Crushing Blow to or the Agent of Recovery

‘A deadly quake, a crushing blow to recovery’ screamed the front page of last Saturday’s Report on Business Section in the Globe and Mail. No doubt other finance and commerce media all over the world had similar headlines. But is this really true? Of course ten thousand dead can not be brought back to life. The human suffering caused by the disaster is immense and can never be compensated. But is it a blow to economic recovery – and crushing one at that? I disagree. I suggest that it may turn out to be just the opposite.

The loss of life and property at this scale is indeed a great tragedy and we are all shocked by it. It is the medium term economic impact that is open to debate. No doubt the production from damaged factories and power plants has ceased and will cause disruption. However, this will probably be temporary. The production will be ramped up elsewhere in underutilized facilities in Japan where the long recession has created spare capacity. Much bigger factor than the loss of production will be the economic activity due to reconstruction which will follow.

It is unfortunate but true that the destruction is good for the system in our economic model. It creates more jobs, puts more money in the system and adds more to general well-being if a building were destroyed and rebuilt rather than merely repaired. This is particularly true if the cost were shared by many either as investment or through insurance payment. The tragic event in Japan is a similar case only it is replicated millions of times. Its impact will be huge requiring the pooling of resources from most of the developed world. It will be done by contributions to the charities from average citizens, particularly those with Japanese connection; local and overseas governments and institutions contributing directly as assistance and by buying Japanese government bonds. Fortunately, unlike Haiti and better than other recent casualties Chile and New Zealand, the country has the political, social and economic structure to benefit, in spite of the vast damage, from the combined efforts of thousands of organizations all over the world.

Thus, the disaster may actually carry the seeds of recovery of Japan and its trading partners. Thousands of homes, office buildings, factories, cars, trucks, power plants and the infrastructure damaged and destroyed by the tsunami must be repaired or rebuilt from the scratch. And this will be done as soon as possible, not debated in political circles for ever more. Hundreds of billions of dollars will be spent in this massive reconstruction, much of it financed by insurance companies, some foreign. Billions of dollars in humanitarian aids will flow in, as indeed they should. There will be jobs, not only in construction but everything, be it planning, administration or execution. For a few years employment will soar. It is not inconceivable that thanks to this rebuilding effort Japan may even regain its number two status among the world’s leading economic powers.

One huge negative from the quake could be the damage to the nuclear power plants. We are fortunate that there are resources and know how in Japan to deal with the problems in the plants and a repeat of Chernobyl is not likely, if it is at all humanly possible. The absence of any significant leak will help the supporters of nuclear power. On the other hand, if there were to be a major leak from even one of them, and it is early days and the after shocks are not over yet, it would provide fuel to the opponents and would delay the construction of new plants for long periods. Even this scenario has a silver lining. It may help in development of alternate power sources and in ways of more efficient use of energy and save us from irreversible calamity. In any event, location of future nuclear facilities must avoid earthquake belts and low lying sea shores and they are not suited to the countries unable to cope with such accidents.


Comment:
Wish I had learnt at school what I discovered so late in life: when I am furious with some one for doing something wrong, most likely the fault really was my own.