Advancing a Free Society

The Economic Costs of Natural Catastrophes: History’s Lesson for Japan

Monday, March 14, 2011

The earthquake that struck Northern Japan on Friday is a human disaster of frightening dimensions. Early estimates place the loss of human life at ten thousand, but such a figure will regrettably prove a gross underestimate. Our first thoughts go to those victims, killed, injured, or suffering the hardship of little food and no electricity.

The Japanese markets opened as usual on Monday morning. Not unexpectedly Japanese stocks fell five percent, and the discussion of the earthquake’s economic cost to Japan has already begun. Talk has turned to how much Japanese GDP will be lost, thereby compounding the problems of Japan’s feeble recovery.

In such cases, economic historians are naturally drawn to past natural catastrophes and their effects on economic output. Some of the worst natural disasters occurred in a past, so remote that we do not have the necessary statistics. Also, we must recognize that historical statistics are much less inaccurate than the current ones, especially when it comes to estimating annual figures. With these reservations in mind, my methodology is to take the country’s GDP the year prior to the natural disaster and then calculate the loss of output until GDP returned to or exceeded its pre-disaster level. This is a primitive method. The correct method would be a counterfactual analysis of the loss of output as measured by what output would have been in the absence of the disaster.

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(photo credit: Official U.S. Navy Imagery)