NCPA - National Center for Policy Analysis

Human Capital Helps Economies Recover from Disasters

September 20, 2001

Economists are being asked what the total economic impact of the destruction and disruption in business activity caused by the terrorist attacks last week will be. They are looking to past experience with wars and natural disasters for answers.

Most research finds that natural disasters like earthquakes and hurricanes have a relatively small impact on the economy. For example, in the most destructive earthquake ever in a modern city -- the 1995 quake in Kobe, Japan -- some 100,000 thousand buildings were destroyed, 250,000 damaged, and 300,000 people became homeless. And 6,500 lost their lives.

  • A recent study by George Horwitch, a Purdue University economist, found that within 15 months manufacturing output returned to 98 percent of its pre-earthquake trend level.
  • By July 1996, all department stores and 79 percent of small shops had reopened, and investment boomed.
  • Similar economic recoveries occurred after Hurricanes Andrew and Hugo and other natural disasters.
  • And despite a manmade disaster, the severe bombing of German cities in World War II, German economic output grew 148 percent from 1947 to 1955, well surpassing its prewar level.
  • The major reason cities and countries are able to recover so quickly, say economists, is that the knowledge and skills of citizens survives intact, and in modern economies, this human capital accounts for as much as 70 percent of national income.

However, there may be lingering economic effects from disasters that can affect long-term recovery. Newark, N.J., for example, never fully recovered from riots in the 1960s. And the results of studies by James R. Hines Jr. and Christian Jaramillo of the University of Michigan of the effects on economic growth of 728 earthquakes in 97 countries in the postwar period, suggest that although severe natural disasters do not affect short-term growth, they do reduce Gross Domestic Product around two percent three years later.

Source: Alan B. Krueger (Princeton University), "Gross Domestic Product Vs. Gross Domestic Well-Being," Economic Scene, New York Times, September 20, 2001.


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