Pricing Ebola: Risk in an Age of Fear
A little over a month after the World Health Organization declared that the Ebola virus could produce 10,000 new cases per week, the organization put out an additional report that emerging infections in West Africa are declining. An aggressive public health program coupled with massive inflows of international aid and expertise, and the possible development of a vaccine by early 2015 should, in the coming months, work in concert to bring to an end what Margaret Chan, the WHO’s Director General, called “the greatest peacetime challenge the United Nations and its agencies have ever faced.” Despite cause for optimism, fear and hysteria, most of it unfounded and all of it destructive, continue largely unabated and could result in cascading economic and social welfare burdens to an otherwise containable health crisis.
Ebola spread through West Africa not because of its uniquely destructive pathophysiology – across the continent the Ebola death count is (and will likely continue to be) dwarfed by Malaria and diarrheal diseases – but because of failures of governance, economic resiliency, and human fallibility.
Perhaps more than anything, mass distrust and fear have stymied the response, although the lack of health worker training, inadequate resources, and government heavy-handedness certainly haven’t helped the situation. In August, an Ebola treatment facility was ransacked by an angry mob, causing sick patients to flee and discouraging the newly sick from seeking treatment. In September, a three-day lockdown in Sierra Leone hindered contact tracing and disrupted economic activity. These are not isolated incidents, but rather highlight a pattern of crisis response failures with roots in institutional and economic frailty. It is however the psychology of fear, and its effect on all economic actors that most significantly hobbles crisis response and prevention.
Now the damage is coming around. The disease is straining grossly underdeveloped regional healthcare systems, and is weakening already weak states. Sierra Leone and Liberia had just started recovering from protracted civil war and were enjoying relatively strong rates of GDP growth. Unemployment was falling and foreign direct investment (FDI), particularly in the mining industry, was surging in. A sharp reversal of this economic progress now seems all too likely.
With capital fleeing and exchange rates wobbling, cross border trade has drastically slowed. FDI is drying up and the tourism industry is near collapse. The World Bank now expects Liberia’s economy to contract by nearly 5% this year (from a healthy 8% growth rate in 2013) and has slashed expected growth in Sierra Leone from 11% to 2%. Inflation, too, is creeping up, largely a consequence of underemployed factors of production – idle or abandoned farmland, labor stuck at home sick or fearful of becoming so, and capital without an appetite for risk, or unable to price it. Rising food prices (by 150% for cassavas, a staple, in Monrovia), and supermarkets struggling to resupply their shelves, may yet spark violent conflict and social unrest that would parallel, if not exacerbate, the misery brought on by the epidemic.
The World Bank has identified a $290m fiscal hole in West African governments’ budgets. It is essential that in a time of national crisis and declining tax revenues, governments are not forced to cull essential staff. Not only would this adversely affect the running of their states, but it could spark unnecessary public backlash.
The World Bank has promised $500m to support damaged health systems in West Africa, and indeed a lot of international money is going into Ebola treatment and prevention. But more needs to go into shoring up national stability. That is, the international community must ensure that basic government services continue to be rendered, that contracts are enforced through the courts, and that the rule of law does not deteriorate. “The final economic toll of Ebola will not be driven by the direct costs of the disease itself – expensive drugs, sick employees and busy caregivers. It will be driven by how much those who are not infected trust their governments,” writes Marcelo Giugale, Senior Director of the World Bank’s global practice for macroeconomics and fiscal management. This is the price of fear, and Giugale’s Ebola Impact Index predicts it could top $33 billion if government mismanagement of the disease leads to 200,000 cases.
Fear hampers economically efficient decision-making by mispricing risk. Research from Nobel Prize winning behavioral economist Daniel Kahneman tells us that individuals fear losses more than they value corresponding gains. Fear reduces labor force participation by overvaluing the tiny risk of losing one’s health over the economic benefits of work. That is, risk is more often measured by fear, not probability.
