The economics of natural disasters: the case of Japan

Linghui Zhu (Jude)

Table of Content

1. Why Japan 2. Japan Earthquake background 3. Literature review 4. Research Problem 5. Hypothesis 6. Methodology 7. Reference

1. Why Japan

Natural disasters have always resulted in tremendous economic loss. Japan, as an island country, is always affected by various types of natural disasters, especially earthquakes, tsunamis and typhoons. According to the reports, “Two out of the five most expensive natural disasters in recent history have occurred in Japan, costing $181 billion in the years 2011 (The Great East Japan Earthquake) and 1995 (Great Hanshin earthquake) only.”

(Source: “Top 10 Natural Disasters in Japanese History”, Elist 10, http://www.elist10.com/top-10-natural-disasters-in-japanese-history/)

Why Japan (cont.)

• One key point to mention, which differs Japan from the other countries, is that the frequent disasters, specifically around 200 reported cases during these 30 years from 1977 to 2010, has brought the government and citizens strong awareness, persistence and preparation capability for disasters. Besides the wooden aseismic design of buildings, the country is improving its disaster management capability such as prediction, adaption instruction and evacuation etc.

2. Japan Earthquake Background

Exposure refers to entities (population, conditions of built-up areas, infrastructure component, environmental area) being exposed to the impacts of one or more natural hazards.Source: world risk index 2014, United Nation University

Vulnerability comprises the components ofsusceptibility, lack of coping capacities andlack of adaptive capacities (Birkmann et al.2011, Welle et al. 2012, 2013) and relates tosocial, physical, economic and environmental factors which make people or systems susceptible to the impacts of natural hazards, the adverse effects of climate change or other transformation processes. Moreover, the term vulnerability covers factors which comprise the abilities and capacities of people or systems in order to cope with and adapt to

Source: world risk index 2014, United Nation University

Visual Display

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00%20.00%

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Exposition VS Vulnerability

Exposition

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Made by author based on the data from world risk index 2014, United Nation University

3. Literature review

• Economic impact theory

• 1. Creative destruction theory (Positive effect)

• which means “when a disaster occurs, it has been suggested that destructions can foster a more rapid turn-over of capital, which could yield positive outcomes through the more rapid embodiment of new technologies.”

• This idea has been supported by Loayza (2009), Skidmore and Toya (2002), Okuyama (2004), Cuaresma (2008) et al.

Source: Toyoda, Toshihisa. "Economic Impacts of Kobe Earthquake: A Quantitative Evaluation after 13 Years."

• 2. Negative Effect

• Raddatz (2007) and Noy (2009) first estimated the impacts of natural disasters from a short-term perspective, regressing per capita GDP on the scale of natural disasters. Both authors found that natural disasters had a negative impact on the economy of the disaster areas in the short term.

• Noy (2009) added interaction terms with each country’s economic and political characteristics and a natural disaster term as explanatory variables and then re-estimated the impact of the natural disasters on the economy. Noy’s findings indicated that when a country is less economically developed or less mature, the impact of a natural disaster was more serious and more persistent.

• Noy and Nualsri (2011) reported that a natural disaster has a negative economic impact in the long and short term.

• 3. “No-effect”

• Cavallo et al. (2010) showed the difference between the actual economic growth path and the estimated counterfactual growth path that would have been accomplished without a natural disaster and then quantitatively calculated the long-term impact of a natural disaster on economic growth. They found that the long-term impact of natural disasters on economic growth was negligible.

Research Question

Theory testing design:

As an unique county, which is the impact of disaster on Japanese economy?

Key independent variable: Impact of disaster

Key dependent variable: GDP

5. Hypothesis and methodology

• Hypothesis:

• Different from the other countries, in macro level, disasters would not impact on the economy of Japan.

