Bird flu and regional cooperation

David E. Sumual, Analyst, Danareksa Research Institute, Jakarta

Attention has shifted again to the renewed concerns of "microbe economics" in recent weeks. Seemingly no less deadly than the SARS outbreak last year, the outbreaks of bird flu have rung another alarm bell about the emergence of a region-wide public health crisis in East Asia.

Bird flu has sprung up in Thailand, Taiwan, Japan, South Korea, Cambodia, Indonesia, Laos, Pakistan, Vietnam, China and Indonesia, killing twelve people and the slaughter of at least 20 million chickens across the region thus far.

According to the World Health Organization (WHO), there is a possibility that the deadly strain of the flu virus, known as H5N1 could spread from chickens to pigs and then mutate before jumping to humans.

After first insisting that this country was free of bird flu, Indonesia belatedly and reluctantly joined the list of countries severely affected by the avian flu pandemic last week. The government was forced to admit that the virus had caused the deaths of some 40 percent of the 4.7 million chickens that have died since last September.

Some analysts suspect that the government decided not to warn farmers of the outbreak earlier because of pressure from certain big poultry companies that feared their operations would be disrupted, as may have been the case in Thailand. Nevertheless, the government officials may have also considered the social and economic consequences, particularly in regard to the upcoming national elections.

The government apparently did not realize that the cover-up mentality might cause an even worse impact on the Indonesian economy. The slow response in containing the avian influenza has put the country's US$6 billion poultry industry, which employs some 2.5 million workers, at risk. Hitherto, the government's initially secretive response has allowed the virus to spread to 51 districts across 10 provinces, causing approximately $917 million in financial losses to date.

Only after intensive pressure from WHO did the government undertake an aggressive campaign to combat the disease by allocating $27 million for a mass culling and vaccinations of chickens. Although the allocation of such a large amount of funds is of relief, all elements in society should pay close attention as to how the funds are channeled to avert any possible abuse of funds.

The Indochina peninsula, especially Thailand, where poultry exports bring in $1.2 billion per year appear has been the worst hit so far. Reportedly, the European Union, Russia, Australia and Middle East countries have banned poultry imports from the region, including Indonesia although there is no evidence that the virus is being passed on through the eating of chicken products. Though it is too early to quantify the potential economic impact of this pandemic, the impact of bird flu on Indonesia's economy is by no means on the same scale as the SARS outbreak.

In the short-term at least, the bird flu outbreak may only hit poultry-industry profits as shown by the media reports of declining sales that prompted lower poultry prices. If this is the case, the impact on the economy will be small as the livestock industry accounts for less than 2 percent of Indonesia's GDP. However, the travel and tourism industry could later be hit if the virus starts affecting humans. Excluding the negative impacts of the recent $25 visa-on-arrival policy, the impact of a man-to-man transmitted virus could be severe on the tourism industry, especially in the absence of appropriate government measures.

Negative sentiment surrounding the bird flu pandemic could even incite a speculative attack on a country's financial system. An obvious example is Hong Kong six years ago when a speculative attack on Hong Kong's pegged currency almost brought the city's financial system down. Worryingly, some signs of financial troubles -- although in no way like the financial contagion that swept the region in 1997 -- have emerged.

Investor paranoia incited by the media coverage about the dangers of avian flu that could harm the region's economies has sent shockwaves through the region's stock markets. Thailand's stock market appears to have been the worst hit, plunging 17.4 percent down to 667 points, since the Thai government acknowledged the outbreak last Monday. The Jakarta stock market is also starting to lose ground, down 7.6 percent since last week to 731.8 (as of lunchtime on Monday), with many investors seeing the bird flu crisis as an excuse to take profits.

The bird flu and SARS outbreaks actually have similar characteristics of the widespread contagion effect of the 1997 financial crisis that turned out to be much more of a regional than a global phenomenon. The region's economies have become highly interdependent and are perceived to have similar economic structures by foreign investors and lenders. The interactions between trade and investment flows account for the deepening of economic linkages in the region.

Interestingly enough, the progress in intra-regional trade has been increasingly stronger, primarily due to a sharp increase in trade linkages between ASEAN countries and the rest of East Asia. For instance, according to DRI calculations, the share of trade within ASEAN rose from 23.5 percent in 1999 to 25.3 percent in 2002. At the same time, the share of trade within ASEAN plus China, Japan and Korea increased from 32.8 percent in 1998 to 36.1 percent in 2002.

All in all, the outbreak of SARS last year and bird flu recently have actually given countries geographically close to one another, some lessons on the importance of closer cooperation. The microbe crises may indeed do a great deal of harm to East Asian countries, but they have also fostered a sense of solidarity in the region because people have common problems and are seeking solutions together. The region's leaders also appear to see the importance for institution-building especially regarding transparency and accountability in dealing with public health issues, which could be a good model for reliable governance in other areas.

The first step of the regional cooperation in the fight against bird flu has been nurtured in the ministerial meeting of the affected countries in Bangkok last week. This initial step was encouraging and may open up an opportunity to strengthen the regional cooperation such as policy dialogs and reviews among neighboring counties in preventing contagion of any crisis.

This article is a personal view