Economic Consequences of the Swine Flu Outbreak

By Geary W. Sikich Copyright© Geary W. Sikich 2009. World rights reserved. Published with permission of the author.

Introduction A paradigm is broadly defined as: a philosophical or theoretical framework of any kind. A paradox on the other hand, is an apparently true statement or group of statements that leads to a contradiction or a situation which defies intuition. A paradox, while seemingly self-contradictory or absurd in reality expresses a possible truth. At the time of this writing H1N1 known as Swine Flu has spread through much of the world. Its low mortality rate has made it a relatively mild pandemic. Yet to be determined is what will happen when the flu season arrives in the northern hemisphere this fall. The World Health Organization (WHO) and Centers for Disease Control (CDC) have been revising much of their guidance and we are seeing almost daily some revelation from the WHO, CDC and the popular media. Far Greater Immediate and Long Term Impacts? The economic impact of the swine flu virus in some countries may be drastic, the chief economist for the International Monetary Fund has warned. Chief economist Olivier Blanchard said the tourism industry in some countries may be negatively affected during a speech at the Carnegie Endowment for International Peace in Washington. Thomson Reuters reported recently that fears of a deadly swine flu pandemic wrecking an already wobbly global economy. These fears have materialized with a vengeance in the commodities markets. Hog futures dropped dramatically and cascaded to share prices of U.S. meat companies which also dropped. Egypt reported that it will slaughter its entire pig population of approximately 300,000 in an effort to stem the Swine Flu virus. Early sell-offs in commodities recall market reactions to the SARS and H5N1 bird flu in 2003. Those outbreaks also raised concerns over demand for food commodities. Economic Impacts are already being felt The impact of Swine Flu on the markets combined with the current financial crisis and an already weak world economy could make Asia’s experience during the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003 pale. This is partly due to the fact that the current Swine Flu virus is spreading faster than SARS did. Secondly, we have seen a much quicker reaction by the WHO and CDC, raising the Pandemic Phase from 3 to 5 in rapid succession. The cascade effects will be seen in commodity prices, stocks of food companies, energy prices, pharmaceutical company expenditures to find a vaccine and any measure of things to come, the region's economies may find themselves in a much deeper hole should swine flu spread. Economists and industry leaders are closely watching the spread of the swine flu. Should a severe outbreak of the flu occur in Asia, economists and industry executives fear the economic damage would be worse than that of the Severe Acute Respiratory Syndrome outbreak in 2003.

Economic Consequences of the Swine Flu Outbreak

In an article entitled, “Matthews borrows against turkeys” (By Iain Dey, Sunday Telegraph, published on 24/06/2007) the following excerpts reveal the economic impact that H5N1 is already having:
Bernard Matthews, the poultry farmer whose eponymous empire was blighted by avian flu earlier this year, has been forced to refinance his business by securing its future against his stock of turkeys. Sales of the company's "bootiful" turkeys have been hammered by the health scare. Recent research suggested sales of both frozen and fresh turkeys across the UK are down around 30 per cent in the wake of the outbreak. The last figures provided by the company suggested a 20 per cent plunge in sales. Bernard Matthews has now been refinanced through an asset finance deal struck with Burdale, a subsidiary of Bank of Ireland, and supported by a handful of other major international lenders. The loans have been secured against some of the company's 56 farms, its plant and equipment, as well as its livestock, according to banking sources. Matthews founded the business in 1950 with 20 turkey eggs and a second-hand incubator. The business turned over about £400m last year and employs more than 6,000 people worldwide. The company produces 7m turkeys in the UK every year. The avian flu disaster is estimated to have wiped around £70m from Matthews personal fortune. The business is run from his Norfolk mansion, Great Witchingham Hall, set in 36 acres, which he restored from dereliction.

My colleague, John Stagl and I transcribed some notes as we were preparing to discuss the economic consequences of a pandemic at a luncheon in Chicago in 2006. We had come to the conclusion at the time, that a pandemic will have a domino effect worldwide. We all know that a pandemic will create a unique set of conditions that impact society, the business markets and medical support systems. One of the differentiating characteristics of a pandemic, unlike any other disaster, is its wide-spread impact. We have already seen that this impact has occurred without human-to-human contagion occurring. The economic consequences to the poultry industry have been dramatic. However, let’s turn our attention to the human-to-human aspects of the post-pandemic period. While we know that the medical community will be one of the hardest hit areas, it is by no means the only area that will suffer extensive near-term and severe long term impact. The medical impact, for that matter it will most probably be the most short-lived impact factor of the pandemic (in terms of deaths, etc.) and post-pandemic periods (people will alter their lifestyles to, perhaps do with less medical services). The longer term ramifications will be felt economically throughout the world. Below is a list of some of the various elements that will feel the impact of a pandemic, either directly or indirectly. Impacts will reverberate through various sectors of the worldwide socioeconomic system. The key point to note is that the reverberation and cascading effect will be painfully uneven. Some countries will fare better than others. Some companies will fare better than others. Collectively though, each will feel the impact of the other as if they were dominos falling creating a cascade effect. An analogy would be to compare

Economic Consequences of the Swine Flu Outbreak

the cascade effect of a pandemic to a tsunami wave. The initial wave may be hardly noticeable however, as it ripples out it gains strength until it surges over the land causing devastation and destruction. Current thinking about pandemic generally starts with the recognition of the illness and a projection on its societal impacts. We know that:         People are affected Society is unprepared Governments are unprepared Private Sector Enterprises are unprepared Medical Institutions will be impacted Economic Sectors Worldwide will be impacted Medical Support Systems are impacted Social Behavior will reflect be Susceptible to Significant Degradation

