Natural Disasters and Their Effect on the Macro Economy Essay Example for Free

Natural Disasters and Their Effect on the Macro Economy Essay Natural Disasters can have both a positive and negative impact on the local, national and the global economy. However it is rare, but not out of the question, to see the positive impact it may have on an economy. For instance, when disaster struck in Haiti from the 7. 3 magnitude earthquake in 2010, between 200,000-250,000 people were killed. That is 2 percent of the total Haitian population of only 10 million. Comparatively New York City alone totals nearly as much as the entire population of Haiti with about 8. 2 million people (U. S. Census Bureau, 2010). The Inter-American Development Bank estimated that it cost 8.5 billion dollars in damage to Haitis economy. The earthquake caused the countrys gross domestic product (GDP) to contract 5. 1 percent that year. Considering that Haiti’s economy only produced 12 billion dollars in 2008, 8. 5 billion dollars is a huge deficit to the overall production and functionality of their economic and social growth. That is less than a tenth of a percent of U. S. GDP of 14 trillion dollars, but Haiti’s GDP per capita is only 1,300 dollars compared to over 40,000 dollars per person in the U. S. (CIA. gov). With all of this said, Haiti brought in nearly fifteen billion dollars through donations. So although there was catastrophic and disastrous losses to both the social and economic stimulus, on donations alone, Haiti was able to receive three billion dollars more than even their best year in 2008 with only twelve billion dollars. Proposing a theoretical situation, if an earthquake destroyed capital stock but left the labor force intact, the real rental price of capital would increase. The real rental price equals the marginal product of capital and having less capital stock available raises the marginal product of capital and therefore, raises its real rental price. This situation would also make the labor force larger in relation to available capital. Since this would lead to a declining marginal product of labor as workers have less equipment to use, the real wage would decrease as well. Due to rising world population, climate change, and environmental degradation, natural disasters are increasing in frequency. They are also becoming costlier and deadlier, according to Swiss Re, a reinsurance company; the U. S. suffered a cost of 145 billion dollars in 2004, which was up from 65 billion dollars in 2003. In 2009, natural disasters cost insurers about 110 billion dollars. In 2010, the cost was double that, at 218 billion dollars. So as you can see, in the past 10 years there have been jumps nearly doubling the cost that a country suffers to natural disasters from year to year. According to the World Bank, there are several factors that affect a country’s vulnerability to natural disasters: its geographic size, the type of disaster, the strength and structure of its economy, and prevailing socioeconomic conditions. In a globalized economy, all these factors, as well as others, also play into how the world’s finances will be affected. A common belief is that short-term economic hits after a disaster, even those as large as this year’s earthquake and tsunami in Japan or Hurricane Katrina in the U. S. in 2005 are more than offset by the reconstruction boom that follows. However this is only in countries that are large and rich enough to have short-term stabilization to the immediate economic hit. The nature of the disaster and the size of the victim count in an economy are key when determining whether or not natural disasters have a negative impact on macroeconomic growth. So in a country such as Haiti and their disastrous earthquake, although a lot of money was pumped into the economy in order to help in the rebuilding, that does not do much when they are still in need of the proper man power that can produce new development or ideas for rebuilding the structures that were destroyed. Incidences of natural disasters have increased by 30 percent since the 1960s, and risk-modeling companies have raised the likelihood of a Katrina-like event happening once every 20 years, rather than once every 40 years (SKOUFIAS, 2003). Because of the possibility of large natural disasters happening more often as well as more frequent smaller natural disasters occurring, how will the economy be affected? Especially if before the reconstruction both socially and economically is finished from the original disaster, another strikes in the same area. Another problem that is faced with economic downfalls due to natural disasters is how other countries may view the stability of that country. For example, 75 percent of Haiti’s national income came through the export of retail apparel to the United States. If Haiti were to have any kind of smaller disasters before they can properly rebuild their economic and working communities, then other countries will only see them as a reoccurring high-risk investment and will no longer look to invest in Haiti, only deepening their turmoil from an economic stand point. Droughts cannot be forgotten either. 2010 set records as the hottest year in one of the hottest decades in history. Climate change, exacerbated by the effects of El Nino, sparked off a series of global heat waves. In Pakistan, temperatures rose to 128. 3 degrees Fahrenheit on May 26, the highest temperature seen in Asia. Russia was plagued by a series of wildfires, destroying crops and woodland, and blanketing cities in smog. People across Europe had to be hospitalized for heat strokes and dehydration as air-conditioning failed to bring relief. Asia had one of the most severe droughts across the globe. The drought caused an estimated 3. 