ECONOMICS : A shakeup for the economy

In the aftermath of the Canterbury disaster, several commentators saw the silver lining. Cleaning up amounted to giant stimulus package for the country’s struggling construction industry.
For the economy generally, the quake would have sharply adverse impact on gross domestic product in the short term, but probably positive one over longer period.
Westpac and ASB economists, typically, were reported to be forecasting slowing in economic growth in the coming months. But reconstruction was likely to more than compensate for the short-term slowdown (it may even drive inflation up in the Canterbury region, as demand soars for building materials and trades people to carry out construction and repairs).
But economists who talk of this stimulatory shot for GDP are not saying earthquakes are good for the economy. This is easily explained: Canterbury has 13 percent of the country’s population and contributes 15 percent of national GDP.
If rebuilding city is good for the economy, we should hope for many more 7.1 earthquakes elsewhere in the country. Auckland would be good starting point. The devastation there would offer the building industry (and GDP) much more robust shot in the arm than – let’s say – Gore.
Economist Brent Wheeler expanded on this. He included himself among the economists who agree there will be increased activity generated by the “re-building” of Canterbury, but explained why this does not necessarily make up for the loss nor add to economic output. He mentioned the opportunity costs involved in glaziers being diverted from what they were already doing, the profits lost while reconstruction takes place, and so on.
But new buildings and reconstruction will involve modern materials. The buildings will be likely to last longer, deliver better performance, and be earthquake-proof. New techniques and improved productivity will get things being done faster, more efficiently and (probably) more safely.
So, said Wheeler: “It is true that we cannot vandalise our way to heaven and that Mother Nature playing vandal is neither helpful nor pleasant – but it is also true that opportunity abounds in building new ways forward for communities which are likely stronger not weaker than they were.”
Marty G, blogging at The Standard, gave similar account of the effects, but used more sobering language, noting – for starters – the immediate shut-down of the economic heart of Christchurch, the extensive damage to factories, shops and so on, and the disabling of large parts of the capital and labour needed for production. Some recession-hurt businesses would go to the wall; job losses would be huge; the government would lose tens of millions of dollars in tax revenue and face big increases in costs from emergency benefits…
In the medium term, when the money spent on rebuilding is spent, the country’s physical wealth will have been returned to where it was before. There will be no real economic gain.
More critically, stimulus package gets the economy revved up again and builds up its production capacity but the rebuilding of Christchurch will simply put back what the city already had before the quake.
The money spent (the damage then was estimated by the Treasury at $4 billion and rising) will replace physical assets but run down financial assets. temporary increase in economic activity (positive) will be offset by decrease in our national wealth (negative), aggravated by an increase in the national net debt.
The most obvious economic impact of the quake is that all forecasts made before Canterbury was rocked will need revising. But economic forecasts always need revising. The quake simply calls for more comprehensive revising.
Another thing: GDP measures no more than the value of all final goods and services within country. It is an inadequate measure if we are talking about economic well-being. But it was never intended to serve that purpose.

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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