But what we do not know and can only speculate about is the scalable variables brought about by random chance. Biological variables (mortality and morbidity rates as a result of the pandemic) can be estimated based on the lethality of the virus (currently at almost 60% versus the Spanish Influenza virus which was around 2 – 3%). There is an excellent study that has been published regarding the impact of a pandemic on the Life Insurance Industry (I will cite from it later). With scalable variables, as Taleb says in the Black Swan, “the longer you wait, the longer you will be expected to wait.” This is as a result of the scalability of random events – randomness runs counterintuitive to conventional logic and the normal bell curve deviations that we are used to. So, here are some purely speculative projections as to what the post-pandemic recovery, restoration and realignment may look like. I have based some of what I am about to project on limited historical evidence from the Plague and Spanish Influenza. I use the term “limited” as a reference to the differences in technology, population, education, industrialization, etc. that was present at the time of the Plague and Spanish Influenza (a mere 89 years ago as of this writing in 2007). Here are some fast facts (courtesy of Maplecroft Index – August 2007) to ponder as we get ready for our journey into post-pandemic speculation.  Nearly two billion people (mostly in developing countries) do not have access to electricity  Nearly half the world's population (three billion people) have never made a phone call  Enabling digital inclusion is most urgent in Africa – a continent that houses 1 in 8 people (12%), has only 1 in 40 fixed line telephones (2.5%), 1 in 30 mobile telephones (3%), 1 in 70 personal computers – PCs (1.5%), 1 in 150 Internet users (0.7%) and 1 in 500 Internet hosts (0.2%)

Economic Consequences of the Swine Flu Outbreak

 Developing countries now account for almost half (49%) of total telephone subscribers in the world, up from just 19% in 1990  Globally only 650 million people have PCs. In the developing world, figures average at about 1/100 people but can be as high as 8/100 in Argentina or as low as 0.18/100 in Burundi

In 1990 only 20 countries were connected to the Internet. In 2003 there were 209

Consider these aspects of predicting the future. In the material that follows, I have calculated a possible error rate of 100%. I could be completely wrong. Other than that what I am writing is pure speculation based on a random event occurring at some time in the future. However, I have cleverly, I hope not cast my forecast with any date specific timeframe and therefore could be 100% right – eventually! Forecasting without incorporating an error rate uncovers, according to Nicholas Taleb (The Black Swan) three fallacies all arising from the same misconception about the nature of uncertainty. His first fallacy is that variability matters. I agree; that is why I am not taking my projections too seriously and casting them with a date, hence I propose a range of possible outcomes. Second, he states that there is the fallacy of failing to take into account forecast degradation as the projected period lengthens. Here again, I agree; we do not realize the full extent of the difference between near and far futures. H5N1 is extremely lethal at present. Viruses mutate in order to survive. I would speculate that the influenza virus that creates a pandemic will be far less lethal than the current strain of H5N1. This, however, also allows for the virus to spread faster, longer and to infect more people – because we stay alive longer and can pass it to many others over time (evidence my projection figure from the previous chapter. Finally, Taleb offers his third, and according to him possibly the most grave fallacy that concerns a misunderstanding of the random character of the variables being forecast. We do not realize the consequences of the rare event. It is the lower bound of estimates (worst case scenario) that matters when engaging in a decision. The worst case is far more consequential than the forecast itself. Remember – “A black swan is a highly improbable event with three principal characteristics: it is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was.” Nassim Nicholas Taleb The Black Swan: The Impact of the Highly Improbable

Economic Consequences of the Swine Flu Outbreak

The following are the initial albeit speculative impacts that we can attribute to a pandemic: Business (all forms of Private Enterprise) Impact  Reduction in workforce this leads to a reduction in output capacity  Reduction in consumption (people staying at home) leads to a decrease in demand  Reduction in revenue leading to less profit, leading to less taxes being paid  Lack of consumption demand leading to employees being laid off; leading to loss of benefits (healthcare insurance, etc.)  Reduction in disposable income leads to further consumption declines and consumption focused on necessities (healthcare insurance may become a luxury)  Redistribution of family asset spending – necessities only  Food  Medical (if you can pay health insurance, you still have deductibles; will the influenza be covered under your existing plan?)  Housing  Private transportation – if possible  More layoffs due to a worldwide sloughing off of demand and some countries closing borders as they attempt to isolate themselves  Business bankruptcies medium and small businesses will feel the pain because they have limited cash reserves. Large enterprises will suffer as a result of loss of consumers and suppliers (how dependent is your business on the small to medium size supplier/vendor? Or, is your small/medium size business heavily dependent on a customer (large enterprise) that may experience a drop in demand putting your operations at risk?) Medical Support Systems (All Medically Related Endeavors)  Doctors in demand for patient diagnosis – office visits  Hospitals overwhelmed with patients  Patients must be isolated, from traditional patient care  Isolation supplies become limited, if available at all  Respiratory equipment in short supply - for secondary pneumonia  Committees will decide who gets respirator support & who does not  Limited supplies of medication (no vaccine for 6-9 mos.)  Hospital & public pharmacies must increase security for medications Investments Fall (Anything that can be Monetized)  Redistribution of family assets – reduced investing  Companies need cash for operations vs. reduced investments  Investors seek “safe havens” for investing – no 3rd world investments

