12 October 2005
On Saturday, a 7.6 magnitude earthquake hit Pakistan, killing an estimated 35,000 people, making this one of the most lethal disasters in history. The news of this disaster came right on the heels of two major hurricanes in the United States. The burgeoning population of the world, combined with almost constant advances in communications technology have made natural disasters almost daily fare. The increasing frequency and severity of natural disasters has led experts to examine the long-term economic effects of disasters locally, nationally, and internationally. Obviously, in the wake of natural disasters there are a multitude of factors that affect the long-term macroeconomic effects on each of these economies, and exploring each of these factors is simply beyond the scope of this paper. I will, therefore, limit myself to the question of the effect of natural disaster fatalities on the national economies of the countries where they occur.
Although the immediate economic influence of natural disasters of any sort is, well, disastrous, it has become generally accepted that the long-term economic consequences of most disasters are fairly limited, especially at national and international levels. (Charvériat, 18). The economic influence of natural disasters may even lead to economic growth in some cases, as suggested by Mark Skidmore and Hideki Toya, for example (Skidmore). As a caveat, it should be noted that these conclusions are most valid for mild to moderate disasters in countries with fairly diversified economies. Some natural disasters are so severe in their scope or so devastating to a vital component of a national economy that the economy is crippled for years.
The key to economic recovery is a national and international economy willing and capable of investing in reconstruction. As Charvériat claims, “The impact of disasters on GDP growth can be expected to be transitory when the overall public and private investment effort for reconstruction (which boosts the growth rate of gross fixed capital formation) outweighs the adverse growth effects of the disasters . . . In addition, the process of replacement of lost fixed capital can be expected to raise its quality, and therefore capital productivity” (15-6). An important step in determining GDP growth, then, depends on determining the level of “adverse growth affects”. The “adverse growth effects” of disasters are varied, but the most powerful is the destruction of physical and human capital.
Although it is somewhat disturbing to discuss human lives, and human casualties, with the callous term “human capital loss”, understanding the effects of human fatalities on the economy is an important part of understanding overall economic effects. In severe natural disasters a major portion of the working population of an area can be decimated. Compounding the problem, evacuees are often reluctant to return to an area that no longer offers a home or a job, but still offers plenty of terrible memories. Despite these initial effects of disasters, the loss of human capital is generally quickly offset by increased rates of human capital accumulation, especially in countries that are prone to recurrent natural disasters (Skidmore).While labor forces may realign themselves within a country following a natural disaster, an examination of the Organization for Co-operation and Economic Development migration numbers reveals that workers do not emigrate out of a country following a disaster. In fact, a cursory examination of the data seems to indicate even a slightly negative correlation between disasters and immigration levels (Table B.1.1.). In sum, the loss of human capital in an affected area is a temporary problem, and workers are quickly replaced in most cases.
A demographic group that is affected even more than workers, though, is the elderly. Although the scope of natural disasters varies dramatically from one disaster to another, the group that is almost universally the most stricken in terms of casualties and fatalities is the elderly. Older members of a society, in the aggregate, are simply less able to deal with the demands and difficulties of natural disasters. They are not only less mobile and less physically able, but they are much more often affected by debilitating diseases or disabilities. These factors make survival, both during and after a disaster, a more difficult task. In truth, the plight of the elderly is one of the most disturbing results of natural disasters. It is important, however, to examine economic effects independently of emotional response.
Advances in medicine have caused the global life expectancy to rise from 47 years in 1950-1955 to 65 years in 2000-2005, and it is expected to reach 75 years by 2050 (World Population Prospects, 10). These changing demographics of the world population have become a major economic issue. By 2040, Japan, Spain and Italy will have one retiree for every active worker in their society (Weisman, 3). The reason that these statistics represent a problem is that the elderly, in the aggregate, are a drain on the economy. This is especially true in countries like the U.K. or Sweden, countries with extensive health care and welfare systems. In these countries economies spend billions of dollars on the elderly, and get very little back in return. On an even more basic level, the elderly are consumers without being producers. And while consumption does hold an important place in economic growth, even the type of consumers that the elderly are is less beneficial than other groups. The elderly generally purchase primarily inelastic goods, such as food and clothing. In addition, while risky investments like stocks and venture capital are the most advantageous for a growth economy, the elderly generally invest in short-term and very conservative commodities, like bonds or savings accounts. In sum, even the elderly who are not a drain on the economy are not, in general, as beneficial to a growth economy as their younger counterparts.
Any time that an economy is able to reduce expenses, that economy will be benefited. Thus, as harsh as it is to speak of individuals as expenses, by killing a disproportionate number of the elderly, natural disasters have a hidden, positive effect on the national economies where they occur. It may very well be impossible to quantify these effects, and it is certainly repellent to our sensibilities to even attempt to measure the benefits of people dying. Because economies naturally replace lost workers very quickly the human capital loss is transitory. Although we may be tempted to focus solely on the effect of working-age fatalities, we should not discount other, more emotionally-charged data. The effect of elderly casualties on certain post-disaster economies can be a significant factor in influencing economic growth, and should not be ignored simply because it justifiably pushes our emotional buttons.
Céline Charvériat. “Natural Disasters in Latin America and the Caribbean: An Overview of Risk”. Inter-American Development Bank. October 2000
Skidmore, Mark and Hideki Toya. “Do Natural Disasters Promote Long-Run Growth?” Economic Inquiry. 40.4: 664-687 <http://ei.oxfordjournals.org/cgi/reprint/40/4/664>.
“World Population Prospects: The 2004 Revision; Highlights”. United Nations Department of Economic and Social Affairs.
Table B.1.1. “Inflows of foreign population by nationality”. OECD