Could the disaster in Japan power a wave of sustainable growth?

Natural disasters and wars are in general very bad things.

Nobody in their right minds would wish for one. But they occur anyway. Disasters and wars have an immediate cost in human life and capital destruction which can never be a chosen path for any ethical course of action. But when they do occur the long term consequences  can critically depend upon the economic environment in which they occur. It seems to me that when they occur in times of economic depression or economic stagnation they can provide the stimuli which can lift countries and whole regions onto a new path of economic growth. Of course the spending that follows does not in itself create wealth. The spending could have taken place on something else (or the wealth spent could have been saved). But it is the direction of spending and the mood of the spending which, I think, creates the potential benefit. It can create a step-change in thinking and behaviour and resolve and shift the path on which economic movement occurs.

The May 2008 earthquake in Sichuan, China killed over 80,000 and destroyed infrastructure on an unprecedented scale for modern China. Yet, the economy was not derailed and instead the massive rebuilding effort that followed added an extra 0.5% or so to the economic growth that followed. The January 1995 Kobe earthquake killed over 6,000 and wiped out the older central areas of Kobe and yet the investment that followed lifted the Japanese economy as a whole – but only for a time. A new mood was created but it was not accompanied by any real political shift. And from about 1999 onwards the Japanese economy has not only been stagnating but Japanese policies have also been stuck in a political rut. In spite of much talk about demographics and the ageing of Japan and the need for new thinking, the political inertia prevailed. This has only been exacerbated by the global financial crisis.

The dislocation to Japanese society and the economy caused by the Great Tohoku quake and tsunami will be massive. But I am quite sure that the Japanese and Japan will overcome. It will take some time but it could even break them out of the political rut and onto a quite different and much more sustainable path. If there is a fundamental shift out of the deadly political complacency which is long overdue, then the short term stimulus that rebuilding will surely bring could become sustainable and the Japanese economy could again be a major driver of global improvements.

chart of the day, japan industrial production 1995Natural disasters can give a boost to the countries where they occur

Rebuilding efforts serve as a short-term boost by attracting resources to a country, and the disasters themselves, by destroying old factories and old roads, airports, and bridges, allow new and more efficient public and private infrastructure to be built, forcing the transition to a sleeker, more productive economy in the long term.

“When something is destroyed you don’t necessarily rebuild the same thing that you had. You might use updated technology, you might do things more efficiently. It bumps you up,” says Mark Skidmore, an economics professor at Michigan State University. “Disasters help people think about things differently.”

Studies have found that earthquakes in California and Alaska helped stir economic activity there, and that countries with more hurricanes and storms tend to see higher rates of growth. Some of the most recent work has found a link between disasters and subsequent innovation.

Mark Skidmore of Michigan State, along with the economist Hideki Toya of Japan’s Nagoya City University, published a 2002 paper in the journal Economic Inquiry that mapped the disaster frequency of 89 countries against their economic growth over a 30-year period. Skidmore and Toya found that, in the case of climatic disasters – hurricanes and cyclones, as opposed to earthquakes and volcanic eruptions – the more the better: nations with more climatic disasters grew faster over the long run than the less disaster-prone.

Jesus Crespo Cuaresma, a professor of economics at the University of Innsbruck, has found some support for Skidmore and Toya’s argument. In post-disaster rebuilding efforts in developing countries  at least in wealthier developing countries like Brazil and South Africa, there is indeed a tendency to use the rebuilding process as an opportunity to upgrade infrastructure that might otherwise have been allowed to grow obsolete.

War is also a “disaster” which costs human lives and destroys capital but can have similar effects.

As Prof. Joshua S. Goldstein puts it:

War is not without economic benefits. At certain historical times and places, war can stimulate a national economy in the short term. During slack economic times, such as the Great Depression of the 1930s, military spending and war mobilization can increase capacity utilization, reduce unemployment (through conscription), and generally induce patriotic citizens to work harder for less compensation.

War also sometimes clears away outdated infrastructure and allows economy-wide rebuilding, generating long-term benefits (albeit at short-term costs). For example, after being set back by the two World Wars, French production grew faster after 1950 than before 1914.

Technological development often follows military necessity in wartime. Governments can coordinate research and development to produce technologies for war that also sometimes find civilian uses (such as radar in World War II). The layout of European railroad networks were strongly influenced by strategic military considerations, especially after Germany used railroads effectively to overwhelm French forces in 1870-71. In the 1990s, the GPS navigation system, created for U.S. military use, found wide commercial use. Although these war-related innovations had positive economic effects, it is unclear whether the same money spent in civilian sectors might have produced even greater innovation.

Overall, the high costs of war outweigh the positive spinoffs. Indeed, a central dilemma for states is that waging wars – or just preparing for them – undermines prosperity, yet losing wars is worse. Winning wars, however, can sometimes pay.

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3 Responses to “Could the disaster in Japan power a wave of sustainable growth?”

  1. world war 3 predictions Says:

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  2. Signs that the Japanese recovery is beginning « The k2p blog Says:

    […] Having a very strong belief in the resilience of Japan and the Japanese in the face of natural disasters, I have – paradoxically – been anticipating that the Great 2011 earthquake and tsunami will actually lead to a wave of infrastructure spending which can actually lead to a new spurt of economic growth. If political changes are also forthcoming this could be a wave of sustainable growth.  […]

  3. Japan back to growth with a bang with GDP up 1.5% in 3 months « The k2p blog Says:

    […] Related: Could the disaster in Japan power a wave of sustainable growth?  […]

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