Authored by: Ayanna Revilla, Ethan So, Nathan Tecson
Edited by: Andrei Dimaculangan, Jared Go, Elijah Soriano
Source: Bing AI
Introduction
Natural disasters are catastrophic events brought about by natural shifts in the environment. Whether it be earthquakes, volcano eruptions, floods, or tsunamis, natural disasters can cause significant damage to the areas they affect.
Oftentimes, natural disasters upend the local economy, displace communities, and even cause loss of life. For this reason, humans for the longest time have feared the occurrence of natural disasters.
However, beyond its harmful effects, can natural disasters bring about a positive impact on the areas it affects? Or at least economically?
Monetary Inflows as a Short-run Effect
When disasters strike, it immediately causes the economy to come to a halt because key infrastructure is destroyed. Essential utility services such as communications, water, and electricity are disrupted. Homes, buildings, roads, and ports are likewise devastated.
As a result, productivity falls and businesses are forced to close down temporarily.
In response to this, governments and central banks are forced to adopt expansionary policies to cushion the economic downturn and help the economy recover. This can be in the form of fiscal policies where the government allocates funds for the aid and relief of disaster-affected communities. This can also be in the form of monetary policies where the central bank adjusts interest rates to bolster private and public borrowings. In addition, organizations, both foreign and domestic, come together to donate various amounts to help and send aid. Either way, there is generally an uptick in monetary flows after calamities to help rehabilitate the economy.
Japan’s 2024 Noto Earthquake
This is exactly what happened in the most recent 7.5 magnitude earthquake in the Noto Peninsula of Japan that struck on New Year’s Day of 2024.
Over 241 deaths and 1300 injuries were reported (Kantaro Komiya, 2024). Buildings and homes were wiped out by the earthquake and the tsunami. According to Japan’s cabinet office, the total cost of damage was estimated to reach 2.6 trillion yen ($17.6 billion). This was the strongest earthquake to strike mainland Japan since the 2011 Tohoku earthquake (Kantaro Komiya, 2024).
Given the high level of damage brought about by the aforementioned earthquake, expansionary fiscal policy measures were naturally enacted. Aside from the deployment of rescue and relief personnel, the government allocated 4 billion yen ($28 million) from reserve funds for disaster relief efforts (Kyodo News, 2024). The government also pledged 3 million yen ($20,000) for families who lost their homes in the earthquake.
Source: TradingView
Interestingly, the earthquake triggered a monetary policy response as well. Over the past few months, the Bank of Japan (BOJ) was making moves indicating that they intend to shift away from negative interest rates, and a policy known as Yield Curve Control (YCC). Doing this would require them to raise interest rates and allow bond yields to increase, both of which may have a contractionary effect.
In a statement after the earthquake though, the BOJ’s governor Kazuo Ueda stated that the “BOJ will be fully prepared to support the financial system after the earthquake” (Hidaka & Teso, 2024).
This statement indicates the need for expansionary measures, making it harder for the country to achieve its much needed monetary policy shift. Furthermore, this may have been priced into the market too which is indicated by the Nikkei225 dropping after the earthquake as shown above.
Infrastructure Development as a Long-run Effect
It is difficult to predict the effects natural disasters may have on the economy in the long run. During the onset of a natural disaster, certain macroeconomic variables are affected, such as natural resources, physical capital, human capital, and technology. Natural disasters devastate natural resources, making agriculture, fishing, and other key economic activities impossible. They also cause physical injuries and casualties which leads to a decline in the labor force. Thus, most may deem natural disasters as something that brings about the downfall of an economy.
However, according to Skidmore and Toya (2002), while disasters generally impede growth, some may bring about a positive impact on the economy.
While natural disasters may cause harm, they also present potential opportunities for the economy to restore and upgrade existing infrastructures and technologies. New and improved infrastructures such as factories, buildings, and roads can create business environments conducive to long-term growth. This also includes developing more robust systems and facilities to combat and prevent future disasters. In addition, this can stimulate economic activity as investments lead to the creation of jobs. However, this opportunity is largely dependent on the reconstruction efforts of the country.
Japan’s 2011 Tōhoku Earthquake and Tsunami
Japan is a testament to how a country can rebound even after a calamity. The Great East Japan Earthquake and Tsunami of 2011 was the fourth most powerful earthquake recorded in the world. It caused massive destruction, loss of life, and infrastructure damage at an unprecedented scale. After a decade-long recovery, Japan has heavily invested in building resilient infrastructures and fostered strong social cohesion to ensure disaster preparedness. Anti-tsunami defenses, earthquake detection systems, telecommunications, and transportation are just some of the many infrastructures that Japan has invested in (Takemoto et al., 2021). Equally, community engagement and private-public partnerships have also played an important role in developing disaster preparedness. While Japan has come a long way, the country notes that resiliency is a continuous and iterative process. This highlights how adaptive planning creates growth opportunities even in the aftermath of a great disaster.
Although natural disasters are inherently unfavorable, there are cases where calamities can be turned into opportunities for growth and development.
With Japan as a primary example, the country serves as a fascinating case study of how people and institutions can come together to become more resilient and stronger as one. While this article mostly argues the possible positive effects of natural disasters, this is by no means meant to undermine the effects of disasters and the damage it may cause to thousands if not millions of lives it affects. Instead, it is meant to explore the interesting economic phenomena of how people and economies interact with one another in the face of calamities.
References
Banica, A., Kourtit, K., & Nijkamp, P. (2020, August 18). Natural disasters as a development opportunity: A spatial economic resilience interpretation - review of Regional Research.
Kantaro Komiya. (2024, January 25). Japan warns of economic impact of Noto earthquake - govt report. Reuters. https://www.reuters.com/world/asia-pacific/japan-warns-economic-impact-noto-earthquake-govt-report-2024-01-25/
Hidaka, M., & Teso, Y. (2024, January 5). Yen falls as earthquake raises bar for BOJ to end negative rates. The Japan Times; The Japan Times. https://www.japantimes.co.jp/business/2024/01/05/economy/quake-raises-bar-for-boj/
Iturrizaga, M. (2019, May 10). Recovering livelihoods after disaster strikes. UNDP. https://www.undp.org/blog/recovering-livelihoods-after-disaster-strikes
NHK. (2024, January 26). Japan estimates damage from noto quake to cost maximum 2.6 trillion yen: NHK World-Japan News. NHK WORLD. https://www3.nhk.or.jp/nhkworld/en/news/20240125_36/
Popp , A. (2006). The Effects of Natural Disasters on Long Run Growth . Scholarworks. https://scholarworks.uni.edu/cgi/viewcontent.cgi?params=/context/mtie/article/1095/&path_info=
Takemoto, S., Sakoda, K., & Shibuya, N. (2021, March 17). Learning from Megadisasters: A decade of lessons from the Great East Japan earthquake. World Bank. https://www.worldbank.org/en/news/feature/2021/03/11/learning-from-megadisasters-a-decade-of-lessons-from-the-great-east-japan-earthquake-drmhubtokyo
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