trade will soon feel the effects. U.S. companies are starting to cut profit projections because of SARS.

No time for recovery

According to a new survey, 70% of Japanese companies doing business in Asia report that they are suffering from the SARS epidemic, and some are temporarily closing plants.

Just when confidence in the global economy should be coming back, SARS has delivered a new shock and the prospect of lower economic growth in the world’s most dynamic region.

Tough pills to swallow

What are the lessons from the two Asian contagions for dealing with the underside of globalization? The first is to identify early the risks that come from increased interconnectedness and prepare for them.

A globalized world requires greater cooperation and trust across borders — whether among central bankers or international health authorities.

The second is the need for fewer secrets and less sitting on information and greater openness and transparency — whether about levels of debt or outbreaks of illness.

The third is swift response. If the medical authorities in China had been mobilized to respond at the end of 2002, rather than in April of 2003, the epidemic might well have been contained much sooner.

Politics of prevention

Finally, a globalized world requires greater cooperation and coordination and higher levels of trust across borders — whether among central bankers and finance ministers about debt and currency movements or among international and national health authorities about the movement of people and microbes.