5 million dollars in immediate damage, both to agriculture and to the country’s hydroelectric sector. There are also other uncounted losses, but still very real costs from the drought: a drought can lower the overall productivity of land due to erosion and topsoil loss. It can reduce the numbers in livestock herds, which most of Asia relies on for everyday living needs as well as economic income. Before the end of the summer, the death toll would rise into the thousands. 15 million people were evacuated, and over a million homes destroyed. Nearly 34 million acres of crops were affected by floodwaters, with at least two million completely destroyed. By August, direct damage from the floods was estimated at $41 billion. This is something that affected the worldwide agricultural need and demand (PreventionWeb, 2010). Proving the destructive power of natural disasters, even in highly developed nations, Hurricane Katrina crushed the gulf coast. Just east of the Bahamas on August 24, 2005 a small, unlikely tropical depression intensified into a tropical storm which was given the name Katrina. This storm slowly made its way to Florida’s southern coast on the 25th where most experts believed the storm would dissipate. Unfortunately, Katrina’s path took it over the everglades allowing it to maintain its category 1 standing that it had acquired before it first made landfall, then entered the Gulf of Mexico. The warm waters of the Gulf fostered the rapid development of Katrina (Kempler 2010). The above image shows Hurricane Katrina at the height of her power. Estimates had Katrina making landfall as a category 4, but thankfully it weakened a bit and before it rolled in as a strong category 3. Katrina became been responsible for an estimated 1,800 deaths, as well as 100 billion dollars total in damages, of which about 60percent were uninsured losses. Some economists would put the total economic loss at around 250 Billion dollars (Amadeo 2011). That made Katrina the most destructive natural disaster ever to hit the United States. With all of Katrina’s destruction, the short term effects on the economy were very evident. Only one year after the disaster the United States, the economy was back to normal. In the first three quarters of 2006 the United States had GDP growth of 5. 6 percent, some of the most rapid growth in recent years (Herman 2006). Even though the nation as a whole made a quick economic recovery after Katrina, locations that were struck directly, like New Orleans, did not make the turnaround quite as rapidly as hoped. The first few months after Katrina the United States economy went into a downward trend. The GDP growth rate dropped from the 4. 2 percent that it had experienced in the first three quarters to 1. 8 percent in the last quarter of 2005. The reason for this impact goes beyond the destruction of property and the primary economic concern; the loss of goods and production capabilities (Herman 2006). Perhaps the most important resource that the gulf region produces is oil. The gulf makes up about 30 percent of America’s oil production and distribution. The effects of Katrina resulted in the destruction of 113 offshore platforms, and nearly 500 oil and gas pipelines (Amadeo 2011). The loss of this production led to a drastic increase in gas prices soaring to over 4 dollars per gallon. This drastic rise in prices created a panic, and people rushed to the gas stations to fill up before prices rose again, creating massive lines and much talk about the gloomy forecast of economic woes come. The only positive result from the increasing gas prices was when the Federal government opened the strategic petrollium reserves. This increase in gasoline prices surprisingly did not have as much of an impact as speculators feared, other than people’s outlook on the situation. There were some effects.mthough mostly food price centered. The three main goods that saw a notable impact were the prices of bananas, rice and sugar (Leibtag 2006). The primary reason for the increase in the rice and sugar prices is because the Louisiana Mississippi area is responsible for 85 percent of the sugar cane production, and 14 percent of the rice production in the United States (Leibtag 2006). The drastic loss in production from that area was softened by short-run increases in the other producers of those crops. This ability to increase short-run production is a factor that contributes to the resiliancy of free-market economies. Though the nationwide effects were not all that staggering, the effects in New Orleans the months following Katrina were devastating. With 80 percent of the city flooded, hundreds of thousands of people were forced to flee the city of New Orleans, many never to return again (Blackburn 2010). This drastic loss in population coupled with the destruction of approximately 200,000 homes and businesses led New Orleans and the surrounding areas into a dire economic situation. In the first few months after Katrina, Louisiana lost 12 percent of the state’s 214,000 jobs (Herman 2006). One result of the loss of jobs was a drastic raise in mortgage delinquancy rates (Herman 2006). This inability to pay is more than likely a contributing factor to the very low rate of return from people who were forced to evacuate their homes by Katrina. Those that did find the resolve to return to stay were in a desperate situation. New Orleans, whose primary industry is tourism, suffered great losses after the storm. They desperately needed to be able to find a way to bring back the American and foreign tourist in order to fuel the creation for more jobs. The drop in tourism is best reflected by the attendance rates in New Orleans famous Mardi-Gras and Jazz Festivals. Both events had roughly a 30 percent drop in attendance from previous years (A year after Katrina, New Orleans desperately seeking tourists 2006). Part of the reason for the delay in the return of the tourism industry is the mass clean-up that had to take place first. Before anyone could return and maintain normal operations, there was still 118 million cubic yards of debris to be cleaned up.