That same fear has closed border crossings, led to farmers abandoning their crops, cancelled business events, and halted exports. According to Jim Yong Kim, President of the World Bank, as was the case for both the SARS and H1N1 epidemics, the “tide of fear” triggered by the Ebola outbreak could cause 80% to 90% of the economic impact.
Remedying state fragility and propping up fiscal gaps should be made a priority if the world does not want to see countries that beat Ebola fail shortly thereafter. That would require a lot of money, and incessant public reassurance by all political leaders as to the real, objective probabilities of risk, rather than the perceived risk. Some of our leaders are trying to help: IMF Managing Director Christine Lagarde was recently spotted sporting an “isolate Ebola, not countries” badge and warning an audience against terrifying investors away from Africa. Others, like New Jersey Governor Chris Christie, unfortunately seek only to score political points by stoking public fear against an ill-conceived threat to his constituency.
Likewise, rather than quarantining West Africa through travel bans and other over-zealous mobility impediments such as mandatory 21-day quarantines for asymptomatic persons, the West should actively encourage trade and transit. The media has rightly lauded the heroism and selflessness of healthcare professionals heading into harm’s way to prevent the disease from spreading. A similar international effort is needed to encourage businesspersons, investors, and financiers to shore up West African economies and seek opportunities that bolster growth industries, stimulate commercial interest, and generate broader market participation.
This need not come out of altruistic benevolence; market mechanisms are well placed to encourage such behavior if some Ebola hysteria dissipates and a risk premium can be better modeled. There are economic opportunities in West Africa, long unnoticed or unexploited, which if leveraged, could not only be commercially lucrative, but also politically stabilizing and create a stronger foundation to combat the disease.
Opportunities abound for distressed securities funds to invest in undervalued assets or debt in imminent default. West African governments, corporations, and local subsidiaries of international corporations have a myriad of assets they may want or need to divest themselves of. International investment in those assets would lubricate the domestic economy and put the three nations most at risk of collapse on the path to recovery. Such investments and development opportunities reap social and economic rewards to both investors and host nations.
The Mount Coffee Hydroelectric Plant on the St. Paul River in Liberia is a poignant example of one such opportunity. Having promised to bring cheap and reliable electricity to a nation ravaged by two decades of civil war, its construction site now sits idle. Laborers stay home, fearful of falling sick, and foreign managers have been evacuated. All the while, fixed and financing costs have to be borne, straining the Liberia Electricity Corporation and international contractors Norplan AS and Fichtner GmbH.
Similarly, Sifca Group, an Ivory Coast-based agribusiness, has halted rubber exports from Liberia due to border closures and staff shortages. Its wares now sit idly in expensive Monrovian warehouses. Even in Ebola-free Gambia, hotel bookings are down 60% due to fears of the spread of the virus, severely straining the tourism industry and putting leisure industry companies at risk of bankruptcy. Securities funds willing and able to accurately price risk are well placed to acquire discounted stakes in assets like these with significant potential for returns. Diversifying their investments across the region would help mitigate against the concentration risk in any one sector or country. In doing so, they’ll also be keeping people employed and providing a much needed financial lifeline to governments, companies, and individuals suffering from the economic consequences of fear.
Liberia, Sierra Leone, and Guinea are going through hell, and to quote Winston Churchill, they’ll have to keep going. Ebola is, however, very much an international crisis requiring a Churchillian effort on the part of NGOs, aid agencies, donor states, individuals, and indeed private capital to prevent the disease from spreading and states from failing. If public action is inadequate, fear will reign – people won’t go to work, businesses will close, economies will collapse, and social order will disintegrate, likely violently. Because fear and its associate, loss-aversion, may come to result in up to 90% of Ebola’s economic toll, it is absolutely paramount that this scourge be contained. The market can help, and opportunities are plentiful for those with a taste for calculated risk. And let us not forget the responsibility of our leaders in steering us away from mass hysteria; it could end up being an even bigger killer than Ebola.
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