The Economics
of Disasters
By Shahid Javed Burki
The northern areas of Pakistan
and the adjoining areas of Kashmir under Indian
control were ravaged by an earthquake on the morning
of October 8. Measured at 7.6 on the Richter scale,
this was the worst earthquake to hit Pakistan
since the founding of the country. In intensity
it equaled the 1935 tremor that destroyed much
of Quetta and took 50,000 lives, almost the entire
population of that city.
The recent earthquake’s epicenter was located
in the Hindu Kush mountains, near the town of
Garhi Habibullah, a small town close to the Line
of Control that separates the part of Kashmir
administered by Pakistan from the one controlled
by India. The epicenter was only 100 kilometers
north of the capital city of Islamabad. It took
the earth a while to settle down after going through
the convulsion that jolted most of northern and
eastern Pakistan. The big jolt was followed by
some 120 significant aftershocks measuring between
5 and 6.2 in magnitude. They were felt for 48
hours of the initial tremor. Another earthquake
hit the area on October 12, four days after the
big tremor.
Pakistan is located right atop one of the most
geologically disturbed places on the planet Earth.
According to one way of looking at the earth’s
crust there are about 36 floating plates which
the scientist Simon Winchester calls “rafts
of solid rock” in his recent book, A Crack
in The Edge of the World. The plates move slowly,
propelled by the Earth’s “molten innards,
the boiling and bubbling radioactive residue of
the planet’s formation 4.5 billion years
ago.” If they collide while moving they
send shock waves to the surface that can cause
great havoc depending upon their intensity.
The earthquake of October 8 occurred along one
of the great tectonic collision zones. The South
Asian subcontinent that includes Bangladesh, Bhutan,
India, Nepal, Pakistan, and Afghanistan rides
on a separate tectonic plate that was once attached
to the Antarctica plate. That was 150 million
years ago. It broke and began to move north. Some
50 million years ago the plate hit the Eurasian
plate; the Indian plate slid under while the Eurasian
was bent upwards.
The collision produced the Himalayas, the Karakoram
and the Hindu Kush ranges as billions of tons
of rock were squeezed out of the Eurasian plate
and sent into the sky as giant mountains. In geological
time the Himalayas are a relatively young range
of mountains. In fact, some of the peaks are still
gaining height and mountain ranges are still being
formed as the Indian plate continues to travel
north at a speed of 40 millimeters a year.
There will be more earthquakes in the future as
this geological positioning of tectonic plates
continues and as the Indian plate proceeds to
press against the Eurasian plate. In fact, in
1905 an earthquake on the Kashmir-India border
killed 19,000 people. The earth moved again and
on December 1964 an earthquake of 6.2 magnitude
struck the same area affected by the earthquake
on October 8 and killed 5,300 people. Pakistan
will remain vulnerable and so will its population
for centuries to come. For this reason the subject
of the economics of natural disasters is something
that should begin to interest the policymakers
in Islamabad.
However, this is not a well-researched or well-understood
subject, particularly in the developing world.
Most of the serious work in this area has been
done by insurance companies in rich countries
that have always to be ready to provide compensation
for those affected. The helter-skelter way in
which we have handled the tragedy brought upon
the nation suggests that we should prepare ourselves
better to deal with similar occurrences in the
future. There will be many more of these in the
future and the damage caused by them will continue
to mount as the size of the population goes on
increasing and as human beings press on into even
more remote areas to find new places to live.
It is incumbent upon the government and the people
to ready themselves for such occurrences and to
deal with all aspects of the tragedy once it occurs.
Being prepared is an important part of handling
situations such as these. The country was not
ready for this event. It could have been had it
assigned a higher probability of being hit by
an earthquake of this magnitude. Being ready is
one part of good governance.
There was a time when the administrations were
prepared to handle natural disasters. I recall
being told to make myself familiar with the plans
the British had drawn to deal with floods in the
low lying areas of the Punjab plains. This was
a part of our training as officers of the now
defunct Civil Service of Pakistan. As a district
officer, I had to be familiar with the evacuation
plans when the news arrived from the monitoring
stations upstream of a river that a flood of certain
intensity was approaching. High areas were identified
to be used for relocating the population out of
harm’s way when the river level began to
rise.
Once it was determined that the approaching flood
was of a given intensity, the district administration
moved quickly, requisitioned trucks and buses,
and transported the vulnerable people to designated
higher sites. I carried out one such operation
in Sheikhupura in the early 1960s when I briefly
served there as the deputy commissioner. My only
contribution to the effort was to give the go-ahead
to the launch of the operation which went like
clockwork once it was put into operation. District
officials were able to move to safe places thousands
of people within the space of a few hours.
