(Repeats report filed late on Sunday)
By Alan Wheatley, Global Economics Correspondent
BEIJING, March 13 (Reuters) - The earthquake that devastated
northeast Japan displaced the country's main island by 2.4
metres and even tilted the axis of the Earth by nearly 10
centimetres. The shock sounds awesome but it was imperceptible.
History suggests the same will be true of the economic impact.
The instinctive reaction when viewing the extensive damage
and frantic efforts to secure damaged nuclear reactors is to
assume economic havoc will follow.
But researchers who have studied similar disasters in rich
countries reach a reassuring conclusion: human resilience and
resourcefulness, allied to an ability to draw down accumulated
wealth, enable economies to rebound quickly from what seem at
first to be unbearable inflictions - be it the Sept. 11, 2001,
attacks on New York or Friday's 8.9-magnitude earthquake, the
worst in Japan's history.
Japan itself provides Exhibit No. 1 in foretelling the arc
of recovery. A 6.8-magnitude temblor struck the western city of
Kobe on Jan. 17, 1995, killing 6,400 people and causing damage
estimated at 10 trillion yen, or 2 percent of Japan's gross
domestic product.
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Graphic on Kobe quake http://link.reuters.com/jec58r
Main story on Japan quake [ID:nL3E7EC0D6]
Analysis on quake recovery[ID:nN12187648]
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The importance of Kobe's container port, then the world's
sixth-largest, and the city's location between Osaka and western
Japan made it more significant for the economy than the more
sparsely populated region where the latest quake and tsunami
struck. Extensive disruption ensued, yet Japan's industrial
production, after falling 2.6 percent in January 1995, rose 2.2
percent that February and another 1.0 percent in March. GDP for
the whole of the first quarter of 1995 rose at an annualised
rate of 3.4 percent.
"Despite the scale of the disaster, it is hard to find much
evidence in the macroeconomic data of the effects of the Kobe
earthquake," said Richard Jerram, chief Asian economist at
Macquarie in Singapore and a veteran Japan-watcher.
Indeed, Takuji Okubo, chief Japan economist at Societe
Generale in Tokyo, noted that Japan's economy grew by 1.9
percent in 1995 and 2.6 percent in 1996, above the country's
trend growth rate at the time of 1.5 percent. Private
consumption, government spending and, especially, public fixed
investment all grew above average in 1995 and 1996, Okubo said
in a report. By analogy, the medium-term impact on growth from
the latest quake was also likely to be positive, he said.
Today's circumstances are, of course, different. Japan's
economy has floundered in the intervening 16 years and its
public finances have deteriorated. On paper, the country, is
perhaps less well prepared at this stage of the economic cycle
to pick itself up off its feet.
But Mark Skidmore, an economics professor at Michigan State
University, attaches greater importance to a rich society's
capacity to constantly adapt to the risks it faces. In the case
of Japan, prone to regular earthquakes, this means improving its
disaster response systems and adopting the latest techniques to
help buildings withstand shocks.
Most of the damage wrought in Japan was by the ensuing
tsunami, for which there was no time to prepare, and not by
collapsing buildings - even though the quake was 1,000 times
more powerful than the Kobe one.
"We don't know yet how devastating this is going to be
economically, or even in terms of human casualties, but Kobe was
able to rebound very quickly and I think there is the same
potential here," Skidmore said in a telephone interview.
Skidmore and Hideki Toya from Nagoya City University in
Japan have examined data for 151 countries over the period
1960-2003 and found that countries with higher levels of income,
education and financial development suffer fewer losses from a
natural disaster. Other researchers have reached similar
conclusions.
"As incomes rise in a society, you can devote more resources
to safety. So economies that have relatively high exposure to
earthquakes or hurricanes start taking the precautions they
need. Japan is among the best prepared in the world because they
have high exposure and high income," Skidmore said.
OPENNESS TO TRADE
Countries with an openness to trade are also better able to
cope with disasters because they create supply chains as well as
commercial and diplomatic relationships that prove to be
important. A well-oiled, well-financed government that can
spring into action and limit the spillovers of the disaster is
also crucial. This bodes well for Japan.
"They have the resources. They have the social and economic
and government infrastructure to effectively utilise the
resources that may come in from outside as well as internally.
They can focus not just insurance but also government assistance
to respond effectively," Skidmore said.
Another U.S. academic who has studied the lessons from Kobe,
the late George Horwich of Purdue University, noted that media
reports said it could take the city as long as a decade to
recover. In the event, within 15 months manufacturing in Kobe
was at 98 percent of its pre-disaster trend; imports had fully
recovered within a year and exports were back at 85 percent
capacity; and 79 percent of shops had reopened by July 1996.
