The impact of large natural disasters on economic growth

In the aftermath of the earthquakes in Haiti and Chile it is natural to wonder what impact these two terrible events will have on these countries' future economic growth. Will the damage permanently lower output and burden future generations with the reconstruction bills? Or will the post-disaster construction boom and opportunity for structural change act as an economic stimulus, ushering in a new period of rapid growth?

Well, the folks over at the Inter-American Development Bank have clearly pondered these two questions more than I have. And their results are not exactly what one would expect.

Using a large comparative sample of severe natural disasters, the authors take advantage of the fact that natural disasters are a random event to tease out their causal effects on growth. In other words, the paper attempts to approximate a laboratory setting by also putting together a "synthetic" counterfactual of what would have happened in disaster countries if the natural disaster had never happened (they do this by grabbing a bunch of similar countries and weighting them to approximate the initial conditions of the disaster countries).

The results can basically be summarized with the graph below. It shows the path of real GDP per capita in actual disaster cases and in the counterfactual cases. Real GDP per capita is set to zero on the year of the crisis.

So what does this tell us? Well, disasters appear to have no effect on per capita income. In fact, the path of real GDP per capita following disasters perfectly mirrors the counterfactual index.

There were, however, two exceptions to the rule:

"Contrary to previous work, we find that natural disasters, even when we focus only on the effects of the largest events, do not have any significant effect on subsequent economic growth. Indeed, the only two cases where we found that truly large natural disasters were followed by an important decline in GDP per capita were cases where the natural disaster was followed, though in one case not immediately, by radical political revolution, which severely affected the institutional organization of society. Thus, we conclude that unless a natural disaster triggers a radical political revolution, it is unlikely to affect economic growth."

So there you have it. From the perspective of GDP per capita, a profoundly flawed but nevertheless indispensable measure of economic welfare, even the most severe natural disasters do not have an effect. So what's the moral of the story here? Is this a tale about human resilience in the face of calamity? Or is it another sobering lesson in the perils of statistical abstraction?

Piñera's honeymoon coming to an end

It seems Piñera's honeymoon is ending. Yesterday the polling company Adimark released it's monthly government approval poll, showing a small two point decline in Piñera's approval rating. Of course, this decrease is within the 3 point margin of error, but Piñera's rate of disapproval has shot up 13 points since last month, reaching 31 percent.

One odd result from last month's poll was that the overall government received a much higher approval rating than Piñera personally, 60 percent vs. 52 percent respectively. This result was in part attributed to public perceptions regarding his, at the time, unresolved conflict of interest due to the delayed sale of his LanChile shares. Well now, however, the approval rating for the government as a whole has dropped 9 points to 51 percent, more or less matching Piñera's own rating.

But what accounts for the precipitous drop? As can be seen below, much of it is explained by public perception of the government's handling of the earthquake. The left side shows approval to the government's help towards earthquake victims and the right shows approval of the reconstruction effort.

[Independently of your political orientation, do you approve or disapprove of the way Sebastian Piñera and his government are handing the following problems related to the earthquake?]

An interesting thing has also happened during the last month regarding the income demographics of his support: it has fallen among the wealthiest and registered a small increase among the poorest (though the latter is within the margin of error).

Now, all in all these results are still obviously quite good, reflecting the fact that so far Piñera has actually done a pretty decent job all things considered, contrary to the left's fears. Obviously, experiencing one of the largest earthquakes on record might change your political agenda slightly and prompt some to govern more pragmatically. But nevertheless, Piñera the consummate businessman deserves some credit. Who would've expected the business presidency to talk about increasing mining royalties, raise corporate taxes and raid the military's trust fund, even if it's to pay for the reconstruction?

The Count: a budding friday tradition

8,758...

...is the number of workers fired in Chile after the earthquake through a "force majeure" or "catastrophe" clause in the labor code.

Following the Feb. 27 earthquake businesses have been taking advantage of Article 159, N°6 of the labor code. This article allows employers to fire employees without paying severance packages by invoking force majeure reasons (acts of God) or catastrophes.

Now, obviously this type of policy makes sense and certainly many small businesses were completely decimated by the earthquake. But it is becoming clear that in many cases it has been abused and some businesses are simply using the earthquake as an excuse to get around labor standards.

These types of abuse have been limited in well unionized firms, but firms with weaker or no unions have essentially been able to do whatever they want. For instance, in some cases employers have fired workers through the force majeure clause only to rehire them with lower salaries.

CIPER has compiled another list of shame. This time it lists all the companies that have fired employees through Article 159. One revelation is that the company that has fired the most, 938, is owned by the Mayor of Santiago, Fernando Echeverría. As our readers may recall, Echeverría also owns a construction company responsible for a few of the buildings damaged during the earthquake and is a long time business buddy of president Piñera.

Chile's La Nación reported one of the more bizarre examples coming from the southern island of Chiloe, where one company actually went as far as to declare 90 of its workers dead as a pretext to fire them!

Long story short, the company first tried to fire them invoking force majeur. The problem was, however, that Chiloe was barely hurt by the earthquake at all, making the move somewhat suspicious. So, in a brilliantly sneaky move the company instead decided to claim that the 90 workers were dead.

But how could this possibly backfire? Well, a lawyer representing the 90 workers who lost their jobs had this to say:

"The workers are alive and kicking, so much so that they all accompanied me to the Labor Tribunal to file a complaint against the company."

We can only hope that this particularly shameless company will get what's coming to it.

The Count

18...