Economic Consequences of the Swine Flu Outbreak

 Reduced capacity to process investment activity – up to 40% of staff sick  Stock and Bond Markets behave erratically leading to less and less investment in publicly traded stocks, bonds  Private equity investments in companies drops for all the above reasons cited previously and all the subsequent points yet to come Commodity Markets  Demand becomes erratic leading to reduced trading  Open pit operations are limited due to physical concerns – exposure to others in the trading pit  Electronic trading (heavier now than ever) becomes erratic as power supply systems and Internet are less consistent  Commodity delivery erratic  Investors seek “safe havens” for investing – no 3rd world investments  Reduced capacity to process investment activity – 30% of staff sick Business Assets Depleted  Lack of investing  Redistribution of company assets to current expense issues  Growth is replaced with survival strategies  Revenue continues to slip  Unemployment grows  National disposable income declines  Human capital (talent – an overlooked asset) not easily replaceable, long lead times to train, less loyalty, more dependent on technology Business Failures Increase  More Unemployment  Loss of personal disposable income  Increased demand for government services (at all levels) Government Impact  Substantial drop in revenues (tax base drops)  Quarantine and Isolation requirements will us most of government assets  Limited ability to provide of traditional support services  Increased demand for services  Social unrest ferments – “someone has to help us” mentality Bankruptcies  Business failures increase to unprecedented levels  Increase in personal and commercial bankruptcies  Backlog in court processing of bankruptcies  Creditors wait longer for assets from courts  Creditors see drop in assets from bankruptcies

Economic Consequences of the Swine Flu Outbreak

 Creditors become more restrictive in loaning money and extending credit  Credit and loan availability drops  More companies fail due to lack of loans & credit Creditors Fail  Delays in bankruptcy processing & asset distribution results in lender failures  Bankrupt company assets are not redistributed into the market  Business market contracts because of operational asset decline  Lender failures compounds bankruptcy backlog and asset distribution Opportunities  Large numbers of qualified, trained individuals available for employment  Companies prepared to identify these people will grow stronger & faster  Substantial number of opportunities will exist as a result of company failures Let’s take a look at one sector, transportation. Within that sector take the slice dealing with passengers and cargo. Just on the basis of moving people and stuff you can already project the complexity. Below are the world’s thirty busiest airports in 2005 ranked by passengers and by cargo. What was your estimate that a person, who knew that they had a highly infectious form of Tuberculosis, would be capable of flying internationally on several flights? Now, take that projection and add the variability factor and random character of the event and think about the consequences in the context of flying from any one of these airports with a case of influenza.
World’s 30 busiest Airports 1. 2. 3. 4. 5. 6. 7. 8. 9. Atlanta, Hartsfield (ATL) Chicago, O'Hare (ORD) London, Heathrow (LHR) Tokyo, Haneda (HND) Los Angeles (LAX) Dallas/Ft. Worth (DFW) Paris, Charles de Gaulle (CDG) Frankfurt-Main (FRA) Amsterdam, Schiphol (AMS) Total passengers 85,907,423 76,510,003 67,915,403 63,282,219 61,489,398 59,176,265 53,798,308 52,219,412 44,163,098 43,989,982 43,387,513 41,940,059 World’s 30 busiest Airports Memphis (MEM) Hong Kong (HKG) Anchorage (ANC) Tokyo, Narita (NRT) Seoul (ICN) Paris, Charles de Gaulle (CDG) Frankfurt-Main (FRA) Los Angeles (LAX) Shanghai (PVG) Singapore (SIN) Louisville (SDF) Miami (MIA) Total cargo 3,598,500 3,433,349 2,553,937 2,291,073 2,150,140 2,010,361 1,962,927 1,938,430 1,856,655 1,854,510 1,815,155 1,754,633

10. Las Vegas (LAS) 11. Denver (DEN) 12. Madrid (MAD)

Economic Consequences of the Swine Flu Outbreak

13. New York (JFK) 14. Phoenix, Sky Harbor (PHX) 15. Beijing (PEK) 16. Hong Kong (HKG) 17. Houston (IAH) 18. Bangkok (BKK) 19. Minneapolis/St. Paul (MSP) 20. Detroit (DTW) 21. Orlando (MCO) 22. Newark (EWR) 23. San Francisco (SFO) 24. London, Gatwick (LGW) 25. Singapore (SIN) 26. Philadelphia (PHL) 27. Tokyo, Narita (NRT) 28. Miami (MIA) 29 Toronto (YYZ) 30. Seattle/Tacoma (SEA)

41,885,104 41,213,754 41,004,008 40,269,847 39,684,640 38,985,043 37,604,373 36,389,294 34,128,048 33,999,940 32,802,363 32,784,330 32,430,856 31,495,385 31,451,274 31,008,453 29,914,750 29,289,026

Taipei (TPE) New York (JFK) Chicago, O'Hare (ORD) Amsterdam, Schiphol (AMS) London, Heathrow (LHR) Dubai (DXB) Bangkok (BKK) Indianapolis (IND) Newark (EWR) Osaka (KIX) Tokyo, Haneda (HND) Beijing (PEK) Atlanta, Hartsfield (ATL) Guangzhou (CN) Luxembourg (LUX) Dallas/Ft. Worth (DFW) Oakland (OAK) Brussels (BRU)

1,705,318 1,660,717 1,546,153 1,495,918 1,389,589 1,314,906 1,140,836 985,456 949,933 869,474 799,073 782,066 767,897 750,555 742,766 741,805 672,844 660,854

NOTES: Total passengers enplaned and deplaned, passengers in transit counted once. Total cargo loaded and unloaded, freight and mail (in metric tons). Source: Airports Council International World Headquarters, Geneva, Switzerland. Web: www.airports.org .

There were almost two billion passengers traveling in 2006; that is roughly three million people every day flying from one city or one country or one continent to another. The potential is obvious for someone with an infectious disease unwittingly perhaps carrying it from one part of the world to another. Air New Zealand had an unexpected downturn in revenue of 11% while cities with SARS were transformed by the SARS outbreak. Sherry Cooper from Toronto explains: During its four-month run in Toronto, ending in June, SARS killed fewer than 50 people. Even China and Hong Kong, the two places hardest hit by the virus, suffered ‘only’ 648 deaths in total. On April 23, the WHO sent out a warning against all unnecessary travel to Toronto, Beijing, and China’s Shanxi province. Travel to and from Toronto plummeted overnight. Overall SARS cost the city’s hotel industry more than $125 million Canadian; more generally, the tourism industry in the province of Ontario lost more than $2 billion Canadian in income and jobs.

