Global Economy
The Effects of SARS on East Asian Economies

Jahyeong Koo and Dong Fu look at the economic impact that SARS has had on major countries in East Asia.

Severe Acute Respiratory Syndrome (SARS) has recently sent a shock wave across East Asia. Now, after nearly 800 deaths worldwide, SARS seems finally to be under control. There are currently fewer than 1,000 probable SARS cases in the world (Table 1). Despite the serious emotional distress it has caused, SARS appears to have had limited and temporary economic impacts in the region.

Mainland China
In the first quarter of 2003, China posted its fastest growth in years—9.9 percent. Since then, the SARS outbreak has put a dent in both consumption and investment. The China Statistical Information Center recently forecast 8.3 percent growth for the second quarter. The Asian Development Bank estimates China’s annual growth rate will fall by 0.2 percentage points from its original estimate of 7.5 percent.

The Chinese government’s damage control with respect to SARS seems to be gradually working, aided by rising temperatures as summer arrives. Most major cities have calmed down considerably, although the inner provinces are still facing a more uncertain situation. Businesses lost some of the most important holiday sales around May 1. However, with new cases declining, domestic consumption may enjoy a post-SARS perk-up. So far there hasn’t been any major disruption to international trade (Chart 1). Any lagging effect won’t show up until coming quarters.

Chart 1

In general, the SARS problem can be characterized as a temporary demand shock to China. As long as investors’ confidence in China’s long-term economic growth doesn’t diminish, China’s trade and capital conditions won’t be significantly affected by the epidemic. Meanwhile, the government is still going to rely heavily on fiscal measures to combat any perceived slowdown.

Hong Kong
Hong Kong has been hardest hit by SARS, judging from the relatively high ratio of the number of contracted cases relative to the population. Until the first quarter, Hong Kong’s economy seemed to be recovering. Now the recovery could be cut short because of SARS (Chart 2).

Chart 2

Taiwan
Taiwanese-invested companies in mainland China have enjoyed explosive growth in the past decade. Cross-strait trade is booming despite constant political fights between the two sides. SARS is just one more factor to be considered in the uneasy relationship. Taiwan nonetheless has a better control of SARS due to its modern medical infrastructure and a more open political and social environment.

Larger problems than SARS in the mid- to long term are the political uncertainty within the island and its relationship with China. With a presidential election coming in about a year, the economy will be the crucial issue for both pro-independence and pro-unification parties (Chart 3).

Chart 3

South Korea
South Korea, a poster child for the world economy last year, is falling into recession, registering two consecutive quarters of negative growth since first quarter 2003. In spite of Korea’s geographical proximity to China, SARS is not a major source of the country’s economic hardship.

First, there have been only three probable SARS cases and no deaths so far in Korea. In a country with many risks other than the epidemic, the influence of SARS on domestic demand is negligible. For example, worldwide SARS deaths total just 10 percent of Korea's traffic fatalities in 2001. Second, the growth of Korean exports to China slowed in May, but not by enough to explain the economic downfall. Year-over-year export growth was 29.3 percent and is expected to return to trend quickly (Chart 4). Korea’s current recession originated mostly from its own economic policies.

Chart 4

Japan
Japan’s economy is even less influenced by SARS than is Korea's. No SARS cases have been reported in Japan. In addition, China is simply not as important a trading partner to Japan as it is to Korea. Even though Japan has thus far been able to ward off the SARS contagion, its economy has languished, growing only 0.6 percent in the first quarter. Deflation persists but appears to be moderating.

Conclusion
On June 24, the World Health Organization removed the last city, Beijing, from its travel warning list because conditions there have improved significantly. Looking back, the negative effect of SARS is seen clearly in cities such as Hong Kong and Beijing. However, people in the East Asian region generally face many serious risk factors other than SARS, from traffic accidents to political uncertainty. Overall the influence of SARS is likely to be limited and temporary.

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