| | |  Business News | July 2008 
Do Natural Disasters Stimulate Economic Growth?
 Drake Bennett - The Boston Globe
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| | Indonesian man Bahtiar working on his new house after the Tsunami in 2004. Some economists believe disasters force the transition to a sleeker, more productive economy in the long term. (Tarmizy Harva/Reuters) | | |
The earthquake that struck Sichuan Province in May left behind scenes of almost apocalyptic devastation in China: mountaintops sheared off into valleys, cities reduced to rubble and dust, cracked dams, collapsed bridges and at least 80,000 dead.
If the Chinese government is to be believed, the earthquake also did something else: it helped the Chinese economy. A little over a month after the quake, the State Information Center, a Chinese government research body, announced that the massive rebuilding effort, and the billions of dollars it would pump into the Chinese economy, would far outweigh the economic losses from the quake. The benefits, the center said, would be enough to bump up national economic growth by 0.3 percent, a small but not insignificant part of a growth rate for 2008 that most estimates put at just under 10 percent.
Traditionally, analysts have cautioned that Chinese growth figures should be greeted with skepticism, but according to one school of economic thought, there may be something to the idea that the quake served as a brutal stimulus. In fact, some economists argue that despite the widespread destruction they leave behind, hurricanes, earthquakes, floods, volcanic eruptions and ice storms can spur economic growth.
Rebuilding efforts provide a short-term boost by attracting resources to the region, economists say. By destroying old factories and roads, airports and bridges, the disasters allow new and more efficient infrastructure to be built, forcing the transition to a sleeker, more productive economy in the long term.
"When something is destroyed you don't necessarily rebuild the same thing that you had," said Mark Skidmore, an economics professor at Michigan State University. "You might use updated technology, you might do things more efficiently."
Studies have found that earthquakes in California and Alaska helped spur economic activity there, and that countries with more hurricanes and storms tend to see higher rates of growth. Some of the most recent studies have found a link between disasters and subsequent innovation.
The economics of disasters remains a small field of study, with few major papers published. Skeptics charge disaster economists with oversimplifying enormously complex economic systems and seeing illusory effects that stem only from the crudeness of the available economic measuring tools.
But as more people move to areas of risk, and as the world sees climate shifts, the debate over natural disasters and their impact has gained resonance.
The population of coastal hurricane zones and cities that sit on or near major seismic faults - from San Francisco to Mexico City to Tokyo - continues to grow, and climatologists warn that climate change could increase the number of extreme weather events in many parts of the world.
While not even the most fervent believer in the economy-catalyzing qualities of disasters would wish for one, the study of the costs and possible benefits of such events may help us better understand how to target recovery efforts. Perhaps they could even elucidate how to replicate the salutary effects of disasters without the actual disasters.
The economic study of natural disasters has roots in the study of human disasters, in particular, the effects of wars, real or imagined. In the 1950s and 1960s, analysts at the RAND Corp. tried to calculate the total impact of a hypothetical nuclear attack on the United States, and they created models for how such an attack would affect the U.S. economy.
The best-known of these analysts was Herman Kahn, a physicist and systems analyst notorious for his willingness, even eagerness, to reduce the seemingly unthinkable to dry actuarial calculations.
In "On Thermonuclear War," a book published in 1961, Kahn wrote that the U.S. growth rate at the time was so strong that, even if a nuclear attack destroyed all of the country's major metropolitan areas and killed one-third of its population, it would "not seem to be a total economic catastrophe."
"It may simply set the nation's productive capacity back a decade or two plus destroying many 'luxuries."'
Natural disasters have provided an opportunity to see how societies actually recover from such large-scale shocks. In 1969, Douglas Dacy and Howard Kunreuther, two young analysts at the Institute for Defense Analyses, published a book called "The Economics of Natural Disasters," one of the first attempts to quantify the economic impact of catastrophes.
The book was largely a case study of the Alaska earthquake of 1964, the most powerful ever recorded in North America. Dacy and Kunreuther found that the money that rushed into the Alaskan economy after the temblor, and the generous government loans and grants for rebuilding, meant that many Alaskans were actually better off afterward.
"We got a lot of hate mail for that finding," said Kunreuther, now a professor of business and public policy at the Wharton School of the University of Pennsylvania.
But though it may have proved unpopular among Alaskans still dealing with the aftermath of the disaster - which killed 131 people, destroyed several towns along the Alaskan coast and leveled portions of Anchorage - the idea that disasters trigger short-term growth has gained adherents among economists.
"The data are pretty clear about it," said Gus Faucher, director of macroeconomics at Moody's Economy.com, a consulting company.
In studying disasters in the United States, Faucher found some examples of a dramatic impact on regional economies. The year after Hurricane Andrew struck southeast Florida in 1992, causing what would today be more than $40 billion in damage, the state saw sharp increases in employment thanks to new construction jobs.
Faucher also credits the rebuilding, aid and investment that followed the Northridge earthquake of 1994 in the United States with helping to pull the Los Angeles area out of an economic slump.
But Hurricane Katrina proved to be an exception, according to Faucher. Because so many residents left the area, because government aid was slow to arrive and with insurance payouts so low, the area did not experience an economic renewal.
To critics of the growth-follows-disaster line of thinking, the problem is that it is, at best, a partial picture. They argue that it ignores the fact that the money and labor that go into postdisaster rebuilding are simply being redirected from other productive uses.
"If you're a carpenter, a trash remover, a physician, you may be made better off," said Donald Boudreaux, an economics professor at George Mason University. "But the things that those producers would have otherwise produced are not going to be produced."
Time is one important factor. "Over any reasonably relevant period of time, society is not made wealthier by destroying resources," Boudreaux said. If it were, "Beirut should be one of the wealthiest places in the world."
The research on long-term effects of disasters is less vulnerable to such criticism because the crucial factor is not that there is new stuff, but that there is better stuff, supporters of the theory say.
In this model, disasters perform the economic service of clearing out outdated infrastructure to make way for more efficient replacements. It might be seen as Mother Nature's contribution to what the Austrian-born U.S. economist Joseph Schumpeter famously called capitalism's "creative destruction."
As it recovers, the economy actually becomes more productive than it was before, and some economists say that the effect can be seen decades after the disaster.
Other, more recent, academic work takes a broader look at the question.
Skidmore of Michigan State, along with the economist Hideki Toya of Nagoya City University in Japan, published a paper in the journal Economic Inquiry in 2002 that mapped the frequency of disasters in 89 countries against their economic growth rates over a 30-year period. The paper controlled for everything the authors could think of that might skew the findings, including country size, size of government, openness to trade and distance from the equator.
In the case of climatic disasters like hurricanes and cyclones, as opposed to earthquakes and volcanic eruptions, the more the better, Skidmore and Toya found. Nations with more climatic disasters grew faster over the long run than the less disaster-prone.
Why only climatic disasters? The authors suggest that, as we have gotten better at forecasting weather, its human costs have been easier to mitigate than with geological disasters. Those still take us by surprise. |
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