The Disaster Profiteers: How Natural Disasters Make the Rich Richer and the Poor Even Poorer (2 page)

Chapter 1

Natural Disasters

Agents of Social Good and Evil

Are natural disasters good or evil? That question, you might think, hardly merits asking since we all think we know the answer. Surely their effects have been relentlessly harsh and endlessly destructive. How could they have anything but a bad effect? People who live in disaster-prone regions of the world must have a tougher time making social progress because they constantly use their financial resources to rebuild rather than to invest in new institutions and structures like schools, public health systems, and judicial systems that bring about social progress. Even if help for rebuilding comes from donor funds or the World Bank, people still are only restoring everything to the way it was, with perhaps a bit of a face-lift, rather than promoting social progress.

This chapter shows that disasters are not as well-understood as we might think and that the good and the evil that result from natural disasters are not doled out equally.

Despite massive and heroic efforts by the United Nations (UN) and a huge number of country-based agencies, as well as uncountable
nongovernmental organizations (NGOs), all aimed at reducing the risk of disasters, they
will
still happen. There is no evidence at all that people want to avoid settling in disaster-prone places, no matter how well aware they are of the risks. If anything, the evidence is to the contrary. In some small countries, such as small island states, the entire country may be disaster prone. We may eliminate the effects of small disasters and mitigate the effects of modest-size ones, but nothing that human ingenuity can muster will save us from the most massive of Nature's tantrums, at least not for the foreseeable future.

It makes sense to believe that disasters are uniformly bad but only in an immediate, reactive, instinctive System 1–thinking sort of way. Destruction all around and deaths in the thousands are certainly tragic. It is fairly indisputable that they are bad in an immediate way—death and ruin can hardly be seen as good (unless by a victorious army)—but the long-run effect is much less clear. It is surprisingly difficult to prove in any rigorous way that natural disasters are bad things in the
long run.

Using the standard measure of gross domestic product (GDP) to describe social welfare and the statistical tools of econometrics that today's economists and political scientists rely on so heavily, it is possible to gain insight into some of the subtlest socioeconomic processes that influence our lives.

Natural disasters are hardly subtle, yet the few econometric studies that exist give contradictory results. Some say disasters hardly matter at all; some say all have negative economic consequences; others say some disasters under certain conditions can have a positive effect (e.g., floods often appear beneficial
1
); still others say that, on balance,
all
disasters have a positive effect.
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Many of today's social scientists use randomized control trials (RCTs) wherever possible as a basis for their research. RCTs were first advanced for testing new drugs by comparing outcomes for treatment
groups (whose members got the drug) and control groups (whose members received a placebo). That's rather hard to do with natural disasters. The difficulty of finding rigorous proof of the harm caused by natural disasters may stem, at least in part, from the tools of modern social science, which are not suitable for the problem. Moreover, using even GDP has come under fire from prominent economists, including Joseph Stiglitz, the Columbia University Nobel Prize winner, because it doesn't measure social progress well at all, especially in poor regions where disasters might do the most harm. One of the major issues with using GDP is that a large fraction of the economies of poor countries is “informal,” meaning that production is not performed by workers who receive a salary from an employer in the way we are used to in the West. No taxes are gathered on this work, and the government has no real way of knowing how much informal production is taking place. Poor countries often have bustling economic activity that is not captured by GDP. Yet, if the tools of modern social science fail us, how are we to know what disasters do besides the brutally obvious effect of causing death and destruction? How
could
they affect societies positively?

You can come up with plenty of examples and counterexamples to support or dispute any variation on the outcomes of econometric analyses. Japan experiences typhoons, earthquakes, tsunamis, and volcanic eruptions, yet until recently it was the second-largest economy in the world. So perhaps disasters are good for Japan, or perhaps the Japanese have learned how to deal with them swiftly because they experience them so often. The recent decline of the Japanese economy has nothing to do with natural disasters and more to do with disastrous economic decisions, a declining and aging population,
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and a suite of other factors. And the horrifying earthquake and tsunami of 2011 actually didn't set the Japanese economy back, no matter how weak it
is often now said to be, by very much or for very long, despite almost universally dire predictions of collapse with global repercussions.

Chile is buffeted by disasters much like Japan, though it does not experience cyclones and is the wealthiest country in Latin America. Does that mean earthquakes are dealt with more easily than cyclones? Argentina has experienced several highly destructive earthquakes but is otherwise almost disaster free, and its economy has been sliding backward for decades now.
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Until 2010, Haiti hadn't experienced a serious earthquake for 200 years. Yet it has one of the worst economies in the world and is the poorest country in Latin America and the Caribbean—and not by a small margin.

In contrast, the areas of western Europe where the Industrial Revolution took off are fairly safe places. They don't flood much and almost never have hurricanes or serious droughts. Had those regions been prone to earthquakes or massive storms, say, mining the coal that fueled the power plants and factories and ignited the rise in human welfare that came with the Industrial Revolution might well have been more of a challenge.

Detroit is supposed to be the safest place in the United States for people who fear natural disasters. Perhaps the auto industry would not have taken off in Detroit had it been in Tornado Alley or an area prone to earthquakes or flooding. The decline and bankruptcy of Detroit has nothing at all to do with natural disasters but rather with the disastrous decline of the US auto industry and other economic factors. Apart from occasional winter storms that cause a few days of disruption, New York, the financial and cultural capital of the United States (of the world, most New Yorkers would say), has a fairly benign climate.