...Is the percent of lost GDP in Chile due to last month's earthquake. Today Chile's new Interior Minister gave the reconstruction effort a hefty $30 billion price tag, 3.6 to 4 billion of which will go to repairing the 14 hospitals across the country that were destroyed by the earthquake. The government also announced a revised tally of the earthquake and subsequent tsunami's casualties, which has reached 452 dead and 97 missing.

Yes indeed, much remains to be done and the debates over how to fund the reconstruction effort as well as holding construction companies accountable for damaged properties is in full force. The gov. is currently considering a proposal to pay for the reconstruction effort by raising royalty fees on mining companies. That's right, Piñera is contemplating going against his campaign promises in the interest of... common sense! And, of course, raising royalties on extractive industries pretty much makes him Evo Morales' BFF even more, no?

On a more serious note, Mr. Lorenzo "tower of pisa" Constans, the president of the Chilean Chamber of Construction (CCC), has issued a (sorta) mea culpa on behalf of Chile's construction companies for maybe kinda sorta possibly violating building codes:

"I'm not ruling out that at some stage, during the geological survey or during calculations or even the construction phase, there could've probably been an error."

Meanwhile, the CCC has signed an agreement with the metropolitan authorities of Santiago to provide the city with technicians to evaluate the damaged buildings and assess possible building code violations. In other words, under this agreement the same construction companies facing lawsuits will provide the city with experts in order to evaluate their own shitty collapsed buildings. What's more, as the excellent CIPER has dug up, the Mayor of Santiago, Fernando Echeverría, owns one of the construction companies in question, Echeverría Izquierdo, which built at least 3 of the damaged buildings. BEST. CONFLICT OF INTEREST. EVER.

Adimark poll: Bachelet remains popular after earthquake

Today the polling company Adimark reports that president Bachelet's approval rating remains at an impressively high 84% percent, despite cries that the government mismanaged the emergency relief effort. This poll provides a unique opportunity to determine the impact of government handling of the crisis on its approval rating since it was originally completed on Feb. 24, right before the earthquake. Instead of releasing the report on March 1 as originally scheduled, Adimark decided to a second round of polling to capture the public's response to the earthquake.

The report provides a breakdown of the data by social strata, showing that Bachelet's approval rating has taken a hit among the wealthy (group ABC1, below) even though this is the group presumably less affected by the earthquake--all those images of looting and populous rage following the earthquake must have really done a number on them.

[Independently of your political orientation, do you approve or disapprove of the way Michelle Bachelet is conducting her government?]

Interestingly, Bachelet's approval was the highest among the least wealthy, C3 and D/E, where her approval rating actually increased. Adimark also reports that, predictably, that Bachelet's approval rating was significantly lower in the areas most heavily affected by the earthquake (although the sample size for each area was too small to be worth reporting independently).

Significantly, Bachelet's handling of the emergency, though lower than her general approval rating, was also quite high at 75%. Now this takes me to my next point...

Who's this above you might ask? That's Alf Landon, the 33rd president of the United States, or at least according to the now defunct Literary Digest, whose infamous poll wrongly predicted Roosevelt's electoral defeat in 1936. Instead of losing the 1936 election, as Literary Digest predicted, Roosevelt defeated Landon by a landslide. The reason for this epic polling fail? Literary Digest conducted its poll by consulting mostly it's own readers, who were primarily wealthy, and through telephone interviews, which also biased the results.

But what does this classic textbook example of sample selection bias have to do with Chile's earthquake and Bachelet's handling of the emergency response?

Adimark's poll is based on phone interviews. Now, although Adimark is a reputable polling company and assures us that the results were corrected for "the level of telephone penetration in each region," I can't help but wonder if it properly accounts for the views of the most affected by the earthquake who, presumably, are in no position to complete a phone survey.

Of course, we shouldn't completely disregard the results of this poll and overstate the potential effect of this bias. It's just that a one sentence explanation of the methodology used in the report isn't exactly reassuring...just saying. In my opinion Bachelet has done a decent job and has exuded confidence throughout both the financial crisis and now the earthquake. It is also possible that there are widespread negative reactions to the government response but that these are limited to other members of the administration and simply haven't stuck to Bachelet herself. Whatever the case, it seems the voices on the Right predicting that the emergency response will forever stain Bachelet's legacy have been silenced for now.

CIPER Chile on the earthquake aftermath

Great coverage of the earthquake aftermath coming from CIPER Chile (Center for Information and Investigative Journalism). CIPER has put together a list of shame of all the construction companies whose new buildings, some of which still have for sale signs in front, collapsed after the earthquake because they cut corners on safety standards. Sorry but no English link on this one but as a consolation prize I linked to CIPER's excellent photo-gallery of the earthquake/tsunami devastated south.

Chile: Public Relations Victory

Last Saturday's earthquake in Chile has left much of the country in shambles and countless recent homeowners are angry at the poor construction quality of their homes and apartments, many of which have been rendered uninhabitable by the earthquake. It is increasingly starting to look like building standards were an until now unnoticed casualty of Chile's economic boom during the last 20 years. Many new buildings, presumably well equipped to withstand a major earthquake, will now likely need to be demolished for safety reasons, leaving many appalled homeowners demanding answers and accountability.

In this context, the president of the Chilean Chamber of Construction, Lorenzo Constans, had this to say on the matter:

"There are many buildings that are tilted, the most obvious example being the leaning tower of pisa which has remained that way for centuries without falling over."

Thanks dumbass! I'm sure all the people who lost their homes thanks to construction companies' negligence and greed will find this very comforting and informative.