Blog Archives

… Gender Equality in Nicaragua

This article is being cross posted on my other blog, Incidents of Travel. Incidents of Travel chronicles my life as a Peace Corps Volunteer in Nicaragua and my thoughts on culture and life in general. Please check it out if you are interested. The article was also submitted to the Peace Corps Nicaragua Gender & Development Committee for publishing on their blog, but they declined to respond.

A book that I read recently that influenced me greatly was Why Nations Fail. The thesis of the book is that the main differentiator between the development path of nations is neither geography nor culture, but instead the institutions of the country, and how inclusive they are of the population. The more politically and economically inclusive, the more development potential, past and present.

I am very compelled to the thesis, and I tend to agree with the theory that culture does not have a strong effect. For the very most part I believe, scientifically, that all humans have equal capacities for intelligence and that characterizing a culture as “lazy” or “hard working” can be an inaccurate generalizing claim based in racist tendencies. The authors instead demonstrate that what may superficially look like a lack of economic motivation on the part of citizens may instead be a response to the lack of economic stimulus and opportunity that exists in the country due to poor societal institutions. For instance, a farmer may not exploit her land to its fullest potential because agricultural price policies lead to over-supply in the market. Or rather, laborers may not seek full employment because of strict government wage schedules across all industries that keep wages artificially low and working is literally not worth the bother.

Nevertheless, the idea that culture may inform economic divergence between nations nags at me. Rugged individualism, the importance of hard work, and the Protestant work ethic are well engrained in my American psyche. In addition, I routinely hear from Nicaraguans that they are an haragán (lazy) people, don’t like to work, and that their labor doesn’t size up to other countries’.

So how do I reconcile the theory with my conditioning and what I hear here in Nicaragua? First of all, folk-theories about rugged individualism, the importance of hard work, and the Protestant work ethic are probably just artifacts of a colonial world riveted by racism. I’m sure there are thousands of essays, papers, and books on Max Weber and his virtues and follies. I won’t delve further into that. As for the self-characterizations of the Nicaraguans as lazy and not hard working, I think that they may have internalized their own oppression and poverty. The imperialism, tyranny, and their derivative poverty that they have lived under for hundreds of years have become to such an extent part of the Nicaraguan psyche that they legitimately start to believe it and express it in their actions. I have seen multiple times teachers, who are poor people themselves subject to the same oppressive institutions as their students, lecture their students telling them that they are poor, come from a lazy culture, and are inferior to other countries. The result of this conditioning is that the students will begin to act accordingly. And these attitudes and behaviors will last for the rest of their lives. In effect, even though culture does not have a direct impact on development, cultural norms and beliefs can become entrenched in the institutions of a country itself, and institutions do affect development.

“The oppressed, having internalized the image of the oppressor and adopted his guidelines, are fearful of freedom.”
― Paulo FreirePedagogy of the Oppressed

Another profound aspect of the Nicaraguan culture that has become more deeply entrenched and truly institutionalized is machismo. Machismo is a cultural system that values qualities traditionally considered to be masculine over qualities traditionally considered to be feminine. It manifests itself in many aspects of life. At its most innocuous machismo dictates the games and activities that parents play with their children, and at its most destructive it leads to domestic and psychological violence against women and even femicide. Economically, machismo manifests itself through gender roles: jobs that are assumed to be for women and others that are presumed to be more suitable for men. For instance, in Nicaragua employers typically search for women only for positions such as clothing store attendant, house maid, secretaries, childcare, nursing, and chefs/waitresses (often the same person) at small eateries. Men are deemed more suitable for management, transportation, medicine (especially surgery), physical labor, finance, and engineering. From what I’ve seen, secondary education is more equitable, but primary education is more of the feminine realm (and yes, primary school teachers make a little bit less money than their secondary counterparts, which I find asinine given the importance of primary education and how challenging the work is).

IMG_4607

The results of this culture are numerous and deleterious. First, women on average earn less money than men, so they often find themselves financially dependent on men even when they would be better off single. This leads to health and emotional consequences, such as being coerced into having unwanted children. Furthermore, seeing less potential for financial attainment after school, women will seek less education. This leaves women with fewer opportunities, especially well-paying opportunities, so they turn to the informal sector, which constitutes 80% of Nicaraguan employment, and is overwhelmingly feminine (men are more likely to immigrate out of Nicaragua, especially to Costa Rica or Panama).

