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The coronavirus demands more integration, not less

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In the photo taken on 13 February 2020 at the Incheon metropolitan branch of the Korean Red Cross in South Korea, volunteers are preparing emergency food to reach citizens who have been isolated from their homes, including those who have come into contact with people infected with the new coronavirus (Photo: Reuters).

In Brief

The residents of Omaha, Nebraska, received unusual letters in the autumn of 1967. The letters weren’t for them, they were for someone who lived in Boston, but they came with simple instructions: if you know that person in Boston, forward the letter to them. If you don’t know them (almost always the case) send the letter to someone who might.

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On average, the letters passed through only six pairs of hands before they reached their target, inspiring the phrase ‘six degrees of separation’. It was a landmark study, conducted by Stanley Milgram, and it showed just how interconnected the world had become.

That interconnectedness has increased exponentially since then, and that’s been a good thing. Increased trade, finance, investment and people-to-people links have seen massive reductions in poverty and increases in living standards that could only have been dreamed of back in the 1960s.

But integration has an ugly side. Financial integration means a lower cost of living, but it also means more dangerous financial crises. Trade integration means huge advances in productivity, but it also means greater exposure to the economies and policies of other countries. And while people-to-people links mean richer communities and a more peaceful world, it also means that a health problem in one country can quickly become a global health problem.

The coronavirus reminds us of the downside of integration: that it makes risks more systemic. The challenge for Asian governments, including Australia’s, is to manage these risks while protecting the integration that has saved and greatly improved the lives of so many. These are not competing objectives. Protecting the fruits of our integration and addressing the coronavirus are both about maximising welfare and minimising suffering.

The solution to the coronavirus is to have more integration and cooperation, not less. Addressing pandemics is what economists call a ‘weakest link public good’. It is a public good because we all benefit from it. One country’s enjoyment of a pandemic-free environment does not prevent any other country from enjoying the same thing, and no country can be excluded from that enjoyment. But it is also a ‘weakest link’ public good because the supply of this good is dependent on the weakest link in the chain. Even if most countries coordinate and manage the spread of the virus as effectively as possible, it only takes one country to drop the ball and the virus will be back before you know it.

Regional and international cooperation is therefore vital. Countries cannot manage the coronavirus on their own, regardless of whether they are developed or developing. Closing borders comes at huge cost. The Australian economy is at risk of losing at least A$1 billion every month that its borders are closed to Chinese tourists, and this is the tip of the iceberg. It doesn’t include the cost of losing Chinese students, investors and business visits, to say nothing of the human cost this imposes on friends and relatives in China. All visitors who’ve been in China, except Australians, have been indiscriminately caught up in this travel ban. Why should Chinese on student visas, for example, not be treated like Australian students brought back from study in China, and be allowed to resume or commence their studies in Australia after a 14 day period of quarantine if that’s medically appropriate?

Closing borders may be politically expedient but is needlessly blunt and ineffective. Regional and international cooperation is the only effective response to this crisis. This cooperation needs to take many forms. Countries with more developed healthcare systems need to provide funding and technical assistance to help countries not so well endowed manage the crisis. Developing a vaccine is the ultimate goal, but the onus of developing a vaccine will likely fall on the developed economies. They must ensure that, once developed, intellectual property and other restrictions do not prevent the vaccine from being distributed widely and cheaply throughout the region. This means getting incentives right for pharmaceutical firms and having governments play a constructive role as necessary.

Asian governments must work together to ensure they do not make things worse than they need to be. The direct costs of pandemics are small. It is the indirect costs that determine the severity of the crisis. The old adage of macroeconomics that my spending is your income and your spending is my income is already on display. Banning Chinese tourists, students and visitors indiscriminately means forgoing the income and other benefits they bring in. Causing unnecessary panic means increased risk premia, and lower consumer spending, workforce participation and confidence. The SARS outbreak is estimated by Jong-Wha Lee and Warwick McKibbin to have reduced GDP among Asia’s economies by between 0.07 per cent (for Australia, Japan and the United States) to a whopping 2.63 per cent for Hong Kong. The human cost behind these numbers must also be remembered.

If the crisis deteriorates further, even more cooperation will be required. Research shows that the impact of fiscal stimulus in boosting GDP is twice as large when countries act together. Keeping trade and investment channels open will be vital. If things get worse, some emerging economies in Asia may require financial support. A flight to safety in the global financial system would see sharp falls in exchange rates, investment and asset prices in the emerging economies, increasing financial stress. Regional cooperation to help shore-up these financial systems will be vital, through loans, currency swap lines, the use of lending facilities in regional development banks and, potentially, lending by regional and global mechanisms such as the Chiang Mai Initiative Multilateralization and the IMF.

Four pieces this week explore the different challenges emerging from the coronavirus.

Sara Davies examines how some of the measures taken to contain the spread of the virus have impeded regional connectivity. ‘To better prepare for future outbreaks, it is necessary to build channels of trust, communication and information-sharing in peacetime, and increased investment in equitable health systems to support outbreak containment measures’, she warns. The peacetime coordination of the WHO’s International Health Regulations needs ongoing financial and political support and there is the issue of funding better understanding of COVID19 and preparing for potential future outbreaks. Davies also warns that trade and travel bans potentially violate human rights, erode collective diplomacy and affect economic outcomes, disproportionately harming the economically vulnerable, and she stresses the need for a regional response.

Greg McCarthy looks at the broader dimensions of the crisis. He shows how the coronavirus has served to magnify political, economic and cultural tensions within and between Australia and China while, in China, the virus has amplified tensions between the Communist Party leadership and the people. Of particular concern are the mounting first-hand reports that Chinese-Australians are facing increasing hostility both online and in-person since the outbreak began. ‘To develop empathy for the victims of the virus in China and elsewhere political differences need to be put aside’, warns McCarthy. ‘The disease is a challenge for humanity, not a clash of civilisations’.

Terence Tai-Leung Chong looks to the lessons learned from the SARS outbreak in 2003. He shows that the SARS experience demonstrates that while the impact of an epidemic on an economy is likely to be severe, it can also be short-lived. But the effects are unlikely to be evenly spread. ‘Unemployment is more likely to rise among small and medium-sized enterprises in sectors vulnerable to epidemics, such as catering, tourism and retail’, he says. ‘In the worst-case scenario, China’s GDP growth rate may drop to about 5.5 per cent in the first quarter of 2020. It is likely to hover at a similar level in the second quarter before eventually bouncing back to 6 per cent in the third quarter’, he forecasts. The economic damage stemming from public panic surrounding the coronavirus is likely to be more severe than the actual damage done by the virus.

Joyce Nip explores the politics of the virus in China. She notes how the death of a doctor in the epicentre of the outbreak has triggered a contest for the production of an iconic hero for the epidemic, threatening to diminish Chinese President Xi Jinping politically, and leading to blame-shifting between the local and central authorities. ‘While CCTV aired a special program to praise heroes of the coronavirus epidemic, the central authorities are attempting to co-opt the collective support for the medics as love for a strong and united China’, Nip says. ‘[The whistleblower] Dr Li Wenliang is acknowledged in a long list of names. With no mention of freedom of speech in the CCTV program, this is not the China that Li called for on his deathbed’.

The coronavirus is a challenge that will be solved; the question is how quickly it will be solved, how much damage is done in the meantime, and how much of that damage is the result of wrong policy calls everywhere. A global challenge requires a global solution and the more actively countries work together the faster life can return to normal. Political expediency shouldn’t be allowed to triumph over collaboration, effectiveness and efficiency.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.

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