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Seminar on "Economics of Reconstruction: Lessons from the Post-Tsunami Experience of Indonesia, Sri Lanka and Thailand"

Prof. Sisira Jayasuriya, Professor of Economics, La Trobe University, Melbourne

8 September 2008, 3pm- 4.30pm, Conference Room 1 (Level B4, )RSIS, NTU

jayasuriya lecture

This seminar dealt with the economic aspect of reconstruction in Indonesia, Sri Lanka and Thailand in the aftermath of the tsunami in 2004. It brought to light several problems, in particular funding issues and the gap between expectations and reality of international aid during the reconstruction. Lessons learned from the tsunami provided insights on how governments and non-governmental organizations (NGOs) could prepare for future natural disasters.

The presentation was divided into five sections. The first section provided an overview of natural disasters as a continuing threat. The second section then briefly discussed the impact the 2004 tsunami had on Indonesia, Sri Lanka and Thailand. A comparison was drawn between the initial disaster relief and the post-disaster recovery phases in the third section. The fourth section deals with the economics of the post-disaster recovery efforts. Conclusions were furnished in the last section.

(1) Natural Disasters as a Continuing Threat
Natural disasters had brought about rising human and material losses. In a 2003 International Monetary Fund report, it was stated that material costs caused by natural disasters had been higher ($652 billion) during the period of 1990-1999 compared to that ($38 billion) for 1950-1959. A World Bank study revealed that 2.6 billion people were affected by natural disasters during the period of 1993-2003 compared to 1.6 billion for 1984-1993. Even though developed, wealthier nations suffered a higher absolute material loss as a result of natural disasters, in terms of percentage of gross domestic product (GDP) the developing, poorer nations actually bore the brunt of the losses; the world’s wealthiest countries suffered a 2.5% loss per GDP as compared to 13.4% for the poorest countries. The concentration of economic activities and human habitations along the coasts as a result of globalization and the preponderant seaborne trade increases human and material susceptibilities to natural disasters such as tsunamis.

(2) Indonesia, Sri Lanka and Thailand after the 2004 Tsunami
In the aftermath of the tsunami in Asia in 2004, Sri Lanka suffered the highest human losses as a percentage of population (0.18%) while the Indonesian Aceh province registered the highest human losses as a percentage of the region (approximately 4%). The disproportionate figure of female deaths, according to the comments of an audience, would probably be attributed to the fact that the female victims did not run immediately but lingered behind to pick up their children when the disaster struck. Aceh suffered the highest economic losses – 97% GDP as compared to the Maldives (83.6%) for instance. Other than focusing on the relief delivery and reconstruction, there were acute needs to address the social consequences such as psychological impact and resettlement as well as instituting measures, an early warning system for instance, to prepare against similar future catastrophes. The multitude of agencies involved, along with diverse agendas, led to problems in the coordination of relief and recovery efforts right from the beginning.

(3) Initial Relief Response and Post-disaster Recovery – A Comparison
Despite the suddenness of the disaster, relief had been rapid and surprisingly, unlike the case of Hurricane Katrina a year later, there had been no breakdown in law and order in the aftermath of the tsunami. The disaster also played a role in ongoing internal conflicts in the region; reconstruction helped in the termination of internal unrest in Aceh but allegedly aggravated the civil conflict in Sri Lanka. Nonetheless, the tsunami relief won accolades worldwide for the display of effective global disaster response. The promised international aid appeared more than adequate but there remained questions over the amount actually delivered and its utilization, due to fears over the potential misuse by recipient governments, some of which marred by bureaucratic corruption. In addition, some of the international governmental donors and NGOs were purportedly providing aid in the name of humanitarian concern but actually out of parochial interests, such as raising media profile back home. The actual relief and recovery efforts after the tsunami had fallen short of the initial expectations. About a year and a half after the disaster, the recovery effort had been criticized for the disparity between the amount of aid pledged and delivered as well as social marginalization due to inefficient allocation of aid.

