Haiti was said to have lost more than 100 percent of its annual GDP in the 2010 earthquake. Disaster economic losses often are given as a percentage of a country’s GDP. That means it is important to understand what GDP is, what it measures, and what losing some fraction of GDP in a disaster means to an economy. Diane Coyle’s excellent book, GDP: A Brief but Affectionate History, outlines the rise of GDP as the universally adopted way to gauge an economy.30 Thomas Piketty also discusses GDP in his celebrated book Capital in the Twenty-first Century because much of his work draws on national income accounts.31 Joseph Stiglitz gives a clear picture of what’s wrong with GDP in Mismeasuring Our Lives: Why GDP Doesn’t Add Up.32 So what is wrong with GDP, and how might that make a difference to how we understand the way disasters affect societies?
GDP became a way to measure an economy in the period before World War II, in the midst of the Great Depression. Prior to this time, there were many different measures of how economies were assessed and considerable debate about what should be measured—what constitutes the “economy,” a debate that continues to today. GDP is calculated as the sum of four terms:
GDP = private consumption + gross investments + government spending + (value of exports minus imports)
Even though it’s a pretty simple formula, if you look up country rankings by GDP or GDP per capita available from the International Monetary Fund, the Central Intelligence Agency, and the World Bank, you will find that they differ and not by small amounts.
GDP does not translate to average income because only a fraction of the income from a country’s production goes directly to workers’ salaries. GDP masks inequality. A disaster might cause great losses to low-income people but not show up very strongly in GDP.
And while the formula is simple enough, the problem is in totaling up what goes into each of the terms. What exactly are gross investments? What goes into consumption? The UN’s System of National Accounts manual is hundreds of pages long and provides guidelines on how this should be done. Many countries don’t, won’t, or can’t follow the guidelines very closely. Most poor countries don’t have the institutional bodies needed to keep track of the figures that go into GDP.
As noted earlier, in poor countries much of the economy is informal, in the sense that many transactions, including pay for labor, are done in cash or bartered. Hence they are not taxed or regulated and do not show up in government accounts. The size of the informal economy in any country is hard to guess. Even in wealthy countries, the informal economy can be around 20 percent of the total, while in poorer countries it can exceed 60 percent.33 The greater effect a disaster has on the informal sector, as it does in many poorer countries, the less likely the amount will be revealed in GDP figures.
After Italy started to include in its GDP an estimate of its quite-large informal economy in 1987, the country’s GDP rose by 18 percent overnight and jumped ahead of the GDP of the United Kingdom. In an even bolder move, Italy started included drug trafficking, prostitution, and alcohol and tobacco smuggling in its national accounts in late 2014.34 The United Kingdom followed a week later. Illegal businesses are big businesses in many countries, and it makes good sense to include their output in GDP figures, but the very fact that they are illegal makes them difficult to estimate. There is no reason to think these illegal activities decrease following a disaster. In fact, with law enforcement distracted by dealing with the disaster, criminal activities may even increase.
Low GDP can indicate low production of goods and a weak position in global markets. But comparing GDP outputs across countries is no simple business. Anyone from a developed country who has visited a relatively poor country knows that goods you buy there seem cheap. It is not uncommon for travelers to conclude that, although poor people have low incomes, goods are cheap, and perhaps people can live reasonably well on a small income. But goods that seem cheap to wealthy travelers still are out of reach of many poor people.
This difficulty is what gave rise to the Big Mac Index created by the Economist. You can get a Big Mac practically anywhere. To calculate the index, first take the price of the hamburger in the United States—say, $2.50—and in another country, such as Mexico, where you pay in pesos. Then convert pesos to dollars using current exchange rates and get the price of a Mexican burger in dollars. If currency exchange rates were perfectly aligned, the Mexican Big Mac would also cost about $2.50. But that never happens. After converting to dollars, the Mexican burger costs less than the American burger, which indicates that the peso is undervalued compared to the dollar. The same burger in Sweden is more expensive; the Swedish currency is overvalued relative to the dollar. The Big Mac Index calculates these relative valuations; it is a way to show what is more formally termed the purchasing power parity (PPP) adjustment.35
One very serious problem with GDP is that capital stocks are not explicitly involved in the equation, and capital stocks are what are lost in a disaster. Capital and capital depreciation are included implicitly because capital stocks are needed to achieve production. But the effect of capital on production is quite variable and is very different in economies at different stages of maturity. The marginal return to capital may be quite low in comparison to total GDP in very advanced economies. If that is true, a marginal loss of capital should mean less in a rich country than in a poor country. In fact, if those losses give rise to new investment and consumption, as they so often do, capital stock losses actually can benefit GDP.
