What Lies Ahead for Japan?

According to James Surowiecki, Japan's future is not the disaster that most now predict:

Even if Japan's nuclear crisis is contained, its earthquake and tsunami now seem certain to be, economically speaking, among the worst natural disasters in history, with total losses potentially as high as two hundred billion dollars. In response, fearful investors sent the Nikkei down almost twenty per cent on the first day of trading after the tsunami, and it's still down more than ten per cent. Yet, while the fear is understandable, this may turn out to have been an overreaction: history suggests that, despite the terrifying destruction and the horrific human toll, the long-term impact of the quake on the Japanese economy could be surprisingly small.

That may seem hard to reconcile with the scale and the scope of the devastation. But, as the economists Eduardo Cavallo and Ilan Noy have recently suggested, in developed countries even major disasters "are unlikely to affect economic growth in the long run." Modern economies, it turns out, are adept at rebuilding and are often startlingly resilient.

The quintessential example comes from Japan itself: in 1995, an earthquake levelled the port city of Kobe, which at the time was a manufacturing hub and the world's sixth-largest trading port. The quake killed sixty-four hundred people, left more than three hundred thousand homeless, and did more than a hundred billion dollars in damage (almost all of it uninsured). There were predictions that it would take years, if not decades, for Japan to recover. Yet twelve months after the disaster trade at the port had already returned almost to normal, and within fifteen months manufacturing was at ninety-eight per cent of where it would have been had the quake never happened. On the national level, Japan's industrial production rose in the months after the quake, and its G.D.P. growth in the following two years was above expectations.

How can this be?

The biggest reason for this, as the economist George Horwich argued, is that even though natural disasters destroy physical capital they don't diminish the true engines of economic growth: human ingenuity and productivity.

And the odd thing is that massive destruction can actually help kickstart an economy. It is a kind of "creative destruction" as Surowiecki points out:

In a study of eighty-nine countries, the economists Mark Skidmore and Hideki Toya, after controlling for every variable they could think of, found that countries that suffered more climatic disasters actually grew faster and were more productive. This seems bizarre: it's close to the broken-windows fallacy identified by the nineteenth-century economist Frédéric Bastiat -- the idea that breaking windows is economically useful, because it makes work for glaziers. But Skidmore and Toya argue that disaster-stricken economies don't simply replace broken windows, as it were; they upgrade infrastructure and technology, and shift investment away from older, less productive industries. (After the Kobe quake, the city's plastic-shoe factories never returned.) In Horwich's somewhat ruthless phrase, disasters can function as a form of "accelerated depreciation."

And Surowiecki points to another factor in regrowth which is very relevant to the US with is 30 years of disproportionate growth of wealth in the top 1% at the expense of the bottom 99%:

Furthermore, it's important to remember that even cities that do successfully rebuild still lose enormous amounts of capital. In that sense, the biggest economic effect of disasters is to redistribute resources rather than create them. Disasters redistribute money from taxpayers to construction workers, from insurance companies to homeowners, and even from those who once lived in the destroyed city to those who replace them.

So disasters are not all bad. Some good can come out of them.