Destructionomics: Do catastrophes improve our infrastructure?
Climate change seems to have had quite some impact on the planet the last few years. Hurricanes have devastated parts of the US and the Caribbean Islands, the drought during last summer has scorched the earth of many countries and the increasing amounts of floods and landslides in Asian countries have whipped thousands of houses and lives. This has a tremendous impact on our infrastructure of today. However, weirdly enough, some TV pundits, while deploring the losses, seem to rejoice themselves with these disasters.
Why? Quite simple: it is widely believed that this could give a boost the US growth numbers. The need for new infrastructure and the thousand’s dollars in investments will induce higher demand and therefore create jobs due to the reconstruction of the destroyed commodities. Simple right?
However, reality is never as simple as it seems. This thinking begs the question of understanding further the impact of these disasters on infrastructure. Economist debate 4 theories on the effect of a destructive disasters on the wealth of a country:
The creative destruction theory: This theory speculates that after a hurricane growth will rise sharply due to the reconstruction. The amount of wealth of the people would not be impacted due to the rise of growth (and thus income). Finally, the long-term growth would also be higher, due to the fact that obsolete capital goods are now replaced and mistakes of the past (e.g. too narrow streets) can be corrected after its destruction.
The Build back better theory: This theory argues that at first the wealth of the people would have got a negative impact. However due to higher short-term and long-term growth the people. The reasons are similar as the ones mentioned in the creative destruction theory.
The recovery to the trend theory: This theory believes that in the short term the wealth of the people would take a hit. However, in the short-term growth would also take a boost. This boost is due to the rebuilding of the infrastructure and goods. Once this recovery has been achieved the growth would again continue with the growth trend before the crisis.
The No recovery theory: This theory is the most pessimist one. Due to the natural catastrophe the economy took a hit. The economy will never be able to fully replace the infrastructure and goods who were lost due to scarcity of resources. The people end up less wealthy.
These theories are hotly debated by economists and pundits, as the opinions differ quite dramatically. It is indeed counterintuitive to think that the destruction of something could lead to more production. However, it does also make sense that if some buildings or other infrastructure are destroyed, that we could replace it with some greater replacements. This whole debate is not helped by the fact that it is quite difficult to research this matter as it is difficult to predict or judge where a city or a country would have been if the disaster wouldn’t have happened.
However, in 2014 an influential paper by Solomon M. Hsiang, who used the data about the effect of around 6000 hurricanes, cyclones or typhoons, tried to give empirical evidence to one of these. It tried to compare “similar” cities and countries to judge the impact of the disasters. The conclusion of the paper seems to support the theory of no recovery. An economy would never convalesce to its previous statefrom a Hurricane and thus the long-term growth would suffer enormously from it.
This paper had quite some consequences as it indicated that prevention would be a better policy choice to reconstruction as an answer to natural disasters. Creating infrastructure that protects countries or withstands extreme external forces would be recommended to offer a better economic result for countries.
This well accepted result was however recently challenged through diverse new results found in the economic historic analysis of the London Blitz bombings. Gerards Dericks and Hans Koster have researched how neighbourhoods who were more intensely bombed during the Blitz faired against those who remained relatively unharmed. They discovered that areas affected more harshly by the bombings had more permissive construction policies (as the buildings and streets were destroyed and thus needed to be replaced), which lead to an increase of the annual growth rate by 1.2% 5or 39% of the annual growth rate).
How can we marry those 2 extremely different results? We can point firstly at the big differences between the research subjects. London being an ancient city who has been founded hundreds years ago and had grown organically during the years. Adding to this fact that London possessed sometimes extremely old infrastructure and city planning structures. The developments of the Caribbean and Pacific islands are much more recent and possess thus much younger infrastructure. It would therefore not be irrational to think that the importance of which infrastructure is being destroyed is an important element. Finally, initial planning and rebuilding policies are crucial to see potential additional growth from infrastructure destruction.
These studies just show the tip of our understanding of this phenomenon and it is clear that we are far from understanding all the mechanics of destruction. Understanding the effect of destruction of each asset type is an important first step to give any conclusive answer. It is thus an interesting new field that opens up and that will need further innovative research, before we could make any decisive conclusions.
WRITTEN BY ALEXIS MERGAN FOR BESA
PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT