17 Nov 2016

The fallacy of disaster economics

From Jesse Mulligan, 1–4pm, 2:18 pm on 17 November 2016

The idea there is an upside to natural disasters – that they are good for the economy - is ‘a figment of our imagination’, economist Shamubeel Eaqub says.

Christchurch construction.

The construction sector in Christchurch is booming after the earthquakes. Photo: RNZ / Alexander Robertson

Eaqub told Afternoons there is a tendency to think there is a net-economic gain as a result of natural disasters such as earthquakes, because they prompt lots of visible economic activity such as cleanup, construction and repairs.

He says it's akin to digging a hole and then filling it up again.

“It frustrates me a great deal because it is a figment of our imagination.

“If you look at the reality of what is happening in Canterbury … and see how people’s lives have been affected, yes there is all this work going on to clean it up and to build new buildings.

“But what would have happened if the earthquakes hadn’t happened – and who wins and who loses?”

He says the construction sector in Canterbury boomed after the quake but it was a short-term boost, and did not take into account the wealth and job losses and the failing businesses, particularly in the CBD.

“With the weaknesses of measures like GDP, what we tend to do is we try and count up all the things that are happening, but we don’t count all the things that have broken.

“There is none of that actually entering into the equation.”

People thought of the rise in economic activity as a kind of stimulus, a free hit, but this is not correct, Eaqub says.

"The increase in insurance premiums meant money is spent there when it could have gone on other things that might have created greater growth."

"That meant that as a result of that event we were all a little bit worse off but, because it was distributed over so many people, it is not as visible as the big positive construction activity we see in Canterbury.

‘It’s never a good thing to break things, because that means that you’re going to have to replace it rather than create something new,” he says.

Some positive results of a natural disaster included the chance to update infrastructure, clear out marginal business to make way for more innovative firms, he says.

Economist Shamubeel Eaqub

Photo: RNZ / Claire Eastham-Farrelly