I work with a cooperative that has 12 male members and one female member. The cooperative is acquiring a small restaurant to feed their guests, and they let me know that the female member would be placed in charge of the restaurant since that is naturally a feminine task. The woman immediately interjected, stating her reluctance and her lack of knowledge about cooking and restaurant management. Nevertheless, she remains in this capacity. This decision winds up hurting the whole cooperative. Maybe she is better at guest relations or accounting, and maybe a male member of the cooperative has skills suited for cooking and restaurant management. If their roles were re-arranged the cooperative would be operating more optimally and probably obtain more profits for its associates, but a machismo culture prevents this from panning out.

The informal sector in Nicaragua is hard work for a pittance. It usually involves waking up early to buy basic food ingredients, then making snacks to sell on the streets or in the bus terminals. Competition ensures that margins are thin to non-existent. In addition, being self-employed, these women have no benefits. They literally cannot afford to get sick and miss a day or work, and they are not paying into the Nicaraguan social security system to hopefully one day retire with even a modest pension that the system provides.

This is the institutionalization of machismo, and it pervades the public sector as well. In Nicaragua, the law states that for high ranking officials, there needs to be equality. For instance, if a mayor is a woman, then the vice-mayor must be a man, and vice versa (curiously, the President and Vice-President are both men). But this mandatory equality is only at the highest levels of government. The bureaucratic ranks are male-dominated.

Apparently only women are suitable for retail

Apparently only women are suitable for retail

Basically, I am describing the institutionalization of culture. Insofar as an exclusive culture (such as machismo) becomes institutionalized, culture very much can have an effect on the development of a country, and I believe it is having that profound effect on Nicaragua.

Despite what I have observed about the pervasiveness of institutionalized machismo, I have seen some conflicting reports in the news. The Economist reported last year that the World Economic Forum’s Gender-Gap Index ranked Nicaragua sixth-place globally for gender equality. Based on what I have observed and described here, I find this very hard to believe. And a deeper dive into the WEF’s data seems to corroborate my doubt.

The score each country receives in the index is an average score of four sub-categories:

  • Economic Participation and Opportunity (0.635)
  • Educational Attainment (1.000)
  • Health and Survival (0.980)
  • Political Empowerment (0.544)

Nicaragua’s 0.789 was sufficient to rank sixth place worldwide.

Nicaragua receives low marks for female participation in the work force, wage equality, and participation in civic life. On the other hand, it gets high marks for education and health. And it is true, as I mentioned, Nicaragua has a high number of female government leaders – statutorily. Nicaragua even had a female President, elected in 1990. Doña Violeta was the first in the line of three non-Sandinista interregnum presidents. Overall though, Nicaragua’s marks for economic participation and political empowerment were mediocre. Nicaragua’s relative strength in the ranking comes from educational attainment (theoretically perfect, according to the WEF’s methods) and health outcomes.

WEF’s data for educational attainment come from UNESCO. However, UNESCO compiles its reports from figures sent in from the Nicaraguan government, which recent investigative reports have exposed as being highly suspect. UNESCO’s last submission from Nicaragua was for the 2010 school year. Publically released information in Nicaragua has been self-contradictory with regards to enrollment levels, and over a ten year period prior to the numbers released for 2014, publically released data actually registered a decrease in the number of students (despite population growth and a large youth population), and then an enormous increase in 2014. In addition, there is evidence that the numbers are being smoothed by selectively including tertiary education, technical education, and adult literacy courses. In addition, there is no comparison in public data between students in conventional daily classes vs. secondary school students in weekend classes. Taken all together, the WEF’s educational attainment score is not reliable, even though it is the largest contributor to Nicaragua’s impressive ranking.

Nicaragua’s score for “Health and Survival” is almost startling. It ranks first place worldwide, which is an amazing accomplishment, especially for the second poorest country in the hemisphere. But again, on closer inspection, I doubt the conclusion. Health and Survival only takes into account two statistics: sex ratio at birth, and healthy life expectancy. Worldwide, women have a longer life expectancy than men. The index attempts to correct for that. However, I think the effect may be particularly strong in Nicaragua, which may account for some of Nicaragua’s strength in the area. Men, on average, have riskier lifestyles. Many more men than women are alcoholics, and men, due to their prevalence in heavy labor jobs, face many more occupational hazards. Fishing and logging are the two most dangerous jobs in the United States; imagine the risk in a country where OSHA does not exist and most fishing, logging, agriculture, and small industry is nearly completely unregulated. In one town alone, Chichigalpa, there is a neighborhood known as the Island of Widows because so many men (an estimated 20,000) have died from kidney failure related to sugar cane harvesting.

