The Disaster Profiteers: How Natural Disasters Make the Rich Richer and the Poor Even Poorer (27 page)

The use of national reserves can have the effect of
increasing
the loss. In doing so, it increases the recovery time. That is because the initial loss,
L,
as well as the amount of reserve that has been drawn on to help effect recovery also have to be regained. The capital that is represented by
R
or
r
is
financial capital. It is not the same as the capital lost in
L,
which is built or manufactured capital, so it's really not correct to just add it on to
L
as I have done, but it illustrates the point. Financial capital will always be needed for recovery, but it is much better for many countries, especially poorer ones, if that capital comes from outside in the form of direct aid or a grant than if it has to come from the countries' reserve funds or loans because using reserves or loans also adds to a country's debt and hence requires repayment.

Drawing on reserves might be thought of as reducing losses, something that would make
L
smaller by shaving some losses off the bottom. But what is lost is lost. Expenditures to counter those losses are also lost in the sense that they are no longer available for other, more productive uses, and they also have to be replenished.

Whether the use of capital reserves has a positive or negative effect very much depends on what the reserve capital is spent on. If it is spent on temporary housing, cleaning up debris, or emergency health care, it is really lost. If it can be used to restore infrastructure, it could have a positive effect on economic recovery. One of the best uses of reserves is to reduce the stagnation period by getting things moving again quickly after a disaster.

Returning to an earlier question: What do we mean by a
disaster loss?
Figure 6 repeats one that we used earlier. The only difference is that we have filled in a triangular area.

The shaded area is the time integration of the losses accumulated from the disaster instant until the point at which recovery to the predisaster level of welfare has been achieved—
T
1
in the faster-growing case, or
T
2
in the slower setting. This integration of losses is much closer to expressing the true economic loss than the initial loss,
L
, described earlier.

The area of the lower triangle is larger than the area in the upper one even though the initial losses are the same.
3
That means that a slow-growing country could lose as much as a fast-growing country, even if it suffered smaller initial losses. So the slow-growing country could take longer to recover and have greater overall losses.

But the points on the recovery line are still below the counterfactual line—the line where the economy
would
have been had the disaster not happened. What recovery should mean is a return to the initial growth line, not the predisaster level of welfare. Figure 6 shows this.

Figure 6. The shaded area may be a better way to express disaster loss.

The economy was at point
A
before the disaster. At point
A',
the economy has returned to the initial level
A.
But, had the disaster
not
happened, the economy,
ceteris paribus,
would have grown to be at
B.

Thinking back to the US economy and its recovery from recession, in June 2014, the US Labor Department announced that the economy was finally employing as many people as it had been before the recession in 2007. So in this diagram, you can think of the vertical axis as jobs. In the US economy, we are at
A'.
What the Labor Department announced was, in
essence, that there has actually been
no
growth in employment in six years; catching up the amount lost cannot be thought of as growth.

The economy is growing again and has more or less reached its 2007 level, but it is nowhere near a projection of where it would have been had pre-2007 growth continued.

On the day of the announcement, the
New York Times
online edition produced an analysis of the recovery in 255 interactive graphs.
4
The purpose of the graphs was to show that the recovery has been very heterogeneous as measured in employment. The oil and gas sector has recovered to where it would have been had the recession not occurred—back to point
B
on our stylized plot in Figure 7. This may have been helped by the shale gas revolution.

Figure 7. Illustration of recovery to predisaster level and predisaster level plus expected growth.

Furniture stores, however, were not doing particularly well before the recession. They were hit very hard in the crisis and have not recovered their losses at all. The business, environment, and other consulting area has recovered to its prerecession level but not to where it would have been without the recession. So the businesses growth trajectory has recovered but not the absolute level of jobs.

The graphs in the
New York Times
show clearly that different sectors of the economy have experienced job recovery at different rates, including
what might be called a negative rate. Natural disasters will affect different businesses and different people differently. In a very broad analogy, perhaps we could think of Haiti after the 2010 earthquake as the furniture business. Perhaps the consulting business is like New Orleans after Hurricane Katrina. It's harder to find an example to match the oil and gas industry.

So, in a stylized way, what we really want to achieve is shown in Figure 8.

Figure 8. Full recovery occurs when the line representing recovery meets the line on which the economy would have grown had the disaster not happened.

Now the postdisaster growth line has met the expected growth trajectory and a different, larger triangular area is involved. What you notice right away about this is diagram that in order to meet the predisaster growth trajectory, the recovery growth line has to slope upward more steeply than the natural growth trajectory. That means that if an economy is ever to return to where it would have been without the disaster, it has to grow
faster
in the postdisaster recovery period than it did before.

In Figure 9, the two counterfactual growth lines are the same.

Figure 9. Full recovery at different recovery rates.

What is different is that the initial loss in the upper example is greater than in the lower example, but the rate of recovery is faster in the upper
one than in the lower one. The area in the upper example is clearly smaller than in the lower example. The upper case can be thought of as an economy capable of rapid response even in the face of large absolute losses. It more likely represents a well-developed country; the lower line represents a poorer situation.

Could there be a silver lining? Imagine that postdisaster growth was somehow made faster than in the predisaster period. A massive infusion of capital from outside the economy with no debt obligation and spent
exceedingly well might achieve that. Then why should that slope of high growth stop when the natural growth line has been reached? Figure 10 illustrates the idea.
5

What you have to imagine is the following scenario. In almost any urban setting, there will be old and new homes, new and old buildings, new and old bridges and roads and ports and other critical facilities. Images of cities in developing countries often show slums on the periphery, luxury high-rises in the center, and perhaps a beautiful beach behind.

In almost any type of natural disaster in a developing country, practically everything is damaged to some extent, but some structures remain fairly intact because, by intent or happenstance, they are stronger. It is reasonable to expect that the older, weaker capital stocks, including critical infrastructure, will be damaged far more severely than the newer capital stock. The old capital would normally be replaced with new capital that is better and more efficient in every way, if only because it's newer. Old roads and bridges are replaced with new wider, stronger roads and bridges. New schools and hospitals appear. The economy with newly replaced infrastructure critical to commerce should run faster than before. A forced technology upgrade led to greater growth.

Figure 10. Recovery overshoot.