GDP also does a poor job of measuring the output of the service sector of an economy because there is no physical product as such. What is the product of nursing, dentistry, or teaching yoga classes (or prostitution for that matter)? According to economist Diane Coyle, what the financial services industry produces is especially difficult to measure. Economic development typically is associated with a move away from agriculture and manufacturing (areas GDP measures fairly well) and toward services (an area GDP does not measure well at all). This move is hugely consequential. At both the high and the lower ends of development, GDP is notably imprecise. For that reason, disaster consequences measured in GDP have to be viewed with great caution.
Discussing the flaws of GDP also gives an important insight into the reason wealthy countries and wealthy people might have the ability to rebound after a disaster. Disasters destroy manufactured capital more than anything else, and wealthy countries are not so reliant on this form of economic activity. Thus, the capacity of wealthy countries to keep going after a disaster is greater than that of an economy in which physical capital and capital production are more important.
The general implication (of our flawed measuring of disaster effects) for the socioeconomic consequences of natural disasters is fairly clear. Disasters mainly cause a rapid loss of lives (human capital) and a loss of physical capital stocks—built assets or crops in case of drought and floods—but that may have little or no effect on GDP because they are not explicitly included in the GDP formula. They would be seen in GDP only in places where the marginal return to capital is high, and hence a marginal loss of capital would cause a strong negative return. Rebuilding following a disaster, in contrast, can involve at least the first three components of GDP in a very positive way—private consumption, gross investments, and government spending. It isn’t hard to see how the effects of a disaster could also be well hidden in GDP figures—or, perhaps worse, may be seen in GDP in some countries and not others, depending on the constituents of the economy. And it wouldn’t be totally surprising if GDP were to rise as the result of a disaster in some settings, but that increase would be meaningless from the viewpoint of social progress.
So how can we think about how disaster losses affect the rich and the poor? Technical Appendix I presents a series of diagrams and some logic that might help explain, in a simplified way, how disaster loss and recovery possibilities can be conceptualized. Technical Appendix II presents some of the basics of so-called neoclassical growth theo
ry that economics has relied on for decades, with suggestions about how disasters might be viewed in that framework.
According to neoclassical growth theory, as an economy starts to grow, at first there is a rapid gain in human welfare from year to year, and then that gain eventually flattens out. Very mature economies, such as those in the United States and Europe, are in the flattened, slow-growth phase. They have a large stock of wealth, but it is not growing very rapidly. China and India are the poster-child twins of high growth; Japan and Argentina may not be growing at all.
This implies that very poor economies should be growing rapidly, yet there are many instances in which they simply are not. Something must be wrong with the theory’s treatment of the early stages of growth, even if it properly predicts the later stages. What might more realistically be happening at the start is what is called negative growth, a phenomenon described as a poverty trap.
Here is the classic description of a poverty trap:
If you live in a poor country, you are very likely to get sick—due to poor sanitation, lack of health care, and the like.
But if you are sick, you can’t work or go to school—you can’t earn, and you can’t learn.
So you get poorer. The poorer you get, the more likely you are to get sick. And so on.
The poverty trap is a self-amplifying feedback of bad consequences.
A country locked in this situation can do nothing to cause growth. In particular, additions of capital are ineffective in promoting growth because the economy isn’t capable of making effective use of the capital. Haiti is a good example of this problem.
It also raises an interesting and unexpected factor in thinking about the economic consequences of disasters. If additions of capital are ineffective in promoting growth for poverty-trapped economies, then rapid subtractions of capital, as might be caused by a natural disaster, may have limited measurable impact as well, especially if GDP is the measure. If the economy is dead, it can’t be made more dead. This leads to what has been called a vulnerability paradox: even though you might think, using very good System 1 reasoning, that poor countries are more vulnerable to the impacts of disasters than rich ones, they may in fact not be.
It also says that for very wealthy economies where growth is slow but absolute levels of capital wealth are high, the loss of capital may not be very damaging because the loss represents only a small proportion of the total value of the economy. This might be why the impact of Superstorm Sandy was fairly minor. New York’s economy is hugely driven by service-sector activities, which barely lost pace for a moment.
Likewise, some individuals have large capital reserves, and others do not. For that reason, individuals will be able to manage quite differently. The owners of capital are better off than those who don’t own it, even though most disasters are primarily events that cause loss of capital.
Imagine that an economy is halfway between rich and poor—say, India or Brazil. At a certain time in the history of a country’s development, the economy has just managed to get out of poverty and is racing toward prosperity. At this stage, returns to capital are very high. Typically such economies are moving along at full capacity but with no reserves to fall back on in times of crisis. If a disaster happens at this stage, losses of capital could be very consequential. It is not hard to imagine such an economy being thrown back into a poverty trap after a disaster. So it could be, contrary to what System 1 thinking might lead you to believe, that robustly growing economies full of promise might be the most vulnerable.
So what does all this tell us?
