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Disaster Economics

by Elaine Schwartz    •    Mar 19, 2011    •    249 Views

Assume an economy has been steadily growing. Then a natural disaster strikes, maybe a hurricane, an earthquake, or a tsunami. How is growth affected? While conclusions differ slightly, the consensus indicates that after 5 years and sometimes much sooner, previous growth levels return.

Reuters and The Economist have good descriptions of why. In a disaster area, when physical capital is destroyed, potentially productive human capital remains.  Outside the area, underutilized plants and labor can compensate for lost capacity elsewhere. In addition, replicating productive facilities might be easier than designing new ones. And sometimes, destruction begets creativity that improves what had existed.

We should ask, though, whether advanced economies are more likely to grow after a disaster because they have the resources to prepare for a crisis beforehand and recover after one. According to one study, advanced economies do fare much better after disasters than less developed economies. By contrast, a 2010 Inter-American Development Bank Study concluded that natural disasters do not ultimately change a nation’s growth trajectory unless radical political change occurred after the calamity.

This NY Times Economix blog provides a good summary of existing articles.

The Economic Lesson

Born in Kharkov, Russia, a gentleman whose name was Simon Kuznets arrived in the United States in 1922. 26 years old, he soon went to work at the National Bureau of Economic Research.

Dr. Kuznets became the Nobel Prize winning economist who developed the concept of national income accounting. National income accounting creates a national balance sheet that lets us know what is produced and the different incomes producers earn. Because of the work of Dr. Kuznets and his associates, we are able to calculate economic growth through the gross domestic product.

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