"Natural disasters in large advanced economies tend not to
significantly reduce current aggregate output or induce an
associated rise in the general price level. In geographically
dispersed economies, disasters are almost always localised
events. But in any economy, it is the capital stock, not output,
that is directly reduced by the disaster," he wrote in a paper
published in 2000.
Horwich concluded that physical capital is the most visible
contributor to economic recovery but human capital is the
dominant economic resource. And Japan has that in spades.
"Destroy any amount of physical capital, but leave behind a
critical number of knowledgeable human beings whose brains still
house the culture and technology of a dynamic economy, and the
physical capital will tend to reemerge almost spontaneously," he
said.
The 2008 earthquake in the western Chinese province of
Sichuan, which killed nearly 90,000 people, is in line with the
academic finding that strong institutions and human capital are
central to the process of recovery.
As a developing country, China had not made enough buildings
earthquake-resistant. Many schools crumbled. Yet the ruling
Communist Party mobilised vast resources for rescue, relief and
reconstruction. As a result, according to a government think
tank, the disaster actually added an estimated 0.3 percentage
point to China's GDP growth in 2008. Less than three years on,
the office charged with reconstruction has been disbanded, its
work complete, an official said on Sunday.
Compare and contrast with Haiti, the most impoverished
country in the Western Hemisphere. The 7.0 magnitude quake that
struck on January 12, 2010, was much less powerful than that in
Japan, but it killed at least 250,000 people, injured 300,000,
left 1.5 million homeless and wrecked large parts of the
capital, Port-au-Prince.
With weak finances and no emergency fund to tap, Haiti's
economy slumped at least 5 percent last year, and the release of
billions of dollars in international aid has been too slow to
settle the homeless and get basic services running again, let
alone spur an economic recovery. A cholera epidemic and
political instability over contested elections reflect the
failures of reconstruction efforts and in turn have made
recovery even more difficult.
Haiti's woes confirm the findings of numerous researchers
that poverty, high unemployment, limited access for the poor to
basic services and a lack of strong national and local
institutions amplify the economic blow of natural disasters.
"The impacts of natural disasters on society and the
environment are substantially greater in less developed
countries," according to a paper by Reinhard Mechler, who heads
the research group on disasters and development at the
International Institute for Applied Systems Analysis near
Vienna.
INDIAN OCEAN TSUNAMI
Another case in point is Aceh, at the northern tip of the
Indonesian island of Sumatra, which bore the brunt of the Indian
Ocean tsunami of Dec. 26, 2004.
Of the 230,000 people killed by the speeding, towering
waves, 167,000 were from Aceh, which suffered total damage of
about $4.5 billion. A big relief effort was launched, but more
than two years later a report from the Asian Development Bank
Institute said key reconstruction targets had not been met and
coordination among the many government agencies and
international donors was poor.
With Aceh accounting for just 2 percent of Indonesia's
economy, the catastrophe was not enough to move the needle of
the country's GDP. But, as with Haiti, the shortcomings of the
region's recovery stood In stark contrast to the experience in
Kobe.
After the initial loss of output, disasters in advanced
economies do not invariably result in a boost to economic
activity.
Gus Faucher, director of macroeconomics at Moody's
Economy.com, a consultancy, has cited the aftermath of Hurricane
Katrina, which devastated New Orleans in 2005: the city did not
experience an economic bounce because so many residents left,
government aid was slow to arrive and insurance payments were
low.
But, as a rule of thumb, reconstruction jobs and the influx
of emergency assistance apply balm to an economy's wounds. Take
the 6.7 magnitude Northridge quake near Los Angeles in 1994 that
killed 57 people, injured 9,000 and resulted in about $40
billion in property damage.
Daniel Blake, an economics professor at California State
University Northridge, found a year later that the $18 billion
in aid and insurance payments made by the federal government
actually jump-started the area's fragile economy after four
years of recession.
And after the 1989 Loma Prieta earthquake, which severely
damaged major roads around the San Francisco Bay, an official
estimate put the Bay Area's lost economic output at between $181
million and $725 million, a fraction of its 1989 gross regional
product of $174 billion. Indeed, the California Trade and
Commerce Agency later found that the Bay Area even managed to do
better than many parts of the state in weathering the early
1990s recession.
A more recent example is that of Chile, where 500 people
died in an 8.8 magnitude quake in February 2010 that caused an
estimated $30 billion hit to the economy due to damaged
infrastructure and property and lost productivity.
Both the government and central bank trimmed their growth
outlooks after the quake, estimating it could shave around 0.25
to 0.5 percentage point off annual growth. But the economy grew
about 5.2 percent in 2010, within the original range of
projections. With the state only halfway through its rebuilding
programme, GDP growth this quarter is likely to accelerate to
around 8 percent.
"The impact of reconstruction on growth is becoming stronger
as time goes on," said Finance Minister Felipe Larrain, who
financed an $8.4 billion recovery package with a mix of bond
issues, higher royalties levied on mining companies and and
savings from a boom in copper, Chile's principal export.
