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?