Comparative Earthquake Economics

A recent article by Matt Yglesias on the affect of weather on the economy (or at least, how it is measured) got me thinking about post-disaster economics. What happens to national economies after major natural disasters? Certainly, the loss of life can’t be ignored, but what about the survivors’ livelihoods?

The immediate affects are obvious – huge swaths of capital, including roads, factories, buildings, and schools are immediately destroyed. The productive capacity of the economy is diminished. A chaotic situation leads to the shutdown of economic activity in areas not immediately affected, as huge supply-chain disruptions result in even broader industrial and commercial shutdowns.

According to the OECD, the 1995 Kobe earthquake chopped 2 per cent of off Japanese GDP. The Tohoku earthquake of March 2011 did even more damage – the World bank estimates were upwards of $235 billion U.S, equivalent to 4 per cent of Japan’s GDP. Shuttered factories and devastated infrastructure led to supply-chain disruptions around the world.

The short-term effects on GDP and employment were huge. Japan’s GDP shrank the next two quarters (7.4 per cent and 1.2 per cent annualized) and employment fell by over 2 million people.

Although the Tohoku earthquake is more recent, the Chilean earth quake in March 2010 provides an even more dramatic example.

The 8.8 magnitude earthquake that shook the heart of Chile’s wine and fishing industries (with far less cost to human life) did an estimated $30 billion U.S. in damages – equivalent to an incredible 18 per cent of Chile’s economy. Like Japan, Chile’s economy plunged 7 per cent annualized after the quake, leaving thousands unemployed.

But after the destruction comes rebuilding, bringing new jobs, new developments, and new opportunities. Commentator, billionaire investor, and Dragon (from the CBC show Dragon’s Den), Kevin O’Leary, bluntly stated that the earthquake created an investment opportunity in Japan, much to the chagrin of many editorialists. He almost certainly has a point (albeit an unpopular one) – the new capital built after a disaster is superior to what it destroyed. Factories are  newer and more efficient. New homes are up to higher standards. Aging public infrastructure like schools and roads can be rebuilt so that they maximize their usefulness.

After the 2010 earthquake, Chile’s GDP soared. Chile experienced sustained economic growth for the next 7 quarters. In the quarter following the earthquake, Chile’s economy surpassed pre-recession highs reached in Q2 2008. And as of the fall of 2011 Chile’s economy is a full 9 per cent larger. No doubt, Chile’s recovery was helped by a nascent world recovery, but the earthquake spurred much of the growth.

Japan’s recovery has been more modest. GDP rebounded somewhat 6 months after the earthquake, but it is still weak. Lagging consumer confidence, relative government instability, Europe’s debt crisis, high public debt levels, and ongoing energy concerns (particularly, the complete collapse of confidence in Japan’s nuclear industry) has led to slower than expected growth. However, it’s still early in the recovery; many cities are just now finalizing rebuilding spending.

All of this seems to point to relatively modest long-term economic consequences, but a recovery requires a number of elements. Rebuilding huge swaths of the economy requires a skilled work force, access to resources, access to the necessary money, and a credible government and institutions that can deliver the resources where needed. Basically, it needs a clear recovery road map and the infrastructure and resources to do it. Japan and Chile have a rosy economic outlook because they have all of these things. Haiti does not.

Chile’s economy was virtually back to normal in 6 months. Haiti’s economy, which was in dire straits before the quake, is still in tatters. For a poor country like Haiti, natural disasters are crippling. Haiti was not prepared to deal with the 1.5 million people who immediately found themselves homeless – as many as 500,000 still are. Water-borne illnesses like cholera proliferated because of a lack of health care infrastructure.

So far, just half of the promised international aid has been delivered.

“There is a sense of the economy getting going again. But we’ve still got half a million people in tents and camps. In terms of reconstruction, certainly not anywhere near enough has gone on.”

Haiti was never in a position to deal with a disaster of this magnitude on its own. Not only because of a lack of infrastructure, but because of high corruption, bureaucratic regulations, and a lack of economic freedom. The lack of international coordination has also contributed to an anemic recovery. Reconstruction that would only takes months in a developed country will take years in Haiti. Data on Haiti’s economy is sparse. Although GDP is estimated to have grown 8.6 per cent in 2011, the rate of under- and unemployed is estimated to be 70 per centjust as high as before the earthquake.

Haiti’s economy continues to recover. The sustained efforts of the authorities and the international community have helped rekindle growth, keep inflation at single digits levels, and strengthen the fiscal and external accounts. However, the reconstruction and the pace of implementation of structural reforms have generally been slower than anticipated, reflecting predominantly the protracted electoral process and the country’s limited administrative and absorptive capacity.

The recovery in Haiti is reliant on building institutions that have never existed there before. Until then, the country’s economic recovery will continue, but painfully and slowly. While a natural disaster is still terrible for a country, it can create an opportunity for strong economic growth. However, the institutions have to be in place beforehand, otherwise it is likely that the country will have enormous difficulty regaining its footing.