Economic Theory and Disaster Management

Disasters such as floods wreak heavy damage, but are often followed by economic recovery.

History shows that while disasters often have catastrophic human effects, the economies of affected nations often recover quickly. Examples of disasters followed by economic recovery include the Sept. 11, 2001, terrorist attacks in the U.S. and the 2004 tsunami in the Indian Ocean.

History

English philosopher and economist John Stuart Mill took an optimistic view of society's capacity for disaster recovery. Mill remarked in the 19th century how rapidly societies recovered from earthquakes, floods, wars and other disasters.

Effects

Although disasters--natural or man-made--can have catastrophic economic effects, many nations recover quickly. The Sept. 11, 2001, terrorist attacks on the U.S. had some effects on output and unemployment, but did not lead to the depression that some feared.

Expert Insight

Economist Gary Becker, a Nobel laureate, recommended increased investment in education, which raises per-capita earnings, as a long-run measure to cope with disasters. Becker observed that better-educated people and more prosperous nations have better capacity to manage disasters.

Recommendations

Becker also advocated greater access to private market insurance and government disaster assistance in countries hit by disasters, such as tsunamis and earthquakes.

Considerations

The expectation of government compensation may lead some people to make less-cautious decisions, such as building homes on earthquake fault lines or in flood-prone coastal areas. Economic theory calls this a moral hazard effect.

References

• Economics of Disaster Management

Resources

• Encyclopedia of Economics - Disaster Recovery