Chilean Earthquake spurs Economic Growth???

Just about seven short weeks after the devastating 7.0 magnitude earthquake hit Haiti, plate tectonics turned upon Chile with one of the world’s largest quakes since 1900.  This monster of an 8.8 magnitude, along with the subsequent tidal wave that washed along the south-central coast of Chile, have caused upwards of 800 deaths so far with about 1,000 people still missing along the coastal region.  As devastating as this is, the total death toll in Chile will fall a couple hundred thousand people short of the Haiti earthquake mostly because of the different poverty levels. 

The World Bank database shows that as of 2008 (2009 was not yet available), Haiti‘s GDP was 6.95 billion dollars with an annual growth rate of 1.3%, while Chile’s GDP was 169.46 billion with a growth rate of 3.2%.  In addition, the average annual income among Haitians is $1,300, while that of Chileans is $15,000.  Simply putting this data to use, Chile currently has more money to organize rescue and recovery as a whole, while individuals have safer living conditions and more resources to aid in survival than in Haiti.  Dr. Colin Stark of Columbia University tells us,  “Poverty is what ultimately kills most people during an earthquake.”  Chile’s lower poverty level will contribute to a quicker recovery, but could the effort actually spur economic growth in the future?

An article in The Economist titled In Need of Repair tells us that the Chilean economy experienced  a 0.9% contraction in 2009. In addition, Chile’s economy will obviously feel the stress of the recovery in the first and second quarters of the current year.  The economy is currently in a rut, but The Economist suspects a bright future after that.

For one reason, the article suggests the earthquake, ” may actually provide a boost for the economy in the medium term as the government spends heavily to repair the damage.”  Gross domestic product is a measure of a country’s overall domestic output, which is a combination of consumption,  investment, government spending, and net exports.  Reconstruction costs are estimated at about 30 billion dollars as of now, which is close to 20% of Chile’s 2009 GDP.  If the government, along with private Chilean companies, are investing an additional 20% of GDP on rebuilding infrastructure, then the gross domestic product is likely to increase as a result of government spending and investments.

A second bright side to the devastation is the undamaged copper mines in northern Chile.  The damages and recovery efforts will stunt forestry and fruit product exports in the south, but copper exports are the country’s main earner abroad.  So while fruit and forestry exports will be temporarily slowed, the most valuable trade earnings should still be flowing in.  To stress the importance of copper exports, much of the spending on recovery will actually be financed through the accumulated copper earnings from 2005 through 2008.

Government spending and infrastructure investments should account for a 20% increase in GDP during the recovery effort while Chile continues its highly profitable copper trading.  We’ll have to wait to see how the reconstruction affects the government and individual spending and how quickly trade and production in the south recover, but the future doesn’t appear too daunting for Chile.  The Chilean earthquake may have been several hundred times more powerful than the one that struck Haiti, but Chile is wealthier and thus better adapted to handle the recovery.  Could this spending stimulus update Chilean infrastructure and rekindle economic growth?

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4 Responses

  1. It seems that GDP will raise in the next year due to this influx of government spending. However, will this be a sustained, long-term increase? It appears to me that most of the government spending on recovery efforts will occur in the near future, so I wonder if the GDP will drop in two to three years when this spending no longer comprises such a large percentage of the GDP. Should be interesting to follow…

  2. Very good point. I’m sure there will be a drop off after the recover is completed. I wonder if Chile’s economy could surprisingly keep up with the recover spending if money is put into updating and innovating infrastructure and production and business centers rather than just rebuilding to the previous standards. It should be interesting to see what the reconstruction efforts focus on.

  3. A lovely example of links! I was looking at the TED database link on copper. How did you find that? Did it have exports through now?

    I often wonder if GDP is flawed as a measure by itself. It is supposed to be general prosperity. But, as Brooke suggests, if it is higher because of spending to recover from a natural disaster, are people more prosperous?

    Is there not more of an org theory connection here, also? What are the hierarchical systems in Chile? How do their interdependencies affect recovery? Does an open system perspective help decision-makers find those systems that may be most critical for recovery?

  4. I found the TED database after some snooping around on google. I tried searching some of our library’s databases, but I wasn’t able to initially find any up to date export data.

    I would agree that GDP is flawed as a measure of prosperity in regards to individuals. Chile’s business structure will probably reap most of the benefits of the increased GDP while the citizens may struggle to rebuild their personal lives. After a major disaster, I suppose all the government can do is rebuild the cities and infrastructure (which increases the GDP) to give citizens a foundation to repair their lives. Rather than current prosperity, GDP seems to represent a positive future outlook in a situation like this.

    From an open system perspective, it is important for Chile to focus on repairing its natural resource harvesting and trade systems. Chile is very rich in natural resources, most importantly copper, so its economy relies heavily on exchanging resources with other countries. Chile’s economy cannot recover and grow unless the country can take in resources from the natural environment and exchange them with foreign environments.

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