Economic Effects of Tsunamis and Other Catastrophes

Economic Effects of Tsunamis and Other Catastrophes- Becker A Reaction to Posner's Discussion John Stuart Mill, the great 19TH century English economist and philosopher, optimistically, but I believe accurately, remarked on ��the great rapidity with which countries recover from a state of devastation, the disappearance in a short time, of all traces of mischief done by earthquakes, floods, hurricanes, and the ravages of war�. The history of both natural and man-made disasters during the subsequent century and a half generally supports Mill. The 9/11 terrorist attacks were quickly recognized as the beginning of a series of possibly more destructive attacks on US citizens and property, and many commentators then believed it would cause a major economic depression. Yet it had a slight overall impact on the course of GDP and employment in the United States, although some industries and New York City were affected for several years. The Kobe earthquake of 1995 killed over 6000 persons, and destroyed more than 100,000 homes, still the economic recovery not only of Japan but also of the Kobe economy was rapid. The flu pandemic of 1918-19 killed about 30 million persons worldwide without having a major impact on the world�s economy. The lasting economic effects are similarly small for most other natural disasters that have occurred during the past couple of centuries. Many natural catastrophes have very low probabilities of occurring, but cause considerable destruction of both life and property when they do happen. The recent tsunami in the Indian Ocean is one horrible example: it killed many more people than either 9/11 or the Kobe earthquake. But bad as it is, the loss of life is much smaller relative to the populations of the nations affected than some previous disasters. For example, the Lisbon earthquake of 1755 may have killed 60,000 people, other earthquakes in the past are alleged to have killed in the hundreds of thousands, and I mentioned the flu epidemic of 1918-19 that killed tens of millions worldwide. History and analysis both indicate that the economic recovery of the nations most adversely affected by this tsunami will be rapid, although it will take longer in the resorts and coastal regions hit the hardest. The expectation of rapid recovery explains why Asian stock markets did not change much after the tsunami struck: Indonesia�s and Malaysia�s actually rose a little during the last week of December, while Thailand�s declined a little, and Sri Lanka�s declined by a few per cent. I fully agree with Posner that it is worth spending considerably more to provide better early warning systems about the future occurrence of earthquakes and tsunamis, asteroids that might strike the earth, and other catastrophes. But no matter how much is spent and how much planning takes place, natural catastrophes will continue and will sometimes be unexpected. There are two ways to protect against natural and other disasters: one is through insurance that helps compensate persons badly hurt by loss of family member or property. The other is through self-protection, which means actions to reduce the probability of the disasters from happening- as when a person drives more carefully to reduce the likelihood of getting into an accident, or when countries agree to reduce emissions of greenhouse gases in the hope of reducing the probability of severe global warming. As more is learnt about various natural disasters, more self-protective actions would become available. But for many of the very infrequent ones, even given generous estimates of the value of life of the type discussed by Posner, it does not pay to take expensive self-protection actions. The best response in these cases is to have an effective insurance system for those badly harmed. So I concentrate most of my comments about protection against disasters on insurance. Survivors of disasters that strike rich nations usually have medical coverage to pay for their treatment and rehabilitation, and insurance to cover much of their property destroyed, while those who perish usually leave life insurance for their families, and the opportunity to obtain decent education for their children. By contrast, most individuals in poor nations of Asia and elsewhere mainly rely on help from their families and neighbors when disasters strike. Unfortunately, such help is not available when disasters attack many members of the same family and whole neighborhoods, as in major tsunamis and earthquakes. An effective way for poorer nations to respond in the longer run would be to encourage greater investment in education. Since education raises the earnings of individuals and the per capita incomes of countries, education clearly makes it easier to cope with disasters- as Mill had already recognized when he emphasizes the importance of knowledge in hastening the recovery from disasters. Beyond that, however, my colleague at the University of Chicago, Casey Mulligan, and I have shown that educated persons take a much longer time perspective in their personal decisions. This means that they are much more likely to anticipate the incidence and location of natural catastrophes when they decide where to live and how their houses are built, and they better self-protect and self-insure themselves in other ways as well. But in the short run, greater access to private market insurance, even if subsidized by governments, is important. Regrettably, such insurance is not likely to be available to, or chosen, by the type of very poor families disproportionately affected by this tsunami. The large outpouring of aid from rich nations will help only temporarily in the very near term. The next best alternative to private insurance would be government disaster programs in poor countries that designate areas hit by major earthquakes, hurricanes, and other catastrophes, man-made or natural, as eligible for disaster assistance. Such programs could make sufficient payments to poor families of husbands and fathers who died, and to families that lost most of their property, to help put them on their economic feet, without causing much of a drain on the government budgets of even poorer developing nations like Indonesia and Sri Lanka. The moral hazard effects of such programs are always worrisome- families might continue to build homes on earthquake fault lines if they expect government compensation when their homes are destroyed, or continue to build close to the shore in potential water-borne disaster areas. There is no perfect offset against such rational responses to government coverage of losses, but incomplete protection (�co-payments�), and regulatory exclusion of certain types of construction and other vulnerable activities in potential disaster regions would encourage individuals to consider the risks involved in their actions.

