04 Jul The Economic Impact of Zika (or Why Disruptors are as Important as Trends)
A year ago most of the us knew little to nothing about the Zika virus, but at the mid-point of 2016, it appears that its existence is one factor that could disrupt world economic activity for years to come. The existence of the Zika virus is a great example of a ‘disruptor’ a random factor that can throw even the most well-thought out business plan into shambles. In the case of Zika, its effects are now impacting economies both in those parts of the world where it is prevalent as well as those where it is not.
A virus that has been around since the 1950s and which is spread by mosquitoes, Zika over the past year has officially reached ‘pandemic’ status. In the Spring of 2015 there was a major outbreak of it in Brazil (the location of the upcoming summer Olympics) and since that time it has spread to parts of South America, Central America, Mexico and the Caribbean.
As everyone learns more about Zika, its influence on decision-making is starting to intensify. What we do know that its most ominous potential effects are to pregnant women whose babies may end up with microcephaly (a condition in which babies are born with an unusually large head). Accordingly, it seems like a no-brainer that Today show host Savannah Guthrie, who is expecting her second child, has announced that she will not travel to Zika-infected Rio to cover the Olympics. It is more confusing, although perhaps also rational, that many men including golfers like Jason Day and Rory McIlroy will not go to Rio. However, there is apparently also evidence that the partners of infected men could give birth to babies with microcephaly, and as well that anyone infected can be at risk for Guilliamme-Barre disease. Even more scary is the recent evidence that children infected with Zika can face long term health risks.
Given all of that, what will be the economic effects of Zika? Obviously the most immediate are to the affected regions, which are inevitably going to face a huge downturn in tourism and perhaps business travel, as well as sky-rocketing health costs. Earlier this year the World Bank put the 2016 tally at $3.5 billion, which will probably turn out to be a conservative estimate. There will also be a multi-year effect, one that will hit successive countries as Zika spreads beyond Latin America and through a wider swathe of the world, including the southern United States.
And yes, there will be a flip side in the sense that some regions will benefit from the avoidance of travel to the affected regions. If you feel uneasy about taking a vacation to the Caribbean, maybe you seek out a beach on Cyprus or head for a U.S. destination like San Diego. If planning a conference in Rio seems like a bad idea, somewhere like Toronto (which conference planners avoided in droves during the SARS crisis of 2003) could be a good choice. The only way that there would be real dead weight-loss is if people choose to not travel altogether and to not spend at all. That seems somewhat unlikely (if you really cannot take a vacation maybe you buy a big screen TV instead, for example) but at this point it is hard to say exactly how people will act as news about Zika hits a peak.
Perhaps more significantly, if Zika does not disappear quickly, long term investment and economic development plans will be affected. Brazil, for example, is a country that has recently gone through an economic metamorphosis that has produced a new middle class. That should have presumably have meant a flutter of foreign investment and business activity coming into the country, an outcome that now may be at risk. Longer term, the potential tragedy of a generation of children affected with Zika would mean huge heath expenditures to many parts of the world. As well, public health expenditures on Zika would have to be diverted from some other areas, which would potentially have a productivity impact as well.
In a sense, a disruptor is the opposite of a trend, which is something with momentum that you can spot. When Rio bid for the Olympics, their plan no doubt covered many eventualities, including the threat of protests or even terrorism. It is doubtful, however, that their strategic plan included the scenario of a pandemic hitting the country at exactly the wrong time. Perhaps it should have, however. Looking around the world, it is clear that so many random factors have the ability to change economic outcomes on a dime that stress-testing a huge number of scenarios is clearly the way to go.