DisastersThe economic costs of natural disasters

It appears that the verdict is still on out on the economic effects of natural disasters with researchers reaching diverging conclusions on the matter.

New Zealand’s economy has actually grown 0.8 percent in the first quarter of this year, despite the 6.3 magnitude earthquake that rocked Christchurch, New Zealand in February. The earthquake damaged less than 1 percent of the country’s commercial property and few of its large businesses were forced to stop its operations, resulting in a higher GDP than most analysts had projected.

“While some businesses in Christchurch were adversely affected, the vast majority were able to continue operating, and the earthquake resulted in some activity that would not normally have taken place,” said Rachael Milicich New Zealand’s national accounts manager in a statement.

New Zealand may have escaped with little economic repercussions, but studies show that this is not always the case with natural disasters. In a study published in the Journal of Development Economics in 2008, Ilan Noy, an associate professor of economics at University of Hawaii, Manoa, found that in the short-term natural disasters have a negative impact on macroeconomic growth, but the long-term effects vary widely depending on the country and type of disaster.

In general, Noy’s research revealed that larger countries with developed economies recovered more quickly and faced little economic consequences of a major natural disaster, while smaller countries that were less developed often struggled with the economic shocks wrought by disasters.

Noy concludes that “countries with higher literacy rates, better institutions, higher per capita incomes, larger governments and higher degree of openness to trade appear to be better able to withstand the initial disaster shock and prevent its effects spilling deeper into the macro-economy.”

In a follow up study completed in 2010, Noy found that even extremely large natural disasters like Japan’s 1995 earthquake and Hurricane Katrina had no significant macroeconomic effects. Meanwhile a 2009 World Bank Study found that floods actually increase agricultural output the year after it strikes thanks to increasing soil fertility.

In the wake of the 1995 Kobe earthquake, Japan made a surprisingly quick recovery. The quake decimated Kobe, which is home to the world’s sixth largest container port and also the source of 40 percent of the city’s industrial output – 300,000 people were displaced and more than 100,000 buildings were leveled. Despite the destruction, the city bounced quickly bounced back and within a year with less than half its port facilities rebuilt, import levels had nearly fully resumed and within fifteen months manufacturing activity returned to 98% of its projected pre-quake levels.

According to Georg Horwich of Purdue University, Japan’s quick recovery was likely the result of Japan’s economic flexibility where it was able to continue producing goods by using different combinations of labor and capital, despite the fact that large sections of infrastructure lay in ruins. In addition rebuilding is often a faster process than the initial building process as it simply replicates a pre-calculated pattern of investment. Productivity growth may also accelerate as new, more efficient machinery is installed.

In contrast, another World Bank study concluded “that disasters have modest but economically meaningful output consequences, resulting on a decline in output per capita of about 1 percent.” It appears for the most part, reconstruction efforts may offset short-term economic losses in the long-run, however the World Bank study also found that incidences of natural disasters on the rise increasing by 30 percent since the 1960s. Perhaps more dangerous is the fact that risk-modeling companies have raised the statistical likelihood of a Katrina-scale disaster occurring from once every forty years to once every twenty years.