Comments

[John Palmer]

Professor Becker's discussion of self-protection and moral hazard has considerable relevance for hurricane and earthquake victims in the U.S. as well. I'm often puzzled as to why people choose to live along the gulf coast or the San Andreas fault -- and then expect others to provide assistance when they are hurt by a hurricane or earthquake.

[T Sarkka]

I just had the same question on my mind as Mr. Palmer: why there are millions of people living on the US West Coast along the San Andreas fault, only waiting for the Big One? What would be the impacts of a major earth quake there, killing,say 150 000 people? Are they now happy because they are insured and they can wait government programs to help them in case of disaster?
I would appreciate an answer by prof. Becker.

[Glen Raphael]

T Sarkka:
People live on the US West Coast because it's a nice place to live. Earthquakes aren't particularly scary if you grow up in an area that has them. What would happen in a major quake? Same thing that always happens: Some buildings would fall down or develop cracks, some people would die, the survivors would rebuild and get on with their lives. Californians live and work in buildings that are designed to survive earthquakes with minimal damage, and every year we get better at building them. Given another century or two of economic and technological progress, even a Big One probably won't do much harm.

[PIITC]

" the disappearance in a short time, of all traces of mischief done by.. the United Nations"

All nations do have an insurance company - the United Nations. We pay our annual insurance premiums (the UN budgets) and then later on, the "co-payments" (the UNs relief aid). The question here is to its economic efficiency - how a meta-mega behemoth that has survived the planet's dramatic economic changes of 'glasnost', 'Perestroika', 'the fall of the Berlin Wall' and China's market emergence has survived with gross inefficiencies and ineptitude. The very recent 'Food-for-Oil' debacle is examplary in its history.

Conservatively, putting its bureacratic overhead at 15% - the estimated $4bn Tsunami relief cost will see a loss of $600m. That is a staggering amount that can substantially pay for education in the devasted South Asian countries. If education is "an effective way for poorer nations to respond in the longer run" then we are dearly paying for UN's maladies.

[Stephen]

Dr. Becker touches on the social and economic opportunity created by massive destruction. I thought of Christopher Wren rebuilding London, and the unified reconstruction of Chicago after the "Mrs. O'Leary's" fire. The threat of sudden collapse seems an inevitable natural process -- the gold mine runs out, long term drought destroys the crops, the river delta alters course, the ice recedes, etc.

I've always wondered about the mechanisms for efficient use of capital during redevelopment. Are there any structured analyses of critical success factors when municipalities or nations recover from disaster? Under what conditions might a disaster lead to local or regional collapse?

[Michael]

What about the implications of all the private donations of people to relief organisations and whether their use is directly aimed at the destroyed regions or not?!
I'd very much a appreciate a comment on that from both!

[Franz]

why have my comments been deleted?
I just wanted to know your opinion on the impact of the donations which go to relief organisations and where it remains unknown when and for what exactly it will be used?

[Ryan]

"There are two ways to protect against natural and other disasters: one is through insurance that helps compensate persons badly hurt by loss of family member or property... The best response in these cases is to have an effective insurance system for those badly harmed."

I must respectfully dissent. This assumes that tsumanis et. al, however unlikely to occur, are inevitably going to kill all or most of the people along the shores of various countries.
Ok, if that's the case, than there is an alternative to insurance: Build low-income housing away from the coast, using the private donations that have flowed in since Dec. 26.
In fact, hire local builders to construct these new homes - that will stimulate the economy much more so than a few extra jobs at Nike would.

I'm not saying this is the best or only solution, but it seems unproductive to suggest that the (mostly) poor who live along the coast with no warning system in please are doomed to death every century or so. This death sentence is all the more unfair given the relative inequality of the people living along the coast lines.

Insurance isn't a bad thing per se, but it's not the only solution. People have auto insurance in the event of accidents, but that does not mean we shouldn't look toward building safer cars.

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