Economic Consequences of the Swine Flu Outbreak

In another example, an article titled, “Just plane gross” published on August 14 2007 in the Wall Street Journal (WSJ): This summer, rampant flight cancellations and delays are forcing many travelers to languish, sometimes for hours, before they can board their flight. Unfortunately, that's nothing compared with what may await them on the plane. Airplanes may be some of the best breeding grounds for illness. The WSJ article further cited the following incident: Indeed, delays can affect cleanliness and comfort, particularly with planes now flying fuller. The percentage of on-time flights fell to 74.5 percent in July from 76.4 percent a year earlier, according to flightstats.com. Summer thunderstorms have been to blame, as have technical glitches like the Federal Aviation Administration computer snafu on June 8. On Saturday, more than 20,000 international passengers were stranded for hours at Los Angeles International Airport, waiting on airplanes and in packed customs halls while a malfunctioning computer system prevented U.S. officials from processing the travelers' entry into the country. The U.S. Customs and Border Protection system went down around 2 p.m., forcing some planes to sit on the tarmac for so long that workers had to refuel them to keep their power units and air conditioning running. Maintenance workers ran trucks around the airport hooking up tubes to service lavatories. So what does this mean from a pandemic and post-pandemic perspective? Just take a look at what the article reveals regarding the cleaning schedule for airplanes: JetBlue says its planes undergo a "maximum deep clean" once a month, same as before, a process that includes a thorough cleaning of the lavatories and galleys, vacuuming of carpets and cleaning of seats, seat trays and side walls. Southwest Airlines says its deep-cleaning cycle is 30 days too. American Airlines says it also keeps a 30-day average. Continental Airlines, like many airlines, says its planes also undergo an overnight cleaning, which includes replacement of soiled pillows and blankets, vacuuming of cabin floors and cleaning of lavatories and passenger seating areas. Between flights, though, the cleaning tends to be cursory. American says it picks up trash and cleans seat-back pouches between flights, but it doesn't wipe down tray tables or vacuum while at the gate unless there's an obvious mess that must be addressed. ATA Airlines also says it doesn't wipe down tray tables between flights unless there's a clear need because of the limited ground time. I am sure that after reading this, you are probably thinking about carrying disinfectant wipes with you on your future travels! If the above examples are common practice, the spread of viral illness could extend the post-pandemic meltdown for the transportation

Economic Consequences of the Swine Flu Outbreak

industry, or the industry could be required to employ more stringent cleaning standards to their fleets of aircraft. And this is only one example of only one segment of one industry sector! Business Impacts – How Long Can You Survive? Impacts can be immediate and expensive. It is therefore prudent that your pandemic planning efforts consider the dynamic nature of the world’s markets as part of your overall strategy. This makes good business sense. It can be readily applied to situations other than a pandemic. With this broader perspective in mind your pandemic preparations can be leveraged into greater management awareness and perhaps, more of a competitive edge for your enterprise. This is true, for public sector entities too. Government can be more competitive and forward thinking and gain leverage with the constituents (taxpayers) whether they are individuals or businesses. One key issue that businesses face with a pandemic that is different from other disasters is that multiple locations could be affected simultaneously. This is complicated by loss of personnel that could occur for several reasons – sickness, caring for sick individuals, school closures, fear of contamination at the workplace, etc. Most of the current business continuity models are based on the recovery of technology and facilities (“brick and mortar” type structures). Few are addressing the human component and if they do they are not doing it very well. First and foremost a basis for ensuring that communication and information flows seamlessly vertically and horizontally throughout the enterprise is essential. This means that you have to have common terminology within and with all the external touchpoints (customers to vendors) that is clearly understood by all. Most organizations come up short when an analysis of the communication and information flow is undertaken. The general finding is that fragmentation and a lack of seamlessness exists. Decision making regarding governance issues can only be addressed by senior executives. Senior executives will establish and manage voluntary compliance mandates as well as ensure compliance with regulatory driven requirements. Strategy requires management engagement in order to achieve 3600 coverage. This coverage consists of: 1) forward looking capabilities “active analysis” and situational awareness; 2) awareness of challenges; 3) executable goals and objectives and 4) ability to capitalize on experience and past successes. Operating in a pandemic will require that your organization have a flexible and responsive strategy. Incorporating business strategy elements into the management decision making process at all levels of contingency planning can facilitate greater flexibility. A tactical focus on processes rather than a strategic focus that is broader based – business goals, objectives and response to market demands can equal less than effective business continuity.

Economic Consequences of the Swine Flu Outbreak

Pandemic – Business Continuity Planners what are you doing? We, as business continuity planners seem to be wary of addressing the issue of a pandemic as a viable scenario for planning. I recently did a tabletop simulation for a client and a presentation on pandemics at a business continuity summit for another client. The tabletop participants reflected on the experience and uniformly expressed to me that the tabletop was one of the most stressful and frustrating experiences that they had participated in. The business continuity summit attendees and many of the speakers who followed me, continued to comment on the material presented, stressing that they needed to rethink their plans. Participants in both events expressed the hope that a pandemic would not materialize. Pandemics cause major economic losses due to absenteeism. Experts predict that during a pandemic up to 30% of the global workforce could either be off work due to sickness or stay away due to fear. Absence levels at the expected rates would cause severe problems. The economic impact of H5N1 will be felt around the world. The impact will initially appear in two primary aspects of business. The first will be the availability of the workforce, the second and more unique impact will be in the market place. Helen Branswell of the Canadian Press wrote on August 17, 2005 in her article entitled, “Flu pandemic could trigger second Great Depression, brokerage warns clients”:
A major Canadian brokerage firm has added its voice to those warning of the potential global impact of an influenza pandemic, suggesting it could trigger a crisis similar to that of the Great Depression. Real estate values would be slashed, bankruptcies would soar and the insurance industry would be decimated, a newly released investor guide on avian influenza warns clients of BMO Nesbitt Burns. "It's quite analogous to the Great Depression in many ways, although obviously caused by very different reasons," co-author Sherry Cooper, chief economist of the firm and executive vice-president of the BMO Financial Group, said in an interview Tuesday. "We won't have 30-per-cent unemployment because frankly, many people will die. And there will be excess demand for labour and yet, at the same time, it will absolutely crunch the economy worldwide." A leading voice for pandemic preparedness said the report is evidence the financial and business sectors which have been slow to twig to the implications of a flu pandemic - are finally realizing why public health and infectious disease experts have been sounding the alarm. "I think that this particular report really signifies the first time that anyone from within the financial world, when looking at this issue, kind of had one of those 'Oh my God' moments," said Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota. "The financial world is finally waking up to the fact that this could be the boulder in the gear of the global economy," he said, suggesting a pandemic could trigger an implosion of international trade unlike anything seen in modern history.