(4) The Economics of Post-disaster Reconstruction Efforts
Initial assessments on reconstruction costs were assumed to be identical to the original value of the capital assets. However, the actual building costs turned out to be higher. With the exception of Thailand, which suffered relatively minimal losses, the affected nations experienced increasing building costs. For instance, housing costs in Sri Lanka increased by 50% over initial estimates by August 2005, only to register an increase of 80-100% by year end. Due to the funding gap as a result of increasing building costs, lesser amount of reconstruction could be done. By attempting to fill the funding gap, these governments experienced increased fiscal burdens which could potentially impinge upon national economic development. Even when funding was available, reconstruction was reportedly politicized, with regions mustering more political clout given priority in resource allocation. The sudden increase in demand for construction led to a ‘building boom’ in the affected areas, hence raising material and labor costs, landing construction-related contractors an unprecedented economic windfall allegedly at the expense of the victims and public infrastructure. The increased rate of reconstruction was not economically feasible in view of the rising building costs. On the other hand, prioritization of reconstruction, while taking into account rising prices, would delay the rehabilitation process and the continued loss of capital assets. This presented a dilemma for governments of the affected nations.

(5) Conclusion
The tsunami relief and recovery efforts had been mired with resource allocation problems. Donor and recipient governments and NGOs were not all forthcoming about how much aid had been delivered out of the amount promised and how it had been utilized. Although there existed lingering concerns over the potential misuse of aid, existing distribution mechanisms had been utilized instead of creating new ones due to concerns over the cost of delivery. The main lesson learnt in the 2004 tsunami case study was not to assume that all initial promises of international aid would be met. In addition, managers of disaster relief and recovery operations should expect sharp increases in reconstruction costs, hence the need to consider cost inflation. Reconstruction programs could also be staggered according to social needs and cost-benefit rationale.

Question and Answer Session

Timeframe of Asset Recovery
Responding to the first question of whether there exists any timeframe for the recovery of human and capital assets which required time to replace, the speaker emphasized that increased losses would generally entail a longer replacement time. He added that replacement could be rapid; citing the example of Aceh which was the hardest hit yet experienced a labor boom as a result of increases in labor costs and demand for construction. In such an instance, labor substitution helped in offsetting the human capital losses. However, the speaker pointed out the potential mismatch between labor supply and skills in demand. In general, post-disaster economic recovery had been rapid, taking the case of Thai tourism which rebounded from decline by 2006.

The Economics of Early Warning Systems
An interesting question brought up by one of the audiences related to the economic feasibility of establishing early warning systems against rarely-occurring natural disasters such as tsunamis. The speaker pointed out that such economic considerations would depend on the anticipated magnitude of the disasters although differences in national priorities and attitudes towards risks would need to be taken into account. Usually such justifications, according to another audience, were based on estimated capital asset loss and damage. However, this led to a third and final question relating to human psychological costs which appeared not to be included in official statistics.

Human Psychological Costs and Policy Discourse
The speaker, while acknowledging that official statistics included only capital asset and estimated income losses, reminded the audiences that human psychological costs were excluded from since they were comparatively less easily quantifiable. In the comments of one of the audiences, difficulties in quantifying human psychological costs had made pure economic costs the only feasible justification for policy discourses related to preparatory measures against future natural disasters. This was especially so when governments faced difficult policy choices in the allocation of scarce resources to a diverse array of national needs.

About the speaker

Sisira Jayasuriya is Professor of Economics at the Department of Economics and Finance at La Trobe University, Melbourne, Australia.

He was Director, Asian economics Centre, at the University of Melbourne from 2001 till beginning of this year and held previous appointments at the Australian National University and the International Rice Research Institute (Philippines). He has been a consultant to international organisations (such as the World Bank, ADB, ILO, UNESCAP, International Food Policy Research Institute), and to many government agencies and private corporations.

He had his undergraduate education in Sri Lanka, and Masters and PhD in Economics at the Australian National University.

Professor Jayasuriya’s current research interests are focused on issues related to economic development in Asia in the context of globalisation. He is author or co-author of several books including The Open Economy and the Environment: Development, Trade and Resources in Asia (Edward Elgar); Courting Turmoil and Averting Prosperity: Colombia since the 1960s (World Bank); Macroeconomic Policies, Crises and Long Run Growth: Sri Lanka (World Bank), and The World Rubber Industry (Routledge), and has published numerous articles in major international journals on economic development issues. His current research covers the impact of China and India on other developing countries, regional trading agreements, WTO issues, agricultural reforms in India, food security and the economics of natural disasters.

Posted on: 8/9/2008 3:00:00 PM  |  Topic: Climate Change, Environmental Security and Natural Disasters

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