But earthquakes are different; they strike without
warning. Each incident is different from the one
that preceded it. That notwithstanding, a better
prepared administration would do a good job once
it is confronted with a crisis. Only an extensive
network of relief centers linked with a disaster
relief administration would have succeeded in
providing timely aid to those affected.
The quake of October 8 was relatively shallow;
the clash of the plates occurred only 10 to 16
kilometers below the surface. Being shallow, it
sent many waves of tremor much further than would
be the case for a quake of this magnitude. The
shocks were felt as far away as Dhaka in Bangladesh.
A much wider area was affected and the rescue
operations have had to be directed to many places,
most of them hard to reach given the terrain.
A shallow earthquake is also more damaging since
the shocks are of greater intensity and can do
severe damage to the structures on the ground.
At the time of writing, it is still not clear
as to how many people were killed and injured
by the earthquake. The official toll has crossed
38,000, thousands more have been injured. Some
three to four million people have been displaced,
needing to be housed, clothed and fed as the weather
becomes less hospitable. The number of people
affected makes this earthquake one of the score
or so most destructive in recent history.
The earthquake in Tanshan, China, remains the
most destructive in terms of the loss of human
life. It struck this medium sized city on July
28, 1976, and killed an estimated 242,000 people.
The earthquake struck soon after the death of
Mao Zedong and many in China believe that the
earth shook at the shock of the death of the Great
Helmsman. The next most destructive quake in recent
history was the deep sea tremor on December 26,
2004, near Aceh, Indonesia, that took 220,000
lives. Thousands died from the tsunami waves generated
by that earthquake.
Can we quantify the damage to the Pakistani economy
by the October 8 quake? Will this disaster leave
a deep impression on the country’s economic
history and create serious economic repercussions
in the future? What can the government do to provide
relief immediately to those who have suffered
loss of life and property? Are there changes in
regulations that need to be put in place in order
to ensure that disasters of this magnitude produce
losses that are not as severe? Should Pakistan
also create institutions that can provide some
security to the people affected by natural disasters?
How should the county prepare itself to deal with
such occurrences more efficiently and effectively
in the future? These are all important questions.
It is not too early to ask them since the way
the relief effort is undertaken will shape hundreds
of thousands lives. It will also leave a strong
imprint on the Pakistani economy and society and
possibly also on its political system.
Natural disasters come in many forms and damage
physical assets as well as take human lives. Earthquakes,
fires, floods, hurricanes and landslides are some
of the most obvious occurrences that bring great
damage and tragedy in their wake. To these we
should also add disease and pestilence that affect
human beings more than economic assets. Asset
damage is not hard to estimate, particularly in
the urban areas where better records and information
exist. Such evaluation is considerably more difficult
in the countryside.
Insurance companies usually work on estimating
the replacement value of the damaged asset since
the cost of recreating them in their original
form is not a good measure of the economic loss.
Thus if a fire or a flood destroys a factory,
most insurance companies will pay for recreating
the lost asset. What is being protected is the
stream of income that was being produced over
a given time by the destroyed or damaged asset.
Given the number of people involved, the areas
in which they lived, and the nature of the economic
activities in which they were engaged in, the
loss of economic assets would be of about $10
to $12 billion, according to a rough guess. In
normal times, these assets would generate aggregate
incomes of about a $1billion to $1.25 billion
a year. This loss of assets will most likely reduce
the annual GDP growth rate by about one percentage
point a year in the next one to three years. My
estimate of the impact on economic growth is higher
than those provided by ABN Amro and some other
analysts.
But this is an estimation of the loss of economic
activity generated by the destruction or damage
done to economic assets. Human beings are also
economic assets; loss of human life or injuries
that incapacitate also cause severe economic loss.
Some years ago, the World Bank developed a model
to estimate economic loss because of health problems;
applying the same model to Pakistan, I would guess
that another quarter percentage point would be
lost because of the human impact of this strategy.
It is easier for economic assets to be rebuilt
which is why, as I will discuss in my next article,
even major natural disasters do not have a long-lasting
impact. However, human capital is not easily replenished
and its loss can be felt for a long time to come.
In other words, the deaths and injuries will have
a longer lasting reduction in GDP growth than
the loss of assets. (Courtesy Dawn)
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