We can see that the impact of disasters—economic and social, short term and long term—can be extremely difficult to discern. Many factors contribute to, and obscure, any assessment of what disasters actually do, including a natural-enough tendency to focus more on immediate disaster events with their attention-grabbing scenes of destruction (phase 2) than on their denouement, willful political obfuscation, and the disconnect between the approaches of the natural and social sciences that creates a void often filled by scienciness. Overall, however, it’s clear that prosperity provides a shield against the worst that nature can do.
On the pathway to prosperity, societies face many barriers. Natural disasters compete with many other challenges, political and economic. Natural disasters probably do more harm to the prospects of poorer countries than to those of richer ones, but so do economic disasters, political crises, incompetent leadership, corruption, conflicts, and public health emergencies. All these crises are more likely to happen in poor countries and are more difficult to get under control. The Ebola crisis in West Africa is the leading example at the time of this writing. The very poorest countries may not be made poor by disasters, but disasters of all sorts may stand more firmly in the way of progress in poor countries than they do in rich countries.
Most free-market economies work, or are thought to work, because the holders of capital are far better off than those who do not hold capital. Holders of capital don’t actually need to work; their capital works for them. The work they do amounts to ensuring that they remain among those with capital and that they can keep acquiring capital. For this reason, being close to the center of power, which may or may not be the government itself, is important because it allows holders of capital to manipulate policy, and hence laws, that will be most favorable to them.
Postdisaster situations—like postconflict situations and times when countries are rapidly emerging from autocratic rule and closed markets (Myanmar and Cuba)—are fertile ground for some and wastelands for others. An elite few make out-of-sight decisions about rebuilding or not rebuilding, about who will benefit from the lucrative contracts that will be part of any reconstruction and who will not. But more important still are the actions of another elite group (perhaps with some of the same members as the first), operating outside media scrutiny, to exploit an opportunity to reshape society in order to secure its hold on power and capital. Wealth is clearly a factor in long-term disaster outcomes. So let’s now turn to a geographic view of disasters and wealth.
Chapter 2
The Geography of Wealth and Poverty
Knowledge and Natural Disasters
Where do wealthy people live? Where do poor people live? Where in the world are people most productive? Where are people at high risk from natural disasters? Is there any relationship between these different geographies?
The maps of the world shown in figure 2.1 tells us where wealth measured in gross domestic product (GDP) is generated. Most ways in which the wealth of countries is compared is in the form of tables and graphs. This depiction of the geography of wealth gives a sense of where people are wealthy and where they are poor rather than simply who is wealthy and who is poor. An earlier version of the map at lower resolution was first published by Jeff Sachs and colleagues in 1999.1
Figure 2.1
Source: Columbia University Center for International Earth Science Information Network (CEISIN), a NASA Socioeconomic Data and Applications Center | SEDAC.
Some regions are obviously very high producers of GDP; some are very low. Coastal regions are often more wealthy than interior regions. There seem to be oases of prosperity amid economic deserts. Some of the economic deserts are true deserts (or mountainous dense forests or frozen places) where few people live, but many are not. What these maps make clear is that the geographic distribution of wealth is tremendously uneven, both worldwide and within many countries. Economists know this but seldom portray the distribution of wealth in this manner.
Economists Jeffrey D. Sachs and William D. Nordhaus and their colleagues compiled these data and asked whether something as straightforward as latitude is a factor in determining wealth. They found something surprising—although there is no “Global South,” a term that is in common use to mean the poor countries to the south of Europe, there is a global middle. With few exception
s, the poorest places on Earth lie closest to the equator, and the most productive parts on Earth are in the temperate zones north and south of the equator. Other economists, most notably Daron Acemoglu, have suggested that latitude has nothing at all to do with it; what matters are institutions, and the apparent geographic effect is just that, apparent or happenstance.2 It is striking nonetheless that the most advanced countries are, for the most part, located in regions with fairly benign climates.
Another way to look at the geographic distribution of wealth is with night lights data—composite satellite images that show how Earth is lit up by light sources, as shown in figure 2.2.3
Figure 2.2
“Night Lights 2012,” a NASA night lights image that illustrates the geographic distribution of wealth across the globe.
Source: NASA Goddard Institute for Space Sciences (GISS).
The most brightly lit places are the places of greatest wealth and correspond fairly well to the first map. Poor regions are dark. Economists are starting to use these data to give information on economic growth patterns, especially in poorer places where standard economic data are hard to come by and not especially reliable. It is far more spatially detailed than a countrywide figure like annual GDP growth.
Figure 2.3 is a night lights image of the Korean peninsula, the kind commonly used to display the stark difference in wealth between two geographically adjacent countries. The one tiny spot of light in North Korea is Pyongyang, the capital. On this map, with its finer level of resolution than that of figure 2.2, we can pick out cities and thin bands of light that show development along major roadways. A comparison between Haiti and the Dominican Republic or between Israel and Palestine is similarly (but not quite as) stark.
The Disaster Profiteers: How Natural Disasters Make the Rich Richer and the Poor Even Poorer Page 5
