Special Report: Advanced economies cope better with disasters
Sun, Mar 13 2011
By Alan Wheatley, Global Economics Correspondent
BEIJING (Reuters) - The earthquake that devastated northeast Japan displaced the country's main island by 2.4 meters and even tilted the axis of the Earth by nearly 10 centimeters. The shock sounds awesome but it was imperceptible. History suggests the same will be true of the economic impact. 
The instinctive reaction when viewing the extensive damage and frantic efforts to secure damaged nuclear reactors is to assume economic havoc will follow.
But researchers who have studied similar disasters in rich countries reach a reassuring conclusion: human resilience and resourcefulness, allied to an ability to draw down accumulated wealth, enable economies to rebound quickly from what seem at first to be unbearable inflictions - be it the September 11, 2001, attacks on New York or Friday's 8.9-magnitude earthquake, the worst in Japan's history.
Japan itself provides Exhibit No. 1 in foretelling the arc of recovery. A 6.8-magnitude temblor struck the western city of Kobe on January 17, 1995, killing 6,400 people and causing damage estimated at 10 trillion yen, or 2 percent of Japan's gross domestic product.
The importance of Kobe's container port, then the world's sixth-largest, and the city's location between Osaka and western Japan made it more significant for the economy than the more sparsely populated region where the latest quake and tsunami struck. Extensive disruption ensued, yet Japan's industrial production, after falling 2.6 percent in January 1995, rose 2.2 percent that February and another 1.0 percent in March. GDP for the whole of the first quarter of 1995 rose at an annualized rate of 3.4 percent.
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Indeed, Takuji Okubo, chief Japan economist at Societe Generale in Tokyo, noted that Japan's economy grew by 1.9 percent in 1995 and 2.6 percent in 1996, above the country's trend growth rate at the time of 1.5 percent. Private consumption, government spending and, especially, public fixed investment all grew above average in 1995 and 1996, Okubo said in a report. By analogy, the medium-term impact on growth from the latest quake was also likely to be positive, he said.
Today's circumstances are, of course, different. Japan's economy has floundered in the intervening 16 years and its public finances have deteriorated. On paper, the country, is perhaps less well prepared at this stage of the economic cycle to pick itself up off its feet.
But Mark Skidmore, an economics professor at Michigan State University, attaches greater importance to a rich society's capacity to constantly adapt to the risks it faces. In the case of Japan, prone to regular earthquakes, this means improving its disaster response systems and adopting the latest techniques to help buildings withstand shocks.
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Skidmore and Hideki Toya from Nagoya City University in Japan have examined data for 151 countries over the period 1960-2003 and found that countries with higher levels of income, education and financial development suffer fewer losses from a natural disaster. Other researchers have reached similar conclusions.
"As incomes rise in a society, you can devote more resources to safety. So economies that have relatively high exposure to earthquakes or hurricanes start taking the precautions they need. Japan is among the best prepared in the world because they have high exposure and high income," Skidmore said.
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"Natural disasters in large advanced economies tend not to significantly reduce current aggregate output or induce an associated rise in the general price level. In geographically dispersed economies, disasters are almost always localized events. But in any economy, it is the capital stock, not output, that is directly reduced by the disaster," he wrote in a paper published in 2000.
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"The impacts of natural disasters on society and the environment are substantially greater in less developed countries," according to a paper by Reinhard Mechler, who heads the research group on disasters and development at the International Institute for Applied Systems Analysis near Vienna.
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The reaction of the yen in coming weeks is another wild card in assessing the impact on Japan's economy. The Bank of Japan, which meets on Monday, is widely expected to pledge as much money as needed to prevent the repercussions of the quake from destabilizing financial markets and the banking system.
Economists also expect the central bank will signal its readiness to ease monetary policy further -- even though its policy rate is already near zero -- if the damage from the quake threatens Japan's fragile economic recovery.
That prospect would normally weaken the yen, but economists are keenly aware that the Japanese currency gained sharply in the weeks after the Kobe catastrophe. It rose from 96 per dollar in late February and briefly punched through 80 to an all-time high on April 19, 1995, before reversing course after the BOJ cut interest rates.
Trade tensions with the United States were a driving force in 1995 and are absent today. A rush to bring capital back to Japan, especially by insurers anticipating large claims, was also a factor post-Kobe and could be again. But Jerram, the Macquarie economist, doubted that history would repeat itself.
"Significant yen repatriation that could push the currency higher and, at an extreme, disrupt global markets, looks unlikely," he said.
Another "known unknown" is whether serious damage to the Fukushima Daiichi nuclear plant will cause countries including Britain, China and Italy to reappraise plans to boost investment in nuclear power. If they do, it would be logical to expect higher oil, natural gas and coal prices.
"A serious accident like that will have repercussions in all countries with nuclear," Bertrand Barre, scientific adviser to French nuclear reactor maker Areva, told Reuters.
If there are clear lessons, we will apply them. We need to take time to work out the consequences and act. 
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