But even then it is not inevitable. Greater understanding of the nature of economic cycles and more sophisticated techniques for monitoring the economy mean that central banks are better equipped to counteract the downward swing in cycles. There probably needs to be some additional external factor, which delivers a major unexpected shock to an economy, to bring on a severe downturn or “economic winter”.
By definition, if a shock is to be unexpected, it is a fairly fruitless exercise to try to speculate what form that shock might take. Terrorism, wars (both trade and physical) and natural catastrophes are all possible contenders. But to illustrate their potential impact, it is worth considering two possible shocks: an influenza pandemic and a water shortage.
Influenza pandemic
An infectious disease that spreads across a broad geographical region or even worldwide can have serious economic consequences. Even with the benefits of modern medicine, an infl uenza pandemic could have a negative impact on economic growth. The h5n1 strain of avian influenza may not mutate to a form that can easily be passed on to humans. But if it does, the worry is that as the virus would be carried by migrating birds, it could quickly become a global problem. Although medical science has improved almost beyond recognition since the Spanish fl u pandemic of 1918–19 killed 20m–40m people, there are nevertheless still considerable logistical challenges in preventing a viral infection of this nature from spreading. As a yardstick, the 2003 outbreak of the sars virus infected 8,000 people, of whom around 800 died. According to the Asian Development Bank (adb), this reduced gdp for East Asia (excluding Japan) by approximately $18 billion or 0.6%.
Apart from the Spanish flu virus, there were two other flu pandemics (1957–58 and 1968–69) in the 20th century. Trying to estimate the possible economic consequences of a pandemic involves a complex range of variables but in a November 2005 report, The Potential Economic Impact of an Avian Flu Pandemic on Asia, the adb looked at two possible outcomes.
Both assume a mild infection rate, with 20% of the population succumbing to the virus and just 0.5% of those infected dying. The fi rst scenario assumes that the pandemic is short-lived, seriously affecting demand for six months and having a much less severe impact in the subsequent six months. The more negative scenario assumes that demand remains seriously affected for a year. The adb’s model predicts that under the fi rst scenario the drop in demand caused by the erosion of consumer confidence will amount to $99.2 billion or 2.3 percentage points of gdp (relative to the adb’s forecast growth rate for the region of, for example, 7.2% in 2006 and 7% in 2007); under the second scenario the contraction could rise to $282.7 billion or 6.5% of gdp. On the supply side, the economic impact of people being off work because of influenza is a much lower $14.2m (0.3% of gdp); this would be the same for both scenarios because the background infection rate assumptions are common to both.
Governments have drawn up emergency procedures to try to limit the spread of an infectious disease. These include restricting travel and trying to prevent groups of people gathering together in places of entertainment or even restaurants. Whether it is bird flu or some other virus, as the adb model shows, a pandemic could have a marked impact on global growth.
Water shortage
Water is essential for sustaining life, yet many in the western world take it for granted. Apart from the human body’s immediate need for water, it touches on all aspects of life: food, health, energy and industry. With water covering approximately 75% of the earth’s surface, a shortage is not an obvious problem. But 96.5% of the total volume of the earth’s water is sea water, and some 70% of the fresh water is held in glaciers and icecaps. In the 2003 un World Water Development Report, Water for People, Water for Life, it is estimated that “2 billion people are affected by water shortages in over 40 countries: 1.1 billion do not have suffi cient drinking water and 2.4 billion have no provision for sanitation” (who/unicef, 2000). Even in parts of the world where there is an apparent abundance of water, the lakes and rivers are becoming increasingly polluted.
In the past 50 years the world’s consumption of water has doubled. Population growth, industrialisation and increased tourism have led to a sharp rise in demand, while climate change appears to be reducing supply. The un report is unambiguous in its conclusion: “There is a water crisis.”
Without water crops fail, and hunger has been the catalyst for many uprisings and wars. A 2001 Oregon State University study estimated that there had been 1,831 disputes over water between two or more countries over the past 50 years, of which 507 involved “confl ict-related events”. Increasing competition for limited supplies of fresh water will inevitably cause disputes, which could easily spill over into conflict.
The two big catch-up economies, India and China, face major water shortages. In parts of India, the water table is dropping by 1–3 metres a year and many large cities are experiencing chronic water shortages. In 2004, the Indian state of Punjab informed neighbouring states that it would be cutting off their water because its farmers were short of water.
Within 20 years the country as a whole is likely to face a serious water crisis. To try to help farmers, the Indian government proposed diverting water from the Ganges–Brahmaputra basin to southern and eastern parts of the country. But this would have a detrimental effect on the amount of water flowing into Bangladesh, and not surprisingly the Bangladeshi government protested vociferously about the Indian government’s plans to alleviate its own water problems. In 2003, the un set up the Water Cooperation Facility to mediate in international disputes of this nature.
In the longer term, water shortage is not likely to be a limiting factor in global growth. There is a well-established desalination industry, converting sea water into fresh water, which produces less than 1% of the world’s freshwater requirement. Environmental concerns about the toxic by-products generated by this process will need to be addressed before the industry can gear up to meet a much more significant proportion of the world’s water needs, but it is estimated that the desalination industry is likely to double over the next 15 years.
Eventually, desalination and improved recycling techniques could become a positive driver for the global economy. But in the medium term water shortage is a potentially negative external factor. There is a direct negative economic consequence of a shortage of water, which hits the agricultural industry hardest. The 2003 European drought, for example, is estimated to have cost $13 billion in lost crop production. But the indirect consequences could be even more damaging if increasingly fierce competition for this essential resource causes conflict.
Read More : External events Influence Economic Cycle