Methodology

• I will follow the process of the case of Vietnam by Noy (2010) to measure the damage magnitude (DM) by using three reported indicators: (1) The number of people killed (KIL); (2) the number of people affected (AFF); and (3) the amount of direct damage (DAM). The weighted damage magnitude (DMS) is calculated based on the three alternative damage measures (DM) and the onset month (OM)

, ,(12 OM )

12i t i t

t i

DMDMS

Methodology (Cont.)

• Besides, taking into account the lagged effect of disaster to the following-year economy in reverse order, for example, disasters occurred in January of a particular year will probably have the least effect on the following-year whereas those occurred in December will be most likely, the weighted lagged values of disaster measures (DMSL) using the onset month (OM) is calculated by:

, ,

12i t i t

t i

DM OMDMSL

Methodology (Cont.)

• My estimation is based on the model followed

• In which, Y is the economic performance in year t, Yt-1 is the first-order lagged economic condition, DMS is the measure for disaster magnitude estimated separately for each type of damage (either KILP, AFFP, or DAMO), DMSLt-1 is the lagged effect from the damage occurred last year, Xt-1 indicates all the lagged controlled variables including saving rate, aged-groups, education and labors.

0 1 1 2 3 1 4 1t t t t tY Y DMS DMSL t X

Explanation

• Japan is learning from its frequent disaster experience, and improving its disaster countermeasure systems.

Qualitative Method

• Comparative case study

• Taking exposition of disasters into consideration, Philippine can be a comparative country.

• Using the media resources to conduct systematic Reviews (Campbell), and to find out the effort of Japan and Philippine did in the resilience processes after each disaster, and make comparison.

Visual Display (Expected Outcome)

Reference

1. Ewing, Bradley T., Jamie B. Kruse, and Mark A. Thompson. "Twister! Employment responses to the 3 May 1999 Oklahoma city tornado." Applied Economics 41.6 (2009): 691-702.

2. Ohtake, Fumio, et al. "Impacts of the Great Hanshin-Awaji earthquake on the labor market in the disaster areas." Japan Labor Review 9.4 (2012): 42-63.

3. Okuyama, Yasuhide. "Long-run effects of a disaster: Measuring the economic impacts of the Kobe earthquake."  Unpublished Manuscript (2002): 1-20.

4. Abadie, Alberto, Alexis Diamond, and Jens Hainmueller. "Synthetic control methods for comparative case studies: Estimating the effect of California’s tobacco control program." Journal of the American Statistical Association 105.490 (2010).

5. Toyoda, Toshihisa. "Economic Impacts of Kobe Earthquake: A Quantitative Evaluation after 13 Years.“

6. Shimada, Go. "A Quantitative Study of Social Capital in the Tertiary Sector of Kobe: Has Social Capital Promoted Economic Reconstruction Since the Great Hanshin Awaji Earthquake?." (2014).

7. duPont IV, William, and Ilan Noy. "What happened to Kobe? A reassessment of the impact of the 1995 earthquake in Japan." (2012).

8. Naoko Okuyama, Masaru Sasaki, Fumio Ohtake, Kengo Yasui. “The Long-term Impact Of The 1995 Hanshin-awaji Earthquake On Wage Distribution ” (2014)

9. Noy, I., & Vu, T. B. (2010). The economics of natural disasters in a developing country: The case of Vietnam. Journal of Asian Economics, 21(4), 345-354.

10. Noy, I. (2009). The macroeconomic consequences of disasters. Journal of Development Economics, 88(2), 221-231

11. Okuyama, Y. (2004). Modeling spatial economic impacts of an earthquake: Input-output approaches. Disaster Prevention and Management, 13(4), 297-306.

12. Skidmore, M., & Toya, H. (2002). Do natural disasters promote long-run growth?, Economic Inquiry, 40(4), 664-687.

13. Hochrainer, S. (2009). Assessing the Macroeconomic Impacts of Natural Disasters: Are there any?, World Bank Policy Research Working Paper 4968.

Thank you!

Q & A