Economic Consequences of the Swine Flu Outbreak

"All the other catastrophes we've had in the world in recent years at the very most put screen doors on our borders. This would seal shut a six-inch steel door," Osterholm said. Cooper, a highly influential figure in the Canadian financial sector, wrote the report with Donald Coxe, a global portfolio strategist for BMO Financial Group. They warn investors the economic fallout out of a pandemic would inflict pain across sectors and around the globe. Airlines would be grounded, transport of goods would cease, the tourism and hospitality sectors would evaporate and the impact on exports would be devastating, Cooper wrote. "This would trigger foreclosures and bankruptcies, credit restrictions and financial panic," she warned, suggesting investors reduce debt and risk in their portfolios to be on the safe side.

Absence of purchases due to illness and psychological reactions to a pandemic will present a new form of business impact that is currently not assessed as part of the traditional business impact assessment; and as such, it is not addressed in any business continuity, disaster, crisis management or recovery plans. Another area that has not been addressed in impact assessment or plans is the loss or restriction of a company’s revenue. Traditional plans start with an assumption that the marketplace is still viable; a potentially false assumption. Traditional plans are designed to get an organization back into their market as quickly as possible – RTO, RPO and MTO come to mind (RTO = Recovery Time Objective, RPO = Recovery Point Objective, MTO = Maximum Tolerable Outage). In the case of a pandemic markets may no longer be viable. If your market is materially impaired, a consequence is that the revenue that is derived from that market may be restricted and/or completely gone. In another article, published on October 7, 2005 (NewsTarget.com) entitled, “Economic Shock Waves From Avian Influenza Spreading Faster than the Disease” the following is pointed out:
The Avian influenza crisis in Asia has already caused more than $10 billion dollars in damage in the economies of the most-seriously affected countries, but this is just the tip of the iceberg compared with the possible global economic consequences of a human influenza pandemic according to a study, Thinking Ahead: The Business Significance of an Avian Influenza Pandemic, released today by Bio Economic Research Associates (bio-era™). ―According to the quantitative measures we developed for assigning relative economic risk exposure to infectious disease outbreaks for countries in Asia, Hong Kong and Singapore are especially vulnerable to the initial economic shock waves that would ensue from a pandemic,‖ said James Newcomb, Managing Director and principal author of the bio-era report. ―However, the secondary impacts on other countries, especially China, could have far-reaching impacts for economies around the world, including the US,‖ he added. Other key findings in the report include:  Avian influenza is the latest in a series of major livestock disease outbreaks that have caused more than $60 billion in economic damages worldwide over the past 15 years.

Economic Consequences of the Swine Flu Outbreak

 Concerns about a possible influenza pandemic are already providing stimulus for increased spending and accelerated research and development efforts in some parts of the economy, ranging from custom microarray chips for rapid diagnostic testing to antiviral drugs.  Governments around the world have recently made commitments totaling an estimated $1.4 billion to stockpile oseltamivir (Tamiflu)—an antiviral drug produced by pharmaceutical giant Roche.  Manufacturers of flu vaccines are gearing up for what may be an unprecedented global demand for a vaccine effective against H5N1 variants, but it is not known whether the vaccines being developed now would be effective against the influenza strains that might emerge.  New ―DNA vaccines‖ offer an alternative to conventional production technologies and could speed the vaccine industry’s ability to respond, but these technologies are not yet approved by FDA. ―We’ve been looking at how things might unfold under six very different but highly plausible scenarios for the evolution of the outbreak,‖ said Stephen Aldrich, President of bio-era. ―In the process, we’ve made assessments of potential outbreak risk by country, the relative economic exposure by country — and how selected industries and companies are likely to be affected.‖

We have not experienced this type of business problem in our lifetimes. The last generation to have to address such a widespread issue was that of our grandparents and parents during the Great Depression. During the Great Depression the revenue component of the free enterprise system was significantly impaired. Just as important, today on a worldwide basis we do not have any leadership in business or government who has lived through the 1918 Spanish Flu Pandemic or the Great Depression and so that experience base is lost to us. Our best option, therefore, is to start to think about the possible problems we may have to confront and take steps to avoid or deal with them in our businesses. If we wait until the pandemic starts, it will be too late. Even if a pandemic were mild, it is estimated that about a third of the world's population would fall sick over a period of months and millions would die. If the strain is virulent, the death toll could mount to several million, over a relatively short period. If we look at previous pandemics (Spanish Flu 1918 – 1919, Asian Flu 1957 – 1958, Hong Kong Flu 1968 – 1969) they generally run their course in 18 to 24 months. As an example, the economic consequences could be staggering; SARS wreaked economic devastation on affected cities and countries in a relatively short period. The Health and Human Services Department plan outlines a worst-case scenario where more than 1.9 million Americans would die and 8.5 million would be hospitalized with costs exceeding $450 billion. Current Forecasts – Business Continuity Planners where can you add value? We often use the phrase “value added” when we promote business continuity planning. We say that we “add value” to an organization by preparing it to respond and recover

