GDP and Natural Disasters

GDP considers natural disasters like earthquakes, floods, tsunamis and hurricanes as being favorable to the economy. Add to this the fact that these disasters are hated by the common people who rightly pray that this destruction happens as seldom as possible. Once again, due to the poor fundamentals of the GDP system, the entire science of economics is branded as being anti social. Once again, the true economic fundamentals are not being considered or else the question of economics being an anti-social science does not arise. In this article we will first consider the prevalent viewpoint and then we will debunk the myths pertaining to it.

Prevalent View: Poor Economy Vs Rich Economy

The GDP system views natural disasters as being a good thing or a bad thing depending upon who is suffering from them.

According to them, if natural disasters happen in a developed economy like the United States then they end up providing a boost to the economy i.e. they increase the GDP numbers.

However, if the same disaster were to happen in a country like Afghanistan it would end up diminishing the economy i.e. reducing the GDP numbers.

The prevalent viewpoint therefore believes disasters which cause loss of human life and displacement of thousands of human beings can be good in certain circumstances.

GDP Sense: Natural Disasters Equals Growth!

The logic provided behind this explanation firstly does acknowledge the fact that natural disasters do cause destruction. This acknowledgement is more like a footnote to the calculation because it never actually makes its way into the main calculation. The loss caused as a result of disasters is never subtracted from the GDP numbers.

However, at the same time, the immense construction activity and the massive resources which are required to simply rebuild what was already