In addition, “Health and Survival” does not take into account other indicators of feminine health, such as domestic violence and abuse and teenage pregnancy. This is a methodological choice on the part of the index creators. They want to capture gaps between the sexes, and these factors are not subject to gaps – men simply cannot get pregnant, and there are no data collected on domestic violence and abuse against men in Nicaragua (or most countries). Nevertheless, Nicaragua has the highest rates of teenage pregnancy in Central America. One in four new mothers are under 18 years old. This leads to health complications for the young women, plus lower educational attainment and lifelong economic dependency on providers, who very well may be the abusive men who got them pregnant in the first place. Domestic violence and abuse is also prevalent in Nicaragua due to the machismo culture. The psychological element of this abuse leads directly to political disenfranchisement.

Overall, I would take the index results with a grain of salt. Methodologically, the index omits a number of important variables to capture the type of data it is selectively looking for. In addition, by averaging the four categories evenly, the index implicitly assumes that economics, health, educations, and political participation are all ends in and of themselves, but many would consider economic participation and health as the ends, with educations and political participation being the means. And lastly, the unreliable nature of data collection and dissemination in Nicaragua makes me suspect of the statistics and results compiled for the index in the first place.

So culture can in fact affect the development path of a nation, if an exclusive culture (such as machismo) becomes institutionalized.

Sources:

http://reports.weforum.org/global-gender-gap-report-2014/economies/#economy=NIC

http://www.economist.com/news/economic-and-financial-indicators/21629478-gender-equality

http://www.laprensa.com.ni/2015/04/22/nacionales/1819357-increibles-datos-en-matricula-increibles-datos-en-matricula

http://www.nytimes.com/2014/05/09/world/americas/deadly-illness-in-nicaragua-baffles-experts.html

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… Oil

Having now written four articles on oil, its price, and the consequences that has for everyday uses of oil, such as gasoline and airfare, I have decided to turn these into a series of posts I am calling the Economics of Oil.

Fill Up at the PumpPart 1:

The Economics of Gas Prices

 

 

Oil PumpPart 2:

The Economics of International Oil Price Conspiracies

 

 

airplanePart 3:

The Economics of Airfare

 

 

Bitcoin MiningPart 4: 

The Economics of Bitcoing Mining*

 

 

As always, comments are welcome and encouraged, even if you disagree with me on any point.

*And yes, you will see just how much similarity Bitcoin mining has to oil

… International Oil Price Conspiracies

Last September I posted an article on gas prices (to which someone had a very thoughtful Reddit response), why prices were falling, and how to account for price discrepancies within the United States. Since then, the international price of oil has kept falling and falling. Earlier this week the price even punctured the $50 a barrel mark.

Crude Prices

This precipitous fall in the price of oil has caused conspiracy theorist to claim that the United States is secretly engineering markets to put pressure on our international enemies such as Venezuela, Russia, and Iran. Do I think that the United States is doing this? Yes, absolutely. But do I think this is a conspiracy? Hardly.

Exhibit A is the recent appointment of Department of the Treasury Under Secretary for Terrorism and Financial Intelligence, David S. Cohen, to the Number Two spot at the CIA (Deputy Director). The White House is not hiding anything about this guy. They say he administered anti-terrorism funding programs, particularly against ISIS, as well as sanctions against Iran and now Russia. Economic espionage is official government policy, and it does not seem to me that they are trying to hide that at all from anyone.

Oil producing countries, particularly the members of OPEC, have been using the price and quantity of oil as a foreign policy tool for decades. Exhibits B & C, the 1967 & 1973 Oil Embargoes, where Arab countries used their leverage in the energy market to place political pressure on the United States. The United States, too, has used oil as a political tool in the past. Many historians claim that Pearl Harbor was the result of Japan’s hand being forced by an Allied embargo on oil reaching Japan.