(Amadeo 2011) Thanks to efforts by FEMA, the Red Cross and many church ministries across the country, there was much help to be found. However, despite the efforts of all these groups, New Orleans a year after the incident was still working its way very slowly towards full recovery. With the aid that had come into the city, organizations were able to rebuild infrastructure and make great improvements to both education and government. In fact, post Katrina New Orleans has experienced steady growth in almost every way, including education levels, over the last 6 years as shown by the chart below Though it took about a year for it the effects to show and recovery to really make a strong step forward, the relief money that came into New Orleans and the other areas affected by Hurricane Katrina did what the nation was hoping it would; help restore one of Americas cultural and industrial centers. The economic turnaround in New Orleans shows how an initial investment in the form of government aid, insurance claims, and private donations can improve the economy of an area affected by a natural disaster. If this idea can hold to be true with the most costly natural disaster in American history, it should work with other costly natural disasters as well. Though maybe part of New Orleans success lay in the restructuring of their government and school systems in addition to the monetary support. Though the economy of the areas affected improve without bringing down the rest of the nation’s economy, suffering this type of event might not prove to be true in countries with weaker economies. Also, if a disaster like this was to hit a city like Los Angelas or New York, like Irene almost did, it is still speculator to say if there would be similar results. One thing can be said for certain, America’s ability to maintain long term economic growth despite short term impacts, like Katrina shows the resiliency of America as an economic super-power. Other economic super powers, like Japan, are trying to find this same formula for economic recovery. In the case of Japan’s 9.0 magnitude earthquake on March 11, 2011, the loss of clean water, electricity, infrastructure, production lines, financial institutions, and more than 15,000 lives caused what the Prime Minister of Japan called the â€Å"The most difficult crisis for Japan† since World War II. However difficult it has been, people have been recovering from the loss of loved ones, injury, and the general trauma of the disaster. Perhaps the greatest and most uncertain long term effects brewing are the econ omic impacts on the world market. Many large industries and economic functions have been hurt, causing price inflation in those industries throughout the world. Since March 11, 2011, nations around the world have had to adjust their consumption in accordance with the loss of production in Japan. Several car companies, such as Toyota and Honda, had their production of car parts slowed, and electronics producers experienced the same effects (Syed, 2011). This has been felt worldwide. For example, Toshiba, who produces roughly 30 percent of the world’s computer chips that store data in smart phones, cameras, and laptops, closed down several factories due to economic losses and physical damages. Events like this are what caused the average price of a chip with eight gigabytes of memory to rise from 7. 30 dollars to around 10 dollars just three days after the earthquake and tsunami struck (Helft, 2011). Obviously, the price of computer chips is not the only price that has risen. Because computer chips are more expensive, new phones, laptops, televisions, cars, cameras, electronic billboards, and complex machinery will have a rise in price to cover the cost of parts and production. This effect will be felt for months, and maybe even years in an already instable world economy. Many of these products are produced in Japan; the world export market has been greatly affected because of that. Japan’s exports have decreased, causing increased economic uncertainty. The macroeconomic result of this is that investors tend to pull away from the increasing risk of pumping money into Japan and look for safer and smarter industries and nations to try to grow their profits (Kihara, 2011). One of the most fascinating things about today’s economy is that everything is so globally connected. Because of this and the slow in Japanese exports, the United States level of consumption of Japanese goods dove 3.4 percent following the earthquake (Guardian. uk, 2011). If this trend continued throughout the year, then the Japanese economy would have lost 4. 2 billion dollars from 2010 levels of United States consumption alone (State. gov, 2011). The disaster and surrounding effects not only caused a decrease of funds going into Japan, but the economic instability caused by the earthquake was devastating in its timing. Japanese and other Asian stock markets plunged as the news of the disaster spread, and this is coming on the heels of the U. S.stock market falling nearly 2 percent the date before. Not only that, but the earthquake caused struggling European stocks to fall to three month lows (CBSnews. com 2011). This goes to show that natural disasters can cause a myriad of negative factors in an economy, and that a spike in uncertainty can be one of the most demoralizing. That uncertainty does not just surface in the stock markets, but also in global financing. The Japanese currency, the Yen, had a significant surge the day after the massive earthq uake struck (Bloomberg. com, 2011). This is said to be credited to the immediate cleanup, repair, and reconstruction needs that Japan incurred following the damages. The long-term effects of the boost in the value of the Yen are still unknown, but it has made the Yen rise in demand in recent months, despite fluctuations since the initial rise in trading worth (Bernard, 2011). The Yen is currently becoming stable once again, eight months after its spike in March then fall in April. Japan has done well in its recovery considering that the Yen hit recent year record lows in April. This graph shows the trading value of the Yen in the past year (Forexblog.org, 2011). The value of the Yen is not the only financial issue at stake. Japan is one of the major foreign holders of U. S. government and corporation debt. With Japan’s Debt-to-GDP ratio at 200 percent, and massive amounts of government spending looming in the rebuilding of the thousands of buildings and roadways lost, Japan is in great need of more money (CIA. g ov, 2010). Because of this, the current interest rates that U. S. corporations are paying on their international loans could increase in an effort to generate more revenue in Japan (Nanto, 2011). In turn, corporations would not be able to borrow as much money for new capital investment, thus hurting the consumption and job creation in the United States at a time when jobs are greatly needed with unemployment rates near nine percent (BLS. gov, 2011). Jobs are a big issue in Japan too. With many of the more than 15,000 killed and nearly 6,000 injured people being a part of the Japanese work force, and tons of cleanup and construction to be done, companies and the government have had to hire thousands of new workers to satisfy the demand for work (Japanese National Police Agency, 2011). After a brief climb in unemployment because of the direct aftermath of the earthquake, numbers dropped to a recent history record low of 4. 1 percent (Tradingeconomics. com, 2011). Once organization was restored, Japan began to utilize its workforce to combat the challenge of rebuilding cities. It is perhaps a gruesome yet effective means of increasing job demand in a nation when its economy was unsettlingly devastated. Since the record drop in unemployment, Japan has had what could be considered a â€Å"Recovery boom. On November 14, 2011, a news article stated: Gross domestic product grew at an annualized 6 percent in the three months ending Sept. 30, the fastest pace in 1 1/2- years, the Cabinet Office said today in Tokyo. At 543 trillion yen ($7 trillion), economic output was back to levels seen before the March 11 earthquake, the report showed. Japan’s return to growth after three quarters of contraction was driven by companies including Toyota Motor Corp. making up for lost output from the disaster. A sustained rebound will depend on how much reconstruction demand can offset a slowdown in global growth as Europe’s debt crisis damps global confidence and an appreciating yen erodes profits (Sharp, 2011). The fact the Japan is now back to its pre-earthquake GDP level is remarkable. It initiates again the idea of what is known to economists as â€Å"The Broken Window Fallacy. † The theory is that an economy can create jobs and achieve higher employment levels though the destruction of the current goods that exist. However, the destruction comes at a cost of replacement that, in the end, is not going to create a net gain, but will instead create a loss or â€Å"quick-fix† break even because businesses will be stimulated, but run less efficiently in the long run. Only time will tell if Japan’s growth over the last few months is simply a rebound or if the disaster caused a rethinking of how things should be done and built, therefore creating a more efficient, productive Japanese economy. Economists will be watching closely to spot trends. Another disaster that could have the same categories of effects on a much smaller scale is Hurricane Irene. The northeastern U. S. experienced the worst flooding since the existence of many towns and buildings of the region. Since only three months have passed since Irene made landfall on the New England area on August 28, 2011, the long term impact of the estimated 45 billion dollars in losses are still speculative (Morici, 2011). Given the current status of the American economy, any damages of the storm are probably being felt most nationwide right now, if compared to the time table of Japan’s economic fall and rise with respect to the earthquake in March. The U. S. may see a slight drop in unemployment and a rise in capital investment as part of the restoration of Irene’s damages, but most likely, no real growth will come out of it. However, the increase in consumption in order to rebuild the damaged parts of the northeast may spark a rise in consumer confidence, and that is what America desperately needs. A natural disaster in a third world country might bring in more money in aid than that country’s economy could have ever produced on its own, making a very positive economic impact. But, as far as the number go, in a developed nation like the United States or Japan, natural disasters cause little more than a large scale broken window fallacy case study. A hurricane, earthquake, or other disaster can bring forth events that build intangible benefits such as consumer confidence, improved organization of infrastructure, or more efficient ideas, but most real development and confidence comes from ingenuity, not devastation. However, it is hard to argue against the fact that necessity is the mother of invention, or in this case, restructured success. Works Cited