The toll in human misery wrought by the
tsunami and earthquakes in Japan test the
imagination of economists but the effects on
Japan’s gross domestic product (GDP) and wealth
are a different matter.
GDP, which
measures goods and services produced, will
immediately dive in Japan and stay lower through
the second and into the third quarters of 2011,
and will then surge as construction and spending
on capital equipment to rebuild drives up growth.
Overall, however, Japan will be poorer for
this disaster. Lost infrastructure, factories and
the like will be replaced but wealth is the sum of
what citizens and governments own - those include
physical assets like those just noted and
financial wealth, namely
securities and cash.
Rebuilding will run down Japan's financial wealth
to replace lost physical assets.
As
estimates of the damage emerge, those totals are
real deadweight losses to wealth. To the extent
Japan must run down financial assets and bring
home foreign investment to rebuild, the net wealth
of Japan is permanently reduced.
Generally, after three years or so, the
impact on GDP is small - production is lost in the
first two quarters but more goods and services are
produced in later quarters to rebuild. Often the
net loss in GDP, from even the largest natural
disasters, comes to no more than 1% of GDP in
large advanced industrialized countries.
Replacing lost production and rebuilding
lifts output in a nation's geographic areas less
affected by the disaster to provide the resources
to rebuild and compensate for lost output in the
most affected region.
However, this time
could be different. Japan has encountered two
disasters - the tsunami and earthquake, and the
explosions at nuclear power plants - and
globalization may make Japan more vulnerable
rather than in the past.
The double whammy
has the potential to keep the Japanese economy
shut down longer, and globalization offers Japan's
export customers alternatives they might not have
enjoyed a decade or two ago. Hyundai and Ford now
are good substitutes for Toyota's cars, and even
more so, Caterpillar tractors made in China can
replace Komatsu's land movers.
The pause
and uncertainty resulting from the nuclear shut
down will cause production to rev up more outside
Japan and mean that it will take longer to return
to full capacity inside the country. Longer term,
the nuclear disaster will accelerate the implosion
of Japan's economy caused by an aging population,
just as Hurricane Katrina caused people and
activities to permanently leave more economically
depressed areas of the gulf region permanently for
faster growing places in the United States.
Some of New Orleans' and the Mississippi's
lost capital will never be restored; it went
elsewhere in the United States. For Japan's
disaster stricken economy that elsewhere may be
other places around the world.
For the
global economy, the nuclear disaster in Japan will
cause more delay in reducing dependence on oil
from the politically volatile Middle East. Wind,
solar and other alternatives hold great promise
but nuclear still offers the safest, large-scale
option around.
The problem is that the
loss of life associated with nuclear failures gets
concentrated, even if it is much smaller over time
per unit of energy produced, at events like
Fukushima. That will increase hesitation around
the world about building nuclear plants and keep
the global economy in the grip of oil longer.
This time, the path to recovery will be
tougher for Japan, and for the global economy,
ripped by the Great Recession and high-priced oil,
the path of recovery will be inexorably altered.
Peter Morici is a
professor at the Smith School of Business,
University of Maryland School, and former Chief
Economist at the US International Trade
Commission.
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