Economic Effect of Earthquakes

From time to time Mother Nature will send human society reminders of how powerless we are to alter or control some of the forces that govern the Earth.  One way in which we are reminded of this is when the ground is pulled out from under us, literally.  Of course, in this case, the phenomenon mentioned is that of an earthquake.  Humanity has not reached a point where we can stop an earthquake from occurring; in fact, we have not really reached a point where we can predict when or where a large earthquake will occur.  All that we can do is, hopefully, be ready to deal with such an event and repair and rebuild from the damage caused by it.  One of the areas that is hit the hardest in the wake of larger earthquakes are the businesses in the effected area.  From the damage caused by the severity of the striking earthquake, the business world will have a ranging effect on the amount of fall out from a hold up in immediate action to outright disaster from the complete destruction of a company’s facilities and/or products from the earthquake damage.    

One of the most recent examples of a cataclysmic earthquake to affect the business world was that of the Japanese earthquake from 2011.  The earthquake was measured at a 9-magnitude on the Richter scale (a scientific means of measuring the force released by the earthquake) and had a severe impact upon the Japanese economy and its varying businesses.  Obviously, with an earthquake of this proportion, the most noted factor was that of the loss of life and displacement of those effected, as they totaled roughly 28,000 and 500,000 respectively (Amaedo).  What was not immediately covered, however, but felt after the fact was the impact that the earthquake had on the economy of the nation.  The earthquake’s damages were estimated by the World Bank to be at around $100-$235 billion and would take roughly five years to rebuild (Ameado).  Due to the severity of this earthquake, the area that was affected suffered almost complete loss of function.  Factories, airports, shipping ports, power plants, and local businesses were completely destroyed and brought the economy of the nation to a screeching halt.  In this particular earthquake, the damage was even more immense because of the location of the country that it hit, which accounted for 6-8% of the world’s largest economy (Ameado).  However, with an event that was so large, the effects of on the economy were not simply limited to Japan, as they are one of the world’s leading players in many global markets.

With this particular earthquake, the ripples of the damages were felt in many different markets.  For example, the damage to the Toyota car manufacturing plant caused resulting damage to the global economy because the parts made by the damage factories could not be produced, resulting in the decrease in the number of Toyota’s made by the company and, subsequently, sold to the general public (Gandel).  This is similar to many of the other businesses that Japan had stakes in.  The global markets felt the impact because Japan could no longer export some of its key products and services, while at the same time, the country also could not import some of the products that the nation normally would import on a regular basis.  What this shows is that the global market is very subjective and can be affected by the outcomes of natural disasters such as earthquakes. 

This is not the only example of a recent earthquake, and its outcomes, that have had a large effect from 2004.  A large-scale earthquake triggered a series of dramatic tsunamis that devastated the Southeastern Asian region of the globe.  The overall damage of this disaster that was triggered from the earthquake was estimated to be circa 1 billion US dollars, which is estimated to be about 4.5 percent of the GDP of the effected region (Athukorala & Resosudarmo).  What the disaster showed was the quick and sudden decline in the GDP of the affected area, as it dropped from 6 to 5.5 percent from the end of 2004 to 2005, and the growth forecast of the area declined steadily in response to the disaster (Athukorala & Resosudarmo).  Again, this example shows that the global and national economies of the effected areas are completely subjected to the force of Mother Nature that dictate the actions of the Earth’s global economies and markets.

To calculate the damages that an affected area could encounter from a potential earthquake (such as one along the San Andreas fault), the Earthquake Loss Estimation Methodology (HAZUS) module has been created to create a set of estimations based upon certain factors such as, “dollar losses of the capital stock,” (Brookshire, Chang, Cochrane, Olson, Rose, & Steenson).  From this module, direct losses are calculated and then inputted in the indirect loss module, which then estimates the impacts on particular economic sectors over time.  This is done by taking into accounts for resulting supply shortages caused by the earthquake as well as demand reductions (Brookshire, Chang, Cochrane, Olson, Rose, & Steenson).  This module is an excellent way for calculating the potential damages that an earthquake can have on a particular region and is an appropriate module for deciding on which way to prepare and put into effect effective policy to ensure that potential damages to certain areas of business can be preserved and appropriately dealt with in times of emergency response and preparedness.  

The effects that an earthquake can have on the economic and business world vary upon the severity of the earthquake.  The larger the earthquake, the larger the potential damage to the area that is struck by it.  It is of the upmost importance to learn from the disasters of the past, such as the Indonesian earthquake of 2004 and the Japanese earthquake of 2011, to see what sort of policies to implement to minimize damages to both the affected nations’ economies and that of the global economy.  Humanity may be unable to prevent an earthquake from occurring, but with proper planning and readiness, we can hope to minimize the long-term effects of these unpredictable natural phenomenon.

Works Cited

Amadeo, Kimberly. "Effect of Japan's Earthquake: How it Affects the Global Economy." About Economics. 2012 http://useconomy.about.com/od/criticalssues/a/Japan-Earthquake.htm.

Athukorala, Prema-chandra, and Budy P. Resosudramo. "The Indian Ocean Tsunami: Economic Impact, Disaster Management and Lessons." Division of Economics: Research Department Australian National University. 2006 https://digitalcollections.anu.edu.au/bitstream/1885/43127/2/wp-econ-2005-05.pdf.

Brookshire, David S., Stephanie E. Chang, Hal Cochrane, Robert A. Olson, Adam Rose, and Jerry Steenson. "Direct and Indirect Economic Losses from Earthquake Damage." Professional Journal of Earthquake Engineering Research. 13.4 (1997) http://www.earthquakespectra.org/doi/abs/10.1193/1.1585975?journalCode=eqsa. 

Gandel, Stephen. "Japanese Earthquake: The Cost to the Economy." Time . 11 Mar 2011 http://business.time.com/2011/03/11/japanese-earthquake-the-economic-hit/.