THE full extent of the damage from the tsunami that hit Japan's north-eastern coast on March 11th is not yet known, but early estimates of the cost are big. Rebuilding homes, factories, roads and bridges could cost as much as $200 billion, some reckon. Quite apart from these direct costs, is the disaster likely to do lasting harm to Japan's economy?
Much will depend on the success of efforts to prevent a nuclear catastrophe. Assuming the situation at the Fukushima Dai-ichi plant stabilises, the contours of the economic impact of the tsunami itself can already be discerned. Natural disasters disrupt production, much as less destructive episodes of bad weather do. In Japan the interruption to electricity supply means that output has been affected even in areas the tsunami did not directly inundate. Toyota, for example, halted production because of problems with parts and supplies. Operations were suspended in six of Sony's factories, only one of which was flooded.
But such disruption is unlikely to persist. On March 16th Toyota announced that it was restarting the production of spare parts. As with bad weather, disasters cause some output to be postponed rather than lost. When production resumes, it is likely to be at a faster clip than usual. Studies of the economic effects of past natural disasters, as well as Japan's own experience after the 1995 earthquake in Kobe, provide further reassurance. They suggest that the macroeconomic effects of the tsunami, though hardly negligible, will not be devastating and will not last very long.
How much a natural disaster reduces output over the medium term depends on a number of factors. Location matters: disasters that strike an industrial belt will be more economically crippling than ones that hit an area where little is produced; the economic effects of the tsunami would have been much worse if it had struck Japan's industrial heartland. And different kinds of natural disasters have different consequences for growth. In the medium term, not all effects are negative. A 2009 World Bank study found that by increasing soil fertility, a typical flood increases agricultural output in the year after it strikes (though output falls in the year it occurs). The benefits from higher agricultural production spill over to other sectors, and in developing countries where the farm sector is a bigger part of the economy this may be enough to lead to faster growth in manufacturing and services in subsequent years.
Earthquakes, on the other hand, have small but consistently negative effects on economic growth. This is because earthquakes do not just shut production down for a while. They also destroy factories, roads, electricity lines and offices. This destruction does not directly reduce a country's GDP, which measures the value of the flow of goods and services that an economy produces. But it does affect an economy's underlying productive capacity. The Japanese tsunami fits this template.
As long as these assets remain out of commission, the output they would have produced is, in theory, lost. In practice, this negative effect can partly be made up by using plant and machinery in areas unaffected by the disaster. Most factories do not run at full steam all the time; output from plants that are still working can be increased to make up for lost production elsewhere.
An analysis of the effect of the Kobe earthquake by George Horwich of Purdue University provides some reason to hope that this might happen in Japan. The quake ravaged many of the facilities of what was then the world's sixth-largest container port and the source of nearly 40% of Kobe's industrial output. Over 100,000 buildings were completely destroyed, and many more badly damaged; 300,000 people were rendered homeless; over 6,000 died. Yet despite this devastation in a big production centre, the local economy recovered very fast. Even though less than half the port facilities had been rebuilt by that stage, within a year import volumes through the port had recovered fully and export volumes were nearly back to where they would have been without the disaster. Less than 15 months after the earthquake, in March 1996, manufacturing activity in greater Kobe was at 98% of its projected pre-quake level.
Mr Horwich reckons that the likely reason for this rebound in output and economic activity, even as swathes of infrastructure still lay in ruins, is that output can be produced using different combinations of labour and capital. Although a disaster may destroy physical capital, things can be made using more labour or using it more intensively than before. In addition, rebuilding is easier than building up capital the first time around, because it mainly aims to replicate a pattern of investment rather than figure out what to invest in. And productivity growth may accelerate when new, and often superior, machinery is installed.
A glimmer, at least
Reconstruction itself, of course, also helps to offset the negative impact of a drop in output in the aftermath of a disaster. Business booms for builders and producers of capital goods. Disasters probably do not actually stimulate the economy because additional production in some sectors may be displacing spending elsewhere, though this is less of a worry in an economy with a lot of spare capacity. Certainly, the year of the Kobe quake was not a bad one for the Japanese economy, which grew by 1.9% in 1995 compared with 0.9% growth in 1994.
There are grounds to hope, then, that this month's terrible events will not cause lasting damage to Japan's economy. But there are worries, too. The nuclear crisis adds greatly to uncertainty. Consumer and business confidence is fragile. With interest rates already at zero, policymakers have little wiggle room. Japan's manufacturing sector is running closer to full capacity now than in the mid-1990s, making it harder to make up for lost output. When disasters occur can matter as much to the economy as how bad they are.
This article appeared in the Finance and economics section of the print edition
The effects of this earthquake were catastrophic for an MEDC. despite some buildings having been made earthquake proof during recent years many of the older buildings simply toppled over or collapsed. A lot of the traditional wooden buildings survived the earthquake but burnt down in fires caused by broken gas and electricity lines.
Other effects included
More than 5000 died in the quake
300,000 were made home less
More than 102,000 buildings were destroyed in Kobe, especially the older wooden buildings.
Estimated cost to rebuild the basics = £100 billion.
The worst affected area was the centre. This was because it was built on easily moving ground which LIQUIFIED, allowing building to collapse and sink.
The worst effected area was in the central part of including the main docks and port area. This area is built on soft and easily moved rocks, especially the port itself which is built on reclaimed ground. Here the ground actually liquefied and acted like thick soup, allowing buildings to topple sideways.
Emergency aid for the city needed to use damaged roads but many of them were destroyed during the earthquake.
Raised motorways collapsed during the shaking. Other roads were affected, limiting rescue attempts.
Many small roads were closed by fallen debris from buildings, or cracks and bumps caused by the ground moving.
The earthquake occurred in the morning when people were cooking breakfast, causing over 300 fires, which took over 2 days to put out.
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Responses to the quake
Water, electricity, gas, telephone services were fully working by July 1995
The railways were back in service by August 1995
A year after the earthquake, 80% of the port was working but the Hanshin Expressway was still closed.
By January 1999, 134,000 housing units had been constructed but some people were still having to live in temporary accommodation.
New laws were passed to make buildings and transport structures even more earthquake proof.
More instruments were installed in the area to monitor earthquake movements.
Most new buildings and roads have, in the last 20 years, been designed to be earthquake proof, schools and factories have regular earthquake drills, etc. Despite this, many older buildings still collapsed or caught fire. This led to many blocked roads and massive problems of homelessness.
Telephones and other communication services were put out of action making communication slow and difficult.
Electricity and water supplies were badly damaged over large areas. This meant no power for heating, lights, cooking, etc. Clean, fresh water was in short supply until April 1995. The government and city authorities were criticised for being slow to rescue people and for refusing offers of help from other countries.
Many people had to sleep in cars or tents in cold winter conditions
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Preparation – A lot of the buildings in Kobe and Japan made after the 1960s are earthquake proof (necessary by law) with counterweights on the roofs and cross steel frames. Many of the damaged buildings in Kobe were built before this period and were made of wood, which caught fire. People are educated on earthquake preparation in Japan.
Prediction – Japan has the world’s most comprehensive prediction programme with thousands of seismometers and monitoring stations in Japan designed to give warning. Kobe hadn’t had an earthquake in 400years and had less prediction equipment than other areas of Japan.
Aid – The Japanese rejected international offers of aid and dealt with the earthquake itself. All of the homeless people were dealt with reasonably quickly and the city recovered thanks to government money.
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