To return to the economic, not political, side of things, the market for oil is an oligopoly. There are a few large suppliers, and there are significant barriers to entry (primarily being that certain countries simply do not have the natural resource underneath them in the ground). More specifically, the market for oil resembles a Dominant Firm Oligopoly, with Saudi Arabia being the dominant firm. As the world’s largest producer of oil (13% of world production), it commands a great deal of pricing power – power that smaller “firms,” such as Venezuela, Ecuador, Nigeria, Iraq, Iran, Libya, and Qatar cannot match. So theoretically, Saudi Arabia could sell its oil at a lower price, and the other countries would have to lower their posted price, or else their clients would turn to Saudi Arabia, which has plenty of oil to supply if it wants to.

And that is exactly what Saudi Arabia is accused of doing, through an arrangement made with the United States (many people point to a meeting Secretary of State John Kerry had in Saudi Arabia back in September). The conspiracy theorists claim that Saudi Arabia is selling its oil at a lower-than-market rate by keeping productions levels too high relative to international demand in order to drive down the price of oil internationally, in an effort to put pressure on the governments of Iran, Syria, Russia, and Venezuela. These countries all conveniently happen to be enemies of the United States and Saudi Arabia, and they are all also conveniently highly-dependent on oil prices for government revenue and social pacification.

Saudi Arabia, from a purely economic point of view, has an incentive to cut production, which would send prices higher. Higher prices mean higher profits, which is better for their economy. Other oil producing nations feel the same way. However, the stars may have aligned this time for the US and Saudi Arabia to strike a deal and keep prices down. The US gets the assist of pressure on its enemies; and not just Russian and Iran. At the meeting between Kerry and the Saudis in September, the Saudis agreed to join the US coalition against the Islamic State. Saudi Arabia, on the other hand, may have bought itself support in its fight against the Assad regime in Syria, and the low prices will put pressure on producers in the United States and Canada, where it costs a lot more money to get the stuff out of the ground than it does in Saudi Arabia. Everyone at the table (a table set for two) gives a little and takes a little.

So do I think that the United States and Saudi Arabia are at least in part engineering the fall in oil prices for their own political motives? Yes, absolutely. But do I think that this is a conspiracy? Absolutely not. This is just business as usual for the United States, where an economist is going to be our Number Two Spy.

This is part three of a four-part series of posts on the Economics of Oil. Other posts:

The Economics of Gas Prices

The Economics of Airfare

The Economics of Bitcoin Mining

… Manhattan

I recently noticed on Facebook that a New York Times article in a column called “The Hunt” has gained some traction, mainly in a negative light. The article is titled, “How to Get to Manhanttan? Save, Save, Save,” and it tells the story of a very young woman who was able to afford a nice apartment on the Upper East Side. The problem with the story is that the math just doesn’t add up.

Annie_Facebook

Annie, a financial services adviser and the subject of the piece, put down 35% on a $426,000 apartment. That’s $149,100. Plus, she spent $30,000 on renovations and remodeling. In total, she used $179,100 of her savings. From the article, it sounds like she worked for about two years and a quarter before making the bid on the apartment. That means she was putting away $6,633.33 a month, at bare minimum. Assuming she was putting away 100% of her take-home pay into savings, her average annual salary was a whopping $79,600. I personally worked in banking consulting until the beginning of this year, starting right out of college just like Annie, and I never made that much even before taxes.

But further questions remain. She certainly couldn’t have saved 100% of her salary. Even though she lived at home she must have used some of her income on transportation (particularly to get to work, even if it is deductible), food, entertainment, clothing, other personal items, and leisure and entertainment. Did she pay for any benefits through her employer, such as health insurance, life insurance, long-term disability insurance, eye care, or dental care? Most likely. What about her 401(k)? Certainly someone as financial savvy as Annie  would be putting away money for retirement at her young age and taking advantage of what we can assume was a match from her employer. And then of course there are taxes. Working in New York and living in New Jersey, Annie must have been hemorrhaging paychecks to the Man on those long nights stuck in the Lincoln tunnel. All in all, this article would lead you to believe that Annie was making six digits out of college.

The last question that needs to be raised really doesn’t need to be asked at all. By now, it should be apparent that Annie received considerable financial help, most likely from her parents, in the purchase of this apartment. So one could assume that she doesn’t have any student debt because her wealthy benefactors most likely supported her through Binghamton University as well. And herein lays my major complaint with this story. The article lauds the virtues of saving and what it can get you in the (relatively) long run. However, the subject of the article is a daughter of wealthy circumstance. I concede that she likely saved a large ton of money, especially for someone of her age. But the fact remains that for the 99% a free education is not possible, and even someone with the discipline of Mother Theresa could never afford that apartment after working for less than three years without someone pitching in with a fat check.

