Monday, January 31

INITIAL ASSESSMENT OF THE IMPACT OF THE DECEMBER 26, 2004, ASIAN TSUNAMI

Here is an initial assessment, current through January 10, 2005, of the impact of the cataclysmic Asian tsunami of December 26, 2004, on south and southeast Asia, provided by the Asian Development Bank. It sounds all too clinical and antiseptic to me. While it duly notes the tremendous loss of life (estimated at 165,000 persons and with a potential, owing to health-related problems, of reaching 300,000, according to UNICEF) and the likelihood of even greater poverty for those impacted in the rural areas who were already hard-pressed to eke out an existence, it basically concludes that the macroeconomies of south and southeast Asia will weather this natural disaster just fine, bounce back quickly and, by implication, banks will be unscathed and new buisness opportunities for them should abound.

As I read through the report, I kept thinking about the incessant appeals for money backdropped by the numerous firsthand reports of United Nations officials on the scene living high on the hog, affected governments interfering with relief efforts, tourism returning to posh, beachfront hotels even before bodies had been recovered, and the recurring question of whether the aid will get to the people who need it most. Even Colin Powell at one point, and risking international criticism, said the brakes had better be put on the charitable giving, as coordination efforts couldn't keep up with the supplies and money pouring in to these countries from the world community. Meanwhile, however, former presidents Bush and Clinton continue to appear in television commercials asking for contributions to the broadening relief efforts.

I welcome a different perspective from those in the blogosphere who have been monitoring the response to the devastating tsunami more closely than I.

Among the conclusions of this report:

... it appears that despite the unprecedented scale of loss of human life, homelessness, and displaced populations, the macroeconomic impact of the disaster will be limited and marginal. The damage is largely confined to rural areas, rather than key economic and densely populated urban centers and industril hubs. Still, the economic impact will be felt severely at the local and community levels, dragging hundreds of thousands of people into even deeper poverty.

Judging by the extent of the damage, the economies of the Maldives and Sri Lanka are the most affected due to their smaller size.

While Indonesia has been severely affacted in terms of losses of human life ... the overall Indonesian economy will be barely affected.

The same applies to the case of India, where due to the size of its economy the macro impact will be minimal.

In the case of Thailand ... most of the country's tourist spots, including Bangkok, have been spared.

... following strong growth from 2001 to 2003, the economies of India, Indonesia, malaysia and Thailand should be in a position to overcome the tragedy.

The direct economic impact of the December 26, 2004, events will come through the negative effects on consumption and business activity in the areas affected. The disaster should not have an impact on the financial markets, much less lead to a financial or economic crisis.

The tourism sector could be negatively affected for a short period of time ...

The aid process has already increased demand for a range of domestic goods and services, including food, drink (water), medicines, building materials, and clothing, as well as transport and communication services, which will benefit a number of domestic businesses. Therefore, it is possible that the overall impact could well end up somewhat positive.

If previous experiences with natural disasters provide any guidance, we should expect some decrease in economic activity followed by a policy response that tends to involve government spending, leading ultimately to economic recovery in about a year.

As of January 10, 2005, the relief aid pledged by the international community amounts to USD 5.0 billion.

One of the factors that has led to the initial assessment that the GDP impact of the tsunami will be slight is that most people affected in the agriculture and fishing sectors have been bypassed in the rapid growth of the last four years.

... for the same reason that the macroeconomic effects may be slight, the poverty impacts may be substantial, especially at the local level. Poverty is potentially the most important effect of this natural disaster.