Economic Consequences of the Swine Flu Outbreak

from incidents. At this time I think that we can earn our keep, so to speak, by providing that “value added” service that we speak of. Current forecasts predict that the H5N1 pandemic will spread around the world in a historically short period of time. One expert stated that if this pandemic is identified on the west coast of the United States it will spread across the country in a week. When SARS spread from China just a couple of years ago, it was in 5 countries in 3 days and in 24 countries in 3 months. Time to react will be virtually non-existent. And if we are to earn our merit as business continuity planners, we need to react now! The companies that survive this extraordinary disaster when it occurs will have heeded the words of Sun Tzu centuries ago, “Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.” Planning today will prove to be the only viable strategy to ensure a company’s “victory”. What If…? What if the pandemic does not materialize? Do we have the proverbial “egg on our face”? In the event that this pandemic does not materialize, your planning will not be lost. Most of it will be transferable. There will be future pandemics (and they occur approximately every 30 – 40 years) and to the ever present threat of terrorist attacks using chemical/biological/nerve agents. Business survivability in the face disasters is imperative to the economic strength of the world community. We as continuity planners have an obligation to be forward thinking and to see what others choose not to recognize until it is upon them. Steps to take…Now The ability to effectively respond to and manage the consequences of an event in a timely manner is essential to ensure an organization's survivability in today’s fast paced business environment. With the emergence of new threats, such as cyber-terrorism and bio-terrorism; and the increasing exposure of companies to traditional threats such as, fraud, systems failure, fire, explosions, spills, natural disasters, etc. an “integrated” approach to Business Continuity Planning is essential. The “integrated” approach, as presented in this article, is based on the concept of graceful degradation and agile restoration. “Graceful degradation” refers to the ability of an organization to identify the event, classify it into a level of severity, determine its consequences, establish minimal stable functionality, devolve to the most robust less functional configuration available and to begin to direct initial efforts for rapid restoration of services in a timely fashion. Several steps can be taken to prepare your organization. First, put in place an effective surveillance program; meaning, expand your business impact assessment activities. In my article, “"Futureproofing" - the Process of Active Analysis” written in 2003, I recommended that we rethink the business impact assessment process:
Traditional analysis such as that performed at the initiation of the business continuity plan development is recognized as necessary to develop a baseline of information. However, it should also be recognized as having certain limitations:

Economic Consequences of the Swine Flu Outbreak

 

Pre-Event - Best guess as to what could occur Static - Best guess based on available facts and models

Traditional analysis creates undecidability due to the inability to predict all behavior in a dynamic environment. Therefore one should adopt an Active Analysis methodology, such as that developed by Logical Management Systems, Corp. (LMS). LMS' methodology is based on the U.S. Military's "Joint Special Operations Targeting and Mission Planning Procedures" (JP 3-05.5 10 august 1993). It is detailed herein. The advantages that can be realized by adopting this methodology and maintaining an active analysis process are:     Uses Static Analysis as a basis Touchpoint complexity factors Dynamic - based on creating a mosaic Time Factors (Time Critical, Time Sensitive and Time Dependent) act as drivers

Termed "Futureproofing" by LMS the active analysis process is designed to create a mosaic that enhances decision making by identifying behavior patterns in a dynamic environment. Active analysis can be subdivided into three categories of possible threats/occurrences that could befall an organization. Dr. Ian Mitroff refers to the three categories as Natural Accidents, Normal Accidents and Abnormal Accidents. I have renamed them and to differentiate the three aspects of each. That is, the threat, the actual occurrence and the consequence of the occurrence.   Natural Threats/Occurrences/Consequences consisting of such things as drought, floods, tornadoes, earthquakes, fires and other naturally occurring phenomena. Normal Threats/Occurrences/Consequences consisting of such things as Economic Disasters, such as:  Recessions  Stock Market Downturns  Rating Agency Downgrade, etc. Personnel Disasters, such as:  Strikes  Workplace Violence  Vandalism  Employee Fraud, etc. Physical Disasters, such as:  Industrial Accidents  Supply Chain  Value Chain  Product Failure  Fires  Environmental  Health & Safety Abnormal Threats/Occurrences/Consequences consisting of Criminal Disasters, such as:  Product Tampering

Economic Consequences of the Swine Flu Outbreak

 Terrorism  Kidnapping & Hostages, etc. Information Disasters, such as:  Theft of Proprietary Information  Hacking, Data Tampering  Cyber Attacks, etc. Reputation Disasters, such as:  Rumors  Regulatory Issues  Litigation  Product Liability  Media Investigations  Internet Reputation, etc. Please note Abnormal Threats/Occurrences/Consequences are becoming more of the norm than abnormal as we see the normalization of threats such as hacking and data tampering. Five key assumptions were used as a basis to for the developmental framework of the "Futureproofing" methodology. These are:      Assumption # 1: The modern business organization represents a complex system operating within multiple networks Assumption # 2: There are many layers of complexity within an organization and its "Value Chain" Assumption # 3: Due to complexity, active analysis of the potential consequences of disruptive events is critical Assumption # 4: Actions in response to disruptive events needs to be coordinated Assumption # 5: Resources and skill sets are key issues

Based on the above assumptions and the results of the baseline analysis (static analysis) one realizes that the timely identification, classification, communication and response, management and recovery from a disruptive event are critical. As depicted in the graphic on the next page over time uncertainty will decrease, as will available options for response and recovery. This is contrasted with increasing numbers of issues and higher and higher costs associated with response and recovery efforts. As such, an organization should seek to continually analyze situations so as to develop a clear picture of the current state of the business system network. Referred to as "Data Fusion Constructing a Mosaic" by LMS; this is a process of getting enough bits and pieces of information in place in order to transform seeming chaos into recognizable patterns upon which decisions can be made.