[ID:nN12197354]
So what does all this mean for Japan?
Pete Wilson, California's governor at the time of the
Northridge quake in 1994, says it was important to cut through
red tape. By waiving the requirement for environmental impact
hearings and setting incentives for building contractors, Wilson
told Reuters he managed to reopen Interstate 10, then the
world's busiest road, in just over two months. Some had feared
it would take two years.
Chile's experience shows that a government is perfectly
justified in resorting to deficit spending to cushion a natural
disaster because of the shot in the arm it delivers to the
economy, said Alfredo Coutino, Latin America director for
Moody's Analytics.
"If one lesson can be learned from Chile's case, it is that
Japan's government has to make a quick move in terms of
implementing the reconstruction with a variety of funding
sources: issue debt, reallocation of public resources, and
international aid," he said.
Japan's problem is that its gross public debt, equal to
about twice GDP, is already the heaviest in the world. With an
ageing population posing an ever-growing burden on Japan's
public finances, rating agencies have sounded the alarm and
warned of possible downgrades unless politicians bury the
hatchet and come up with a plan to reduce the debt over the
medium term.
"The earthquake should lead to somewhat expansionary fiscal
policy. However, due to its already large deficit, it is
unlikely that the Japanese government would plan a large scale
fiscal stimulus," said Okubo, the Societe Generale economist.
YEN WILD CARD
The reaction of the yen in coming weeks is another wild card
in assessing the impact on Japan's economy. The Bank of Japan,
which meets on Monday, is widely expected to pledge as much
money as needed to prevent the repercussions of the quake from
destabilising financial markets and the banking system.
Economists also expect the central bank will signal its
readiness to ease monetary policy further -- even though its
policy rate is already near zero -- if the damage from the quake
threatens Japan's fragile economic recovery.
That prospect would normally weaken the yen, but economists
are keenly aware that the Japanese currency gained sharply in
the weeks after the Kobe catastrophe. It rose from 96 per dollar
in late February and briefly punched through 80 to an all-time
high on April 19, 1995, before reversing course after the BOJ
cut interest rates.
Trade tensions with the United States were a driving force
in 1995 and are absent today. A rush to bring capital back to
Japan, especially by insurers anticipating large claims, was
also a factor post-Kobe and could be again. But Jerram, the
Macquarie economist, doubted that history would repeat itself.
"Significant yen repatriation that could push the currency
higher and, at an extreme, disrupt global markets, looks
unlikely," he said.
Another "known unknown" is whether serious damage to the
Fukushima Daiichi nuclear plant will cause countries including
Britain, China and Italy to reappraise plans to boost investment
in nuclear power. If they do, it would be logical to expect
higher oil, natural gas and coal prices. (For related stories,
click on [ID:nN11262134] [ID:nN12287930])
"A serious accident like that will have repercussions in all
countries with nuclear," Bertrand Barre, scientific adviser to
French nuclear reactor maker Areva <CEPFi.PA>, told Reuters.
If there are clear lessons, we will apply them. We need to
take time to work out the consequences and act." France depends
on nuclear power for nearly 80 percent of its electricity
[ID:nLDE72B0FP]
Japan's earthquake is just the latest in a series of
unwanted shocks for the world economy, which is still far from
having shaken off the fallout of the 2008 global financial
crisis. Political turmoil in North Africa has reduced oil
supplies from Libya and raised the spectre of wider disruptions
to deliveries from the Middle East.
Food prices have climbed to record highs. The euro zone debt
crisis is far from over, with bond yields for Greece, Ireland
and Portugal at seemingly unsustainable levels. Policy makers in
the main economies who have slashed interest rates close to zero
and run up huge budget deficits would appear to have little
ammunition left to fire if consumer, business and investor
confidence takes a dive because of Japanese quake.
But economists at J.P. Morgan said it was important to bear
in mind that most, if not all of these shocks will prove to be
temporary and are unfolding against a backdrop of very strong
fundamental supports for growth, including booming industrial
production, improving labour markets and a 17 percent rise in
global share prices since September.
The bank has recently trimmed its forecasts for the United
States and the euro zone but its projection for global growth in
the first half of 2011 remains at a rate of 3.7 percent, which
is 1 percentage point above trend.
"Put differently, the shocks to date would have to magnify
considerably to push global growth below this trendline." the
J.P. Morgan economists said in their latest Global Data Watch
publication.
(Additional reporting by Braden Reddall in San Francisco, Simon
Gardner in Santiago and Kieron Murray in Mexico City)
((alan.wheatley@thomsonreuters.com; +86 1391 007 9146;
alan.wheatley.reuters.com@reuters.net))
(If you have a query or comment on this story, send an email to
news.feedback.asia@thomsonreuters.com))
Keywords: JAPAN QUAKE/RECOVERY
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