My true complaint is not with Annie though. She legally bought this apartment and she has every legal right to live in it and pursue satisfaction and happiness in her life however she pleases. The problem in this case is the NY Times. By failing to run the numbers and fact check this article they failed their readership. But through this failure they have reinforced the false ideal that hard work and discipline alone can help you achieve your materialistic goals. Rather, the NY Times should be espousing alternatives means by which young people and the middle-class can find safe, comfortable housing in New York City and other places around the world. What we need is innovation. Innovation in how we finance shelter. And innovation in how we actually shelter ourselves and how we conceive of adequate and satisfying shelter. This article reinforces materialistic societal norms and makes people believe that they are doing something wrong if they are not walking a taught tight rope towards their “American dream.” Didn’t we learn with the Triple-F Fiasco (Fannie-Freddie-Foreclosure!) that the American dream can easily turn into a nationwide nightmare? Renters can be happy people too. The NY Times doesn’t seem to realize this. With income inequality large and growing the NY Times and its readership need to realize that wealth and assets are not the only way to lead the good life. People can choose their own path.

I suppose since this blog is called “The Economics Of …” and I titled this post The Economics of Manhattan I should talk about economics a bit. I hope that my readers do not think that economics is about making everyone rich or maximizing wealth for everyone. I am an economist because I want to maximize opportunity for everyone – their opportunity to be happy, whether it is through wealth and asset accumulation, or whether it being through less materialistic means. My hope is that societies will put policies in place so that the opportunity is available to everyone, not that society will define what happiness is and have everyone marching towards that goal through the engines of the economy.

… Uber

Uber_logoTo me, Uber is the pinnacle of economic innovation. It harnessed technology, the app revolution, and used it to improve efficiency and provide a new service. The service is designed to deliberately overcome a classic economic problem, asymmetric information. And the pricing model is based on sound economic principles. It is at the forefront of a technology driven revolution that economists are calling “the sharing economy.” Similar services include Lyft, AirBnB, and Craigslist.

Uber, at its core, is simply an app. You download it to your smartphone from an app store, and then you give it some basic information, including a credit card number. Then, whenever you need a ride you use a map to tell the app where you want to be picked up and you specify the level of service you want – a private car, a taxi, a black car, or an SUV. The app takes care of the rest. It dispatches a driver and gives you his or her name, user rating, contact information, and estimated time of arrival.

When the driver arrives the app alerts you and you can head outside and hop in. All you need to do is tell the driver where you are headed and he or she will take you. Then when you arrive at your destination you just get out. No fumbling for change in your pocket or listening to the taxi driver grumble about you wanting to use a credit card. The app, which already has your credit card information, automatically bills you based on level of service, distance traveled, and time elapsed. All of this information, including a map, is e-mailed to you. I’ve used these e-mails in the past to compile invoices for my business trip expenses at my old job. Gratuity and any taxes are automatically subsumed into the rate. The app simply asks you to rate the driver, out of five stars, and provide any comments or feedback.

Black car

Asymmetric information is a classic economic challenge. It is when the two sides of a transaction – the buyers and sellers, demanders and suppliers, consumers and providers, whatever you want to call them – do not have the same information about the product or service. For example, the used car market suffers considerably from asymmetric information. The dealers know a car’s history and if it’s a lemon, but the buyers don’t have this information, which saps demand and can lead to less than optimal prices on vehicle sales.

Uber has solved this problem for the chauffeured rides-on-demand market. Not only does the rider have to rate the driver, but the driver has to rate the rider. Riders and drivers both have average ratings out of five stars, which are revealed to both parties when the service is called for. Riders can decline a driver with a poor rating, and drivers can decline service to rude riders with a poor rating. This symmetrical access to information improves the efficiency of the market and helps secure the fairest price for service possible. It also ensures quality. I’ve taken many uber-clean Ubers in which I’ve been offered a small bottle of water or a nice sucking candy, at no additional cost.

Pricing is another strong feature of Uber. Accurate prices take into account both real-time supply and demand for a service. But sometimes prices are fixed and only take into account one side of the curve. For example, one problem with certain popular “hot lanes” on interstates is that they only take into account demand. The price goes up when the normal lanes are congested, but it doesn’t take into account how congested the express lanes are. When the express lanes are also jammed this has the effect of unnecessarily attracting more vehicles, worsening the congestion. And when the fast lanes are empty the prices are not optimized to attract more vehicles, improving traffic flow for the normal lanes.