The idea that societies
could prosper from disaster in the long run, as some econometric studies suggest, is, not surprisingly, quite
controversial. Mark Skidmore and Hideki Toya first put the idea forward in an article in
Economic Inquiry
in 2002 with the provocative title “Do Natural Disasters Promote Long-Run Growth?”
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They used the standard tools of econometrics to show that for meteorological disasters like floods and hurricanes, disasters have positive returns. That is, climate disasters were found to be good for the economy—the more disasters the better, in fact. Not so for what they call geological disasters, meaning earthquakes for the most part. They are negative in their effects. Note that the article described “long-run” effects, and the authors studied economic growth over many years in quite a few countries. Often during the rebuilding phase a boost mainly benefits the construction industry (and not necessarily the local industries, which may be damaged by the disaster), but that boost should be short-lived. Skidmore and Toya say, however, that the effect is lasting.

The explanation for a positive return draws on the work of the Austrian economist and political scientist Joseph Schumpeter (1883–1950), who was on the faculty at Harvard University from 1939 until 1949.
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The idea goes under the somewhat disarming term
creative destruction.
Schumpeter also called it “industrial mutation” and wrote that it “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.”
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Schumpeter wrote about the creation of new businesses rather than the effects of natural disasters, which he never once mentioned. One of the most commonly cited examples of creative destruction is the rise of personal computers, which harmed many mainframe computer companies and put several out of business. What is new is far better than what is old, but the new does harm the old.

It is easy enough to map the thinking behind Schumpeter's theory—the gale of creative destruction, as it is sometimes called—into
the analysis of disasters. It is posited that rather than destroying old businesses through new business innovations, disasters destroy old, inefficient capital, clearing the ground for new, more productive capital development. Old capital stocks are replaced by newer, better capital. Disasters force technology upgrades that benefit many businesses and the economy as a whole. But does this really happen? Who really rides the gale to a better life?

There is, in fact, some evidence that creative destruction does happen, sometimes. Two months after the 2008 Sichuan earthquake, journalist Drake Bennett, writing in the Business section of the
New York Times,
quoted a Chinese government source as saying that the rebuilding would boost the economy by 0.3 percent in GDP growth.
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Bennett also quoted one of the earliest findings of this type by Douglas Dacy and Howard Kunreuther. In Dacy and Kunreuther's
Economics of Natural Disasters,
they reported that government loans and grants for rebuilding after the 1964 Anchorage earthquake meant that many Alaskans actually benefited overall.
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This is more than getting back on your feet quickly; it is an actual improvement in welfare compared to where Alaskans would have been had they not been knocked off their feet by the earthquake.

Betty Hearn Morrow claimed in a book titled
Hurricane Andrew: Ethnicity, Gender and the Sociology of Disaster
that many homes were improved in the reconstruction and that people often made comments like “come see the new bathroom that Andrew built.”
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Restored public housing was often of better quality, and some people were able to become homeowners for the first time.

This
can
work, and it would be wonderful if it would
always
work. No one with insurance would replace a kitchen that burned in a house fire with the exact same appliances as the ones they had before. Since it is a chance to upgrade, you would get new models—a forced technology upgrade. But the only way this could happen in a poor
country would be if the World Bank and other donors acted quickly to build new structures before people simply replaced the old with replicas of what came before. As we'll see later, Haiti is the perfect example of such replacement.

It is plain enough to anyone that disasters
do
bring harm, so the fact that we can construct imagined scenarios in which they don't must, at some level, be a ruse or a flaw in economic logic or methods.

How, exactly, in real situations, can disasters operate as agents of social change, and how will they do so in the future? Do disasters accrue benefits to some while bringing harm to others?

If we are to understand what impact natural disasters have, we need to define what exactly they are. The word
disaster
is used to describe so many different incidents, many of which are completely trivial and, objectively, not disasters at all. Quite a range of definitions can be found in dictionaries, but most include some sense of suddenness and loss. For example, the
Oxford Dictionary
defines the word as:

Dis•as•ter
1. A sudden event, such as an accident or a natural catastrophe, that causes great damage and loss of life. 2. Denoting a genre of films that use natural or accidental catastrophe as the mainspring of plot and setting. 3. An event or fact that has unfortunate consequences. 4. A person, act, or thing that is a failure.

Sometimes the definition includes business failures. Many dictionaries list airplane crashes as examples. The root of the word is the Italian
disastro,
meaning “ill-starred.” The sense is astrological, of a calamity blamed on an unfavorable position of a planet.
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The sense, then, is of something far outside of what human societies can be considered responsible for.

The
Oxford
definition is general to all disasters but encompasses the elements of what we mean by a
natural
disaster. The scale of natural disasters is usually measured in human losses—deaths—and economic losses. Neither is simple to estimate, and they are poorly correlated—a large death toll does not imply large economic loss; nor is the reverse true.

There is no agreed minimum number of deaths required for an incident to qualify as a disaster. The defining factor here is really the number relative to our expectations of what the number should be. If a traffic accident kills a dozen people, it probably would be considered a disaster because we don't expect everyday traffic accidents to claim so many lives. A dozen separate fatalities one at a time would not be a disaster, even though the total number of deaths is the same. A school shooting
is
a disaster, whatever the number of deaths. One death makes it a tragedy because we rightly expect the number to be zero. When more than 300 schoolchildren die in a ferryboat accident off South Korea, it is a disaster. It is the simultaneity and the unanticipated nature of disaster deaths that tell us that something unusual and unusually bad has happened.