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In Depth: Natural Disasters
Economies: The road to recovery

Need for realistic measurements, targeted use of resources

Photo: Rhonda Braden surveys the damage from Hurricane Katrina to the residential street in Long Beach, Miss., where she grew up. AP Photo.

The economics of natural disasters is volatile, deceptive, and challenging but not entirely bleak, say MIT Sloan economists and NGO leaders.

From the glass-half-full standpoint, these upheavals spark renewal and catalyze long-needed change — but it will take exceptional dedication, determination, and the smart use of resources. A not inconsiderable “if” from the perspective of many experts.

MIT Sloan Dean Richard Schmalensee believes that storm-ravaged New Orleans will rebound within a decade. “It will recover,” he says, “though it may never be the tourist Mecca it once was. The city can be viable for the same reasons it was in the first place: the port and the oil.”

MIT Sloan Professor Kristin Forbes, a recent member of the White House Council of Economic Advisors, is also cautiously optimistic for the future of the Gulf Coast region. She expects the area to follow a traditional post-disaster growth pattern — an initial sharp contraction in output, followed over time by a surge in growth. Such a rebound was seen in the aftermath of Hurricane Hugo, when reconstruction proved a boon for the economy of stricken states.

But Forbes points out that the economy will reflect this surge without taking into account the losses, an anomaly of how we calculate the GDP — the Gross Domestic Product, the total value of goods and services produced by a nation.

“When you build something new, it's reflected as an addition to the GDP,” she notes. “When you lose a building, it's not subtracted from it, so the post-disaster growth results in a somewhat deceptive increase in economic growth.”

Far-reaching impact
Similarly, Forbes says that because of the level of poverty in Pakistan and Indonesia, the overall economic fallout in those countries might be calculated as less, but she cautioned against measuring the impact of a disaster with such a superficial yardstick. In human terms, the toll was far greater.

MIT Sloan Professor Tom Kochan agrees that the local economies in developing regions hit by disasters will be devastated. He also says that there is bound to be less of a chain reaction through those economies than will be the case in the United States. Kochan, who recently spoke during MIT's Big Questions After Big Hurricanes symposia, believes that in terms of economic fallout, the United States will feel a powerful impact from Katrina and Rita for a long time to come.

“Because of the impact on the energy industry, two of the most vulnerable industries are airlines and automobiles, and those losses will ripple through the economy and put more industries at risk,” Kochan says. “Then there's the whole impact on the federal budget. If the price tag is $200 billion, there's no way we can deal with this unless we find a way to repeal some of the tax cuts or raise revenue in some way, because the effects of adding to the deficit and passing these costs on to the next generation will be significant. We will find ourselves in a real economic crisis when foreign countries no longer trust that we can repay the debt.”

Kochan proposes that the government launch an economic and social reconstruction fund modeled after initiatives like the Tennessee Valley Authority, which would offer incentives to the private sector to help provide food, housing, health care, and educational and social services for displaced families as well as the resources needed to finance the recovery and rebuilding process.

Need for microfinancing
Kofi Annan, Secretary-General of the United Nations, is also concerned about the big picture issues that these disasters have illuminated. Speaking at the U.N.'s International Day for Disaster Reduction on Oct. 12, he called 2005 “a year of profound lessons.” We cannot stop natural calamities, he warned, “but we can and must better equip individuals and communities to withstand them. Those most vulnerable to nature's wrath are usually the poorest, which means that when we reduce poverty, we also reduce vulnerability.”

Annan, a 1972 graduate of the MIT Sloan Fellows Program, noted the urgent need for microcredit in developing countries. “It's time to recognize that microfinance can help empower those with little or no access to traditional financial institutions, thereby reducing disaster risk and improving disaster management.”

The Secretary-General went on to urge “governments at all levels, international organizations, civil society groups, and the private sector to invest in poverty reduction and disaster prevention in order to build resilient communities and save lives.”

Bruce S. Gordon, president and CEO of the NAACP, also believes strongly that economic stability reduces vulnerability to natural disaster. In the wake of the hurricanes, Gordon toured the Gulf Coast region and set up a disaster relief operation at the NAACP that has reunited more than 100 families and provided relief to more than 2,200.

Gordon, a 1988 graduate of the MIT Sloan Fellows Program, called on President Bush to make certain that those displaced by the storms would also have a role in reconstruction. “We want to make sure that going forward there are safeguards to assure that people displaced by Hurricane Katrina will be the first in line to get jobs rebuilding the affected areas,” he said in a statement released by the NAACP.

Kochan shares those concerns. “There's a real danger that by lowering wages and taking shortcuts on employment standards and contracting rules, we'll enrich contractors but fail to help rebuild the economy for the people who will need it most. The key principle should be to give all adults displaced by Katrina who are able and willing to work access to training and a guaranteed job in the cleanup and rebuilding process.”

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