Economic Impact of Asian Tsunami Tragedy (page 1 of 2)

Experience Suggests a V-shaped Economic Impact

Previous disasters give us some insight into the likely economic impact of this tragedy. Last year's SARS epidemic, the 2002 Bali Bombing and the Kobe earthquake in Japan almost a decade ago give us some insight into how the economic impact of natural disasters unfolds.

There tends to be a V-shape economic impact - a large dip in economic activity followed by a policy response that tends to involve increased government spending, leading ultimately to economic recovery in a year or so.

Clearly the scale of this disaster is far greater and impacts more countries, but the profile may well be the same; initially, a huge economic setback, followed by a strong policy response and economic recovery.

Direct and Indirect Costs to Hit Growth

The immediate economic impact tends to be direct, with negative effects on consumption and business activity in the regions and sectors affected. The direct economic impact in this case is likely to be concentrated on tourism and fishing in the coastal areas affected.

The wider, indirect impact is harder to predict. For instance, following the Bali bombing there was a wider, negative impact on tourism across Indonesia, but conversely some benefit to tourist sectors in Thailand and Malaysia as tourists changed plans.

After the Kobe earthquake, there was a wider negative impact on business confidence in Japan. Similarly after this disaster there will be a wider negative impact, as tourism and consumer and business confidence is impacted by the scale of the disaster. Not only is tourism important, but also for many countries this is the peak tourist season, compounding the impact.

While the tourist sector is a similar size of both Indonesia's and Sri Lanka's economies, the impact is likely to vary considerably. In Indonesia the main tourist areas of Bali and Lombok are not impacted.

In contrast, the extent of the devastation on Sri Lanka suggests its tourist sector and economy will be hit harder. Given the size of the economies and the scale of the disaster, it is the Maldives and Sri Lanka that are worst affected in economic terms, although all countries will be impacted.

Asia's Bigger Economies to Rebuild Quickly

In recent years, the world economy has shown a remarkable resilience to economic, financial and terrorist shocks. Asia, too, has been resilient, as evident from last year's SARS outbreak. The bigger economies impacted by this disaster will be resilient, while the smaller ones will need more assistance.

Experience suggests the policy response will be key. In Bali, for example, the Indonesian government moved quickly to rebuild the local economy and spent significant amounts in promoting tourism. After Kobe, there was huge infrastructure spending.

Similar experiences have been seen after other natural disasters. Of course, the scale of this disaster is huge in comparison, suggesting the policy response not only needs to be speedy but significant in size. Clearly some economies will be more resilient and governments better able to respond.

The immediate response is of course likely to be humanitarian in focus. The rebuilding of coastal infrastructure will take far more time. It will need effective planning and could be costly. Also, often bottlenecks mean that spending on construction has to be phased.

For the region in general, the rebuilding process will be greatly helped by the current economic and political climate.