Uber, on the other hand, has base rates for distance and time traveled. However, when demand is high or there are not a lot of cars available, they implement a surge pricing scheme which multiplies the price of the ride based on the real-time state of the market. At first this pricing scheme got Uber some bad press due to lack of transparency, but now that they have improved the app to make the user aware of the price it is a great system. The people who are most willing to pay for the service, as expressed by price, are most efficiently matched with the drivers most willing to provide the ride.

I've never seen surge pricing this high, but it only reflects real-time market conditions. It could have been during a bad storm when no one wanted to be out driving, or during a high-demand period, like New Year's Eve

I’ve never seen surge pricing this high, but it only reflects real-time market conditions. It could have been during a bad storm when no one wanted to be out driving, or during a high-demand period, like New Year’s Eve

The app is sleek. The pricing system is fair, and the its rating system overcomes classic economic challenges to ensure as free of a market as possible. So what’s the problem? What’s all the fuss with Uber about? The problem with Uber and the sharing economy is that everyone who has their hands in the traditional economic structure is throwing a fit. Uber’s success is partially at the expense of traditional taxi drivers. And taxi services are heavily regulated in most cities around the world. This is leading to taxi commissions throwing up roadblocks (some literal, most legal) all across the world. However, regulated taxi markets are a relic of an over-regulated past. Like most markets, regulation and government intervention benefits few and passes on unnecessary costs and under-service to most. I can certainly understand why taxi commissions are protesting. The livelihood of their beneficiaries is being completely upended. However, innovation, invention, and new technology, are the engine of economic growth. When government policies suppress the urge for unnecessary regulation and allow innovation to flourish economic prosperity reaches the most people – even the disrupted taxi drivers, once they adjust their service or find another job.

SAN FRANCISCO TAXI DRIVERS PROTEST AGAINST LYFT AND UBER WHICH TAXI DRIVERS SAY ARE OPERATING ILLEGALLY IN SAN FRANCISCO

My Past Writings

Before I branched off and started this blog I used to contribute to my friend’s blog, Spolitomics. Here are the links to some of my favorite old articles on that blog.

A tome on monetary policy, still relevant today even though I wrote this in 2012:

My most read article to date:

My proposal for a Fiscal Federal Reserve:

When I wrote the Justice Department’s playbook on the American Airlines merger:

My personal favorite, a proposal for airlines to improve their service:

Some insight into my old job and just what it was that I did:

My longest, and most recent, article:

 

And for anyone who is having trouble sleeping at night, my thesis from the University of Delaware. See if you can count how many times I misspelled “Bernake:”

… Ebola

I first had the idea for this article about a year ago when MERS was popping up, but I didn’t write it. Then a few months ago, when Ebola was just beginning to rear its head, I resurrected the idea, but I didn’t follow through. I wish I had written this earlier, but nonetheless, I’m taking her home this time.

From a public health point of view, 2014 has seen an alarming number of epidemics spreading around the world. MERS is emanating from Arabia and infecting travelers worldwide. One of the most feared diseases of modern times, Ebola, is experiencing its worst outbreak in history. And the infamous Plague has appeared in Colorado and China, alarming public health workers. That’s not to mention the spread of Chikungunya (chik-en-gun-ye) in the US and Latin America, and terrifying protocol breaches at infectious disease laboratories in the US. In addition to the devastating human impact that the spread of infectious disease has, there are also acute economic impacts that are interesting to explore.

o-EBOLA-570

The last time that there was an epidemic of worldwide proportions was 2003, when SARS ripped across Asia and spread to others regions of the world, including Canada. The epicenter of the epidemic was Hong Kong. Due to fear of the virus spreading, people tended to avoid the public sphere. As a result, consumption plummeted. Certain retail establishment, such as restaurants and movie theaters, saw traffic decline by more than 50% during the spring of 2003. Overall, Hong Kong retail sales were 6.1% down year-over-year in March, and a whopping 15.2% in April, before fully recovering by July. In addition, travel and tourism were severely stunted during the outbreak and for a period following it. In total, Hong Kong saw 63% fewer visitors during the outbreak, and during the height of the scare air traffic fell by 77%. SARS eventually infected 8,422 people, resulting in 916 deaths. This equates to a mortality rate of 10.9%. Most remarkably, due to the public health response to the virus, all victims were identified and isolated, and SARS has been completely eradicated from the human race. There has not been a single reported case since the outbreak in 2003 was contained. It is the only disease in the history of the world that humans have achieved 100% eradication.

