Earthquake economics

A little over a month ago, an earthquake of magnitude 7.8 on the Richter scale struck Nepal, causing immense loss of life and property. Aftershocks continued for quite a few days. Although it will not be the same again for many people and places, Nepal is slowly returning to normal. The country is trying to put the earthquake behind and move forward on all fronts.

While there is not a lot of research on earthquakes in economics, our friend Nejat Anbarci at Deakin University and his co-authors have been studying this particular type of natural disaster for some time, and have come up with some fascinating insights.

Natural disasters by themselves are non-discriminatory in nature — they do not engage in statistical or taste-based discrimination. Yet the damage caused by disasters is not identical.

For instance, when Hurricane Katrina hit New Orleans in 2005, the poor were at a greater risk of flooding simply because they lived in neighbourhoods that were below sea level.

On the other hand, when Hurricane Gustav hit Baton Rouge (an hour west of New Orleans and home to both of us) in 2008, the rich were at a disadvantage. There was no danger of floods in Baton Rouge. Most of the damage was due to falling trees caused by high winds, and affluent areas tend to have greater number of trees than poor neighbourhood

In other words, if we were all cavemen, then an earthquake would affect everyone in the same manner. However, human activity makes places different and fatalities caused by natural disasters therefore are also different.

Interestingly, when studying the factors that determine the impact of earthquakes at the country-level, Nejat and his co-authors have found that the fatalities caused by earthquakes are not only negatively related to income per capita, but are greater in countries with greater income inequality.

Why is this? Because the ability of a country to reach an agreement on how resources must be allocated to mitigate the fatalities caused by earthquakes is positively associated with income equality. Hence, in countries with high income inequality the rich can insure themselves against earthquakes, leaving the poor vulnerable.

Destructive as they may be, economists also view natural disasters as a window of opportunity — the opportunity to rebuild. Earthquakes are no exception. By destroying the existing infrastructure, they create a necessity to replace these with new and improved (seismic-resistant) ones.

In this sense, earthquakes can be thought of as providing what in the words of the great Joseph Schumpeter would be called “creative destruction.” Moore’s Law is perhaps the best example in contemporary times.

While the creative destruction may cause economic sufferings in the short run, they produce substantial economic benefits for the society as a whole in the long run. In fact, research shows that in the long run earthquakes affect income positively.

However, earthquakes not only reshape the topography of an area, but also have the potential to reshape political and democratic institutions. Research by Anbarci and co-authors shows that the effect of earthquakes on political transitions is not very straightforward — there are both direct and indirect effects.

Earthquakes directly affect the chances of the existing government since they have to face the wrath of the public that might hold it responsible for all the damages. A severe earthquake also causes economic stress in the short run leading to regime change.

Moreover, the distribution of the massive amount of resource that must be put into the recovery and development processes may also create discontented groups that are likely to vote against the government in the upcoming elections. Thus their direct effect is pro-democratic.

Earthquakes may affect political institutions indirectly through their indirect positive impacts on incomes in the long run through the creative destruction process. This can serve to make an existing government more autocratic since it becomes difficult for the opposition to fight incumbent government that can demonstrate economic progress.

One thing the Nepal earthquake did reveal is that we are still human beings and we do care about other fellow beings in distress. The international community including India was quick to show support.

Relief came in the form of emergency supplies, troops and medical. In addition to this, several countries and NGOs provided millions of dollars with the UN contributing about $15 million.

One question that economists have pondered over is what affects the flow of relief. Would a country other than Nepal have received more or less in terms of relief aid?

Research shows that the amount of disaster relief depends on a number of factors including the colonial history of the affected country, whether it shares a common language with the donor countries and engages in trade with them, whether or not it is a UN friend, and the distance between the disaster-affected country and the donor country.

Interestingly, it turns out to have the same extent of disaster relief, a country with no colonial ties must experience 50 times more fatalities than a former colony. So whatever other consequences colonial ties might have had, when it comes to disaster relief the shared past does have a positive impact.

Of course, the real question in the context of disaster relief is not how much relief was received, but whether it actually made it to the affected population.

This is a serious issue in developing countries where levels of corruption are often high and government controlled distribution channels notoriously leaky. In fact, it has been suggested this was a major cause of the high fatality rate of the 1999 Orissa super cyclone.

In the context of earthquakes however, public sector corruption can have serious impact through another channel. Death tolls caused by earthquakes can rise since corruption makes it possible to ignore building codes, which ultimately magnifies severity of earthquakes leading to more deaths and a greater loss of property.

According to Anbarci’s study, an earthquake of similar magnitude will kill more than twice as many people in India as it would in Australia simply because of differences in the levels of corruption. India’s average corruption scores for the study period (1975-2003) is 3.3 and Australia’s is 6 where a higher number implies lower corruption.

Of course, if this carries over to the infrastructure sector, then when aftershocks rumble through the earthquake zone for days to come as in Nepal, further damage to life and property will keep occurring making it difficult to restore normalcy for quite some time.

Sarangi teaches economics at Louisiana State University. Jha is a PhD in economics from Louisiana State University