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The economics of Ebola

EbolaThe economics of Ebola

By Catherine de Fontenay

Published 13 November 2014

Economists are being called upon to estimate the costs of the Ebola epidemic to West Africa and elsewhere. Economists, however, should also play a part in estimating the likelihood of the disease spreading. Economics is the study of incentives, and many biological models of the spread of the disease may be underestimating the impact of individual incentives. Based on cost-benefit analysis, the potential costs of Ebola spreading are extremely high and the risks may be much higher than they are currently portrayed. Voters and donors should support greater efforts to end Ebola in West Africa. As International Monetary Fund director Christine Lagarde says, “real action” is needed to counter the outbreak. Without such action Ebola places the global economy at risk.

Economists are being called upon to estimate the costs of the Ebola epidemic to West Africa and elsewhere. However, economists should also play a part in estimating the likelihood of the disease spreading. Economics is the study of incentives, and many biological models of the spread of the disease may be underestimating the impact of individual incentives.

Assessments of the cost of Ebola in West Africa are grim. The World Bank estimates the impact of Ebola on Liberia, Guinea, and Sierra Leone this year is around 3 percent of GDP. It estimates these governments have incurred financial losses of a similar magnitude. The impact on West Africa as a whole is tipped to be between US$2 billion and US$7 billion.

Important agricultural regions are under quarantine, interrupting production and sales. This will to lead to food shortages. Retailers are also reporting a 50 percent to 75 percent drop in turnover as people avoid human contact. According to The Economist, the response is that “investors evacuate foreign workers, borders close and international flights are suspended.”

The risk of further embargoes also mean that exporters are suspending production and investment in the region. Already Sime Darby, the world’s largest listed producer of oil palm, is slowing production and SIFCA Group, an Ivory Coast-based agribusiness, has stopped exporting rubber.

If Ebola spreads throughout West Africa, the cost could rise to US$32.6 billion by the end of 2015. There are larger and more populous countries nearby and Nigeria has already contained one outbreak. Many of these countries are more integrated with the world economy — Lagos in Nigeria is a major travel hub. The trade and travel embargoes would be extremely costly and the costs in terms of lost output would also be hefty.

These costs do not even take into account the damage to the health system from the loss of many health-care workers, nor the damage to the economy from lost workers and schooling. They also fail to take into account the enormous personal toll of those who lose family and friends to the disease.

These estimates give some indication of the costs faced if Ebola were to penetrate other parts of the world. These costs would be significantly higher because developed economies rely much more on trade and travel.

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