Ebola, on the other hand, has a much higher mortality rate. In some previous outbreaks it has reached 90%. So far in 2014 it has not infected as many people as the SARS outbreak, probably because the West African countries it is spreading through are less densely populated and have fewer interconnected socio-economic communities than East Asia. However, it is taking serious tolls on the under-developed economies. Consumption, like in Hong Kong, China, Singapore, Taiwan, and Canada, during SARS, has plummeted. Even though the virus is not spread through the air, no one wants to risk catching the disease from an infected person at the market. Plus mines, which are one of the economic engines of growth in Africa, are shuttering to prevent the spread of the disease through workers. And globally, prices for agricultural commodities such as cocoa and palm oil are increasing in anticipation of an under-productive harvest in West Africa. Lastly, foreign airlines are cancelling flights to the three infected countries – Sierra Leone, Guinea, and Liberia. And the latest news from West Africa now has the disease spreading into Senegal as well, although it seems to be contained in Nigeria.

These short-term impacts fail to mention the more dire impact on human capital. With the loss of life there is an immense loss of economic productivity for years to come. In addition, this Ebola outbreak is acutely affecting health care workers who are caring for patients. Health care workers, especially doctors, are extremely productive members of economic communities, and the affected countries will have to reinvest millions in medical education for years to come to recuperate the losses they are experiencing as their best doctors and nurses succumb. In addition, with attention being placed on Ebola, other virulent diseases are being neglected, so mortality rates are rising generally across West Africa, further sapping human capital.

The last time there was a widespread, nearly uncontrollable worldwide pandemic was 1918, when Spanish Influenza spread across the entire world and killed 40 million people worldwide, including 0.8% of the population of the United States of America. Evidence from the pandemic is hard to come by, but the main effect, similar to SARS, was a vast reduction in retail sales – the face to face interactions that often drive economic activity. However, globalization had not swept the world by 1918. Commercial air travel did not exist, and World War I was still being fought, severely limiting international travel and economic cooperation. If another global pandemic were to arise, the economic effects could be far more severe.

Although there has never been an international pandemic during the era of globalization of international air travel, we can use the experience of the 2010 eruption of Eyjafjallajökull (EH-ya-fi-AHT-la-yo-coot) on Iceland. Due to the emission of ash particles into the atmosphere, air travel across Europe was all but shut down for a week in 2010, stranding millions, stunting professional services-based economic activity, and shuttering the tourism industry for a short time. In the UK alone, 456.5 GBP was shaved off of GDP, an equivalent of 0.02% of annual GDP. This translates to more than 10,000 jobs. The impact was much larger on the airline and hospitality industries (British losses exceeded 700 million GBP), but domestic consumption, in the form of retail sales, was not affected. In fact, the stranded customers likely boosted retail sales by having to eat and sleep for an extra week.e25_23048757

If an infectious epidemic were to spread globally, forcing governments to close borders and ground air travel, the British and European volcanic experience could be magnified hundreds-fold. Tourism and business travel would evaporate. Plus, most forms of human economic interaction, mainly shopping and entertainment would dry up before our eyes. Shops would close, lay-offs would be massive, and most effected economies would dive head-first into recession, if not depression. Interestingly, cyber commerce may experience a boon, with consumers preferring to shop from the safety of their home computers. That is, as long as telecommunications were still properly functioning and not suffering from the loss of workers, and delivery services, such as FedEx, UPS, and the US Postal Service, were still carrying out package deliveries.

I truly hope that the current Ebola outbreak in West Africa is contained and eradicated, because the pain that victims and their families are suffering must be awful and the fear that the populations are living in absolutely stifling. And I also hope that societies around the world take this as an opportunity to optimize their public health initiatives, if only to prevent undue harm to economies, developing and developed, from epidemics and pandemics.

Sources:

http://www.hiebs.hku.hk/working_paper_updates/pdf/wp1084.pdf

http://www.bloomberg.com/news/2014-08-21/ebola-sickens-economies-of-west-africa.html

http://www.stlouisfed.org/community_development/assets/pdf/pandemic_flu_report.pdf

http://www.visitbritain.org/Images/Volcano%20Economic%20Impact%20Study%20-%20Oxford%20Economics_tcm29-15226.pdf

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