Second, recognize that you cannot depend on public authorities (read this as government at all levels) to be there for your organization. They will have too many issues to deal with and they will also be impacted by the pandemic – remember that 30% of the population could be affected; that means that civil authorities are just as susceptible to contracting the disease. Your organization and its “value chain” must its

Economic Consequences of the Swine Flu Outbreak

own comprehensive plan for dealing with the business consequences of a pandemic. Rethink the basis on which you developed your plan – talk to the risk management and strategic planning personnel in your organization and find out what they are looking at with regard to business expansion, contraction, risk mitigation, etc. They should be very conversant as a result of the recent hurricanes, earthquakes, tsunami and general competitive forces in the economy. Revise your business continuity plan. Develop the ability, as an organization, to sequence back your operations while ensuring that your business system and its network (“value chain”) can maintain level of functionality while operating at reduced capability. When your business system and its network reaches the state of minimum functionality, the organization can begin to conduct a campaign of "agile restoration" until it achieves a state of full functionality and a return to normal operations. If you do the first step, putting in place an effective surveillance system, you will develop "detectors and indicators of change" metrics that can be employed to facilitate the constant analysis of the state of the business system and its complex "value chain" network. The "detectors and indicators of change" provide the early warning basis for event classification at the lowest (least severe) levels. Third, train, drill, exercise. All the planning in the world is never going to be effective unless it can be implemented. One key to implementation is having a trained organization. That means that we have to train not only the primary position holders in our organization, but we have to train the secondary and even a third level within the organization. If Only We Had Known…A New Paradigm for Planning Strategists In my latest book, “Integrated Business Continuity Planning: Maintaining Resilience in Uncertain Times” I asked: "Is Business Continuity integrated into your business operations as a way of doing business; or is Business Continuity an adjunct to the business that you are involved in?" As you ponder this question, you need to reconsider the value proposition offered by having an integrated approach to business continuity. I offer the following definitions for the purpose of this article and as a basis for developing an “integrated” approach to continuity: Crisis: "A disruptive event that is amplified, elevated and magnified." Business Continuity: "All initiatives taken to assure the survival, growth and resilience of the enterprise." Executives have an obligation to their stakeholders to assure that everything that can reasonably be done to protect the business and ensure its competitiveness in the

Economic Consequences of the Swine Flu Outbreak

marketplace is done. Unless executives rethink the relationship between how they do business (strategy, competitive intelligence, etc.) and the way they currently address business continuity (managing disruptive events, security, etc.), the imbalance between "security" and competitiveness will not be resolved. Therefore, businesses must rethink their recovery strategies to be able to deal with and survive pandemics. This is a whole new paradigm for planning strategists. The table below is a look into the proverbial “crystal ball” at what could be some of the possible outcomes when the pandemic strikes. Economic Effect of a Pandemic – Business Continuity Planning Analysis
Segment
Commercial Real Estate

Short-term Effect
Demands for office space will potentially decline in affected areas. Suburban areas may see an increase in demand due to businesses relocating from areas that have been quarantined.

Long-term Effect
Fixed costs for businesses holding leases will remain the same, even in the face of declining occupancy and declining revenue.

Analysis
Presidential Executive Order: Amendment to E.O. 13295 Relating to Certain Influenza Viruses and Quarantinable Communicable Diseases Subsection C added: "(c) Influenza caused by novel or reemergent influenza viruses that are causing, or have the potential to cause, a pandemic.". Utilities in general, need greater business continuity assistance due to the lack infrastructure being replaced. Integrated grid systems are susceptible to disruptions that can cascade throughout a system quickly. Worldwide refining capacity is currently under pressure. A pandemic could see facilities forced to shutdown either by quarantine or due to lack of workforce. Dependence on information systems to operate facilities, pipelines, etc. creates security vulnerabilities for this industry. Heavy dependence on information systems for operations creates security vulnerabilities for this industry. Loss of skilled workforce creates potential system vulnerabilities. Heavy concentration in large metropolitan areas, dependence on information systems for operations, low reserves of cash could create vulnerabilities. Loss of workforce due to pandemic could create inabilities to function effectively.

Utilities (Electric, Gas and other infrastructure power supplies)

Potential loss of worldwide workforce could see system degradation due to lessened ability to respond to normal maintenance and emergency situations. Potential loss of employees worldwide due to pandemic could cause inability to meet demands resulting in higher prices for energy and related products.

Loss of expertise within the workforce could result in a permanent destabilization of the energy sector, leaving it more susceptible to disruption than at present. Potential long-term demands may not reach current levels as a result of loss of life worldwide. Fixed costs for businesses would remain the same regardless of utilization or demand.

Energy Industry (Oil & Gas)

Communications Industry (Voice, Data and other information systems, etc.)

Banking & Finance

Potential increase in demand due to pandemic causing more people to work remotely, greater need for information, greater need to communicate with others. Potential loss of worldwide workforce due to pandemic. Potential demands for cash can outstrip the amount of cash in circulation. Credit and Debit systems (cards) use could decline as a result of pandemic. Volume based businesses could see a decline in revenue (i.e., SARS created decline in volume for many car companies). Potential for significant short term disruption to economies worldwide. Pandemic could be the single most devastating event for this sector ever. Quarantine, flight restrictions, lack of workforce, inability to ship goods to markets, lack of security of Intermodal systems could create havoc with businesses and consumers. Shortages would occur immediately (i.e., hurricane effects)

Fixed costs remain unchanged regardless of demand. Due to potential loss of workforce, system reliability may be impaired.

Transportation

Potentially having to live in a cash society (i.e., earthquake aftermath) could create continued high levels of demand for cash. Potential for inflation remains high. Businesses impacted due to loss of workforce and falling revenue. Markets worldwide could see significant declines that will last for long periods. Potential for long term disruption to economies worldwide. Air, land, sea transport potentially effected in such a way that they never recover. Cargo security will be a high profile area. Port, distribution and staging areas will receive heightened scrutiny due to the high potential for transmission of virus tainted produce at these touchpoints.

Quarantine could have devastating effects. Difficult to ensure security, information systems are vulnerable. Human resource issues will be ongoing concern.

Economic Consequences of the Swine Flu Outbreak

Economic Effect of a Pandemic – Business Continuity Planning Analysis (continued)
Segment
Water Supply Systems

Short-term Effect
Potential loss of worldwide workforce could see system degradation due to lessened ability to respond to normal maintenance and emergency situations.

Long-term Effect
Loss of expertise within the workforce could result in a permanent destabilization of the energy sector, leaving it more susceptible to disruption than at present. Water systems would remain highly vulnerable due to a lack of security resources. Potential loss of worldwide workforce could see system degraded for a long period even in the aftermath of the pandemic. Demand for general services would be impacted. Hospitals worldwide would take long periods to recover. Possible long term collapse of medical systems and healthcare worldwide. Lack of antiviral drugs would have long term impact. Police, fire and other services would be short of employees for long period. Demands for action will grow; lack of antiviral medication could have major negative impact. Potential chaos with targeting of government facilities for disruption. Worldwide tensions as scarce resources are in demand and loss of population leave governments vulnerable.

Analysis
Water systems need greater business continuity assistance due to the lack infrastructure being replaced. Potential loss of workforce has long term impact on water systems resulting in degradation to service. Degradation of Emergency Services combined with degradation Transportation could present significant infrastructure concerns for continuity planning efforts. Possible return to late 19th century medical services capabilities due to loss of skilled workforce. Significant regional and local impacts for continuity planning.

Emergency Services

Potential loss of worldwide workforce could see system degradation as demand for service would escalate to unprecedented levels. Hospitals worldwide could not manage the amount of patients. Possible collapse of medical systems worldwide. Lack of antiviral drugs would have immediate impact. Police, fire and other services could be severely impacted due to loss of workforce at a time when demand escalates. Potential collapse of governmental control worldwide. Use of military by governments worldwide to maintain order could result in negative effects. Loss of workforce could create inability to implement current pandemic plans. Possible inability to protect population and infrastructure.

Continuity of Government

Disruption of government could happen, although it is difficult to foresee a total collapse. Governments worldwide would be under tremendous stress. From a continuity planning perspective, the need for collaboration would never be greater. Government could invoke orders to force business cooperation (i.e., U.S. Presidential Executive Orders)

Conclusion: Seize the Initiative - It Makes Sense A Chinese proverb states that "Opportunity is always present in the midst of crisis." Every crisis carries two elements, danger and opportunity. No matter the difficulty of the circumstances, no matter how dangerous the situation… at the heart of each crisis lays a tremendous opportunity. Great blessings lie ahead for the one who knows the secret of finding the opportunity within each crisis. Today business leaders have the responsibility to protect their organizations by facilitating continuity planning and preparedness efforts. Using their status as “leaders,” senior management and board members can and must deliver the message that survivability depends on being able to find the opportunity within the crisis. Market research indicates that only a small portion (5%) of businesses today have a viable plan, but virtually 100% now realize they are at risk. Seizing the initiative and getting involved in all the phases of crisis management can mitigate or prevent major losses. Just being able to identify the legal pitfalls for the organization of conducting a crisis management audit: can have positive results. We cannot merely think about the plannable or plan for the unthinkable, but we must learn to think about the unplannable. Business continuity planning must be overlapping in time, corrective in purpose complimentary in effect.

Economic Consequences of the Swine Flu Outbreak

About the Author
Geary Sikich Entrepreneur, consultant, author and business lecturer Geary Sikich is a Principal with Logical Management Systems, Corp., a consulting and executive education firm with a focus on enterprise risk management and issues analysis; the firm's web site is www.logicalmanagement.com. Geary is also engaged in the development and financing of private placement offerings in the alternative energy sector (biofuels, etc.), multi-media entertainment and advertising technology and food products. Geary developed LMSCARVERtm the “Active Analysis” framework, which directly links key value drivers to operating processes and activities. LMSCARVERtm provides a framework that enables a progressive approach to business planning, scenario planning, performance assessment and goal setting. Prior to founding Logical Management Systems, Corp. in 1985 Geary held a number of senior operational management positions in a variety of industry sectors. Geary served as an intelligence officer in the U.S. Army; responsible for the initial concept design and testing of the U.S. Army's National Training Center and other intelligence related activities. Geary holds a M.Ed. in Counseling and Guidance from the University of Texas at El Paso and a B.S. in Criminology from Indiana State University. Geary is also an Adjunct Professor at Norwich University, where he teaches Enterprise Risk Management (ERM) and contingency planning electives in the MSBC program, including “Value Chain” Continuity, Pandemic Planning and Strategic Risk Management. He is presently active in Executive Education, where he has developed and delivered courses in enterprise risk management, contingency planning, performance management and analytics. Geary is a frequent speaker on business continuity issues business performance management. He is the author of over 195 published articles and four books, his latest being “Protecting Your Business in Pandemic,” published in June 2008 (available on Amazon.com). Geary is a frequent speaker on high profile continuity issues, having developed and validated over 1,800 plans and conducted over 250 seminars and workshops worldwide for over 100 clients in energy, chemical, transportation, government, healthcare, technology, manufacturing, heavy industry, utilities, legal & insurance, banking & finance, security services, institutions and management advisory specialty firms. Geary can be reached at (219) 922-7718.

Economic Consequences of the Swine Flu Outbreak

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Economic Consequences of the Swine Flu Outbreak

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