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Tuesday, October 17, 2006

Broken windows in Asia

This morning I received the first semester report of natural disasters worldwide as reported by Centre for Research on the Epidemiology of Disasters (CRED). During the first semester of 2006 there were fewer overall natural disasters relative to the average over the previous ten years, however flooding was a much larger problem than in the past. CRED points out that:
Among extreme events, floods increasingly affect the livelihoods of rural people, setting back improvements in development in these areas by years. The upside of this situation is that floods are one of the disasters most amenable to prevention and mitigation. Time tested engineering techniques, many of which are low cost mechanisms and culturally appropriate, exist.
As we witnessed here in the United States last year, government involvement in flood control has become a much more thorny issue over the past thirty years. This might not be the case in lesser developed countries, but in more developed countries issues such as property rights, bureaucracy, environmental issues, graft, and numerous other problems make it difficult for solutions to be actually put in place.

In addition to the number of events, CRED attempts to measure the number of people and the economic damages involved with each natural disaster. The first semester's estimates are as follows:
Disaster Month Country Economic damages (US$)
Earthquake May Indonesia 3.1 billion
Flood May/June China 957 million
Windstorm June Philippines 645 million
Flood April U.S.A. 259 million
Windstorm March Australia 200 million
Flood January Guyana 165 million
Flood June China 130 million
Flood June Russia 125 million
Flood June Taiwan 116 million
Flood April China 100 million

The relative magnitude of the U.S. flood in April to the overall U.S. economy is puny compared to the damages suffered by other countries during this time period. An endogeneity problem exists here: lesser developed countries have fewer resources to dedicate to prevention and therefore suffer the greatest damages. However, in the chicken-and-egg problem, greater damages in a particular time period reduce the amount of resources available to put in "risk managing" solutions.

Beware the flawed "broken windows" concept of economic growth. The argument suggests that damages caused by natural disasters provide economic stimulants as rebuilding takes place. The problem with the argument is the immense opportunity costs that are suffered after natural disasters. Rather than putting resources into building factories or any other endeavor, such as, say, flood control measures, resources are instead dedicated to rebuilding infrastructure, housing, and agriculture. If the broken windows argument held any merit, then Southeast Asia and China would be in the fabled cat-bird seat.

I don't think the folks over there (or anywhere hit by a significant natural disaster) see it that way.

I am not sure what the answer is - perhaps international "aid" or loans would work, but they haven't to date and in the case of many countries the politics of such transfers would be touchy.

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