x Abu Dhabi, UAE Thursday 20 July 2017

Disaster recovery theories don't take the human spirit into account

No economic model can account for people's determination. Recoveries, by their very nature, come down to a people's state of mind.

When it comes to economies recovering from disasters, there seems to be two contrasting schools of thought.

One states that sudden, unexpected hits to productive capacity have a silver lining. Larry Summers, the former top economic adviser to Barack Obama, told CNBC last week that Japan's earthquake "may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place".

Mr Summers pointed to the 1995 Kobe earthquake, from which Japan actually gained economic strength. His argument is that reconstruction may not detract from an economy but could actually stimulate it.

There are many who might agree. A decisive, strategic rebuilding that radically upgrades the quality of capital stock may actually enhance long-term potential, especially when the replaced stock is old or outmoded.

But there is another view, that destruction can never be a source of profit or growth. The analogy used is that of the broken window. The spending needed to pay for it does not account for how that money could have been used if the window had not been broken.

This argument holds that Japan will not be better off for the rebuilding effort. Housing starts, as an example, will increase, but the housing stock will not.

The rebuilding of factories and office buildings are no different. In other words, the spending at best only takes you back to square one.

Whatever stance you take, the three recent disasters in the Asia-Pacific region will place very different burdens on their respective economies.

The Queensland floods in Australia can reasonably be expected to have less economic impact than the Christchurch and Sendai earthquakes.

Queensland also had a high degree of preparation in critical centres such as the Brisbane central business district. Sendai and Christ-church have not had this luxury.

There are also seasonal differences. The floods hit the state when economic activity was low. Many offices and factories were operating below capacity.

Christchurch was the opposite. The quake hit when seasonal activity was high. Japan was also accelerating its economy, after the Lunar New Year lull.

Many analysts are saying that despite the huge loss of life and economic activity in Sendai, and even despite the unknown nuclear threat, the longer-term impact will not be hugely disruptive.

Japan, as is well known, is a manufacturing powerhouse and a highly organised society. It may be possible to transfer manufacturing activity elsewhere in a way Christchurch and Queensland could not.

Queensland's farming industries were the most heavily affected and will take longer to regenerate. But the state's services industries were back in business within days, and the mining and logistics industries were only lightly affected.

Growth is expected to return to Queensland next quarter. Christ-church will also rebound, just behind Queensland, say Westpac Bank economists.

The big question has shifted to Sendai and greater Japan. Kenneth Rogoff, a Harvard University professor and a former chief economist at the IMF, said last week investors could not yet fathom how the crisis will spill over into other manufacturing sectors, damaging the global rebound.

"Japan being incapacitated by power outages and so on could have a multiplier effect throughout Asia," Prof Rogoff said.

Japan's already unsustainable public finances may be unable to cope with damage estimated at about ¥15 trillion (Dh689.24 billion), or 3 per cent of the country's GDP.

Japan specialises in products essential to industry almost everywhere.

It makes 40 per cent of global electronics parts, 19 per cent of semiconductors and 20 per cent of all technology products.

China relies heavily on Japanese imports, including capital goods and parts for manufacturing assembly, especially in electronics. The US imported $US124bn (Dh455.45bn) of merchandise from Japan last year, including cars, car parts, semiconductors and telecommunications equipment.

Japan is spending big. The Bank of Japan has continued to flood money markets with cash, bringing its total emergency funding to nearly $700bn as it tries to soothe fears about the economic impact of the earthquake, tsunami and unfolding nuclear crisis.

Whether you believe in the broken window scenario or the stimulus effect, perhaps post-war recoveries might point the way.

No economic model can account for people's determination. Recoveries, by their very nature, come down to a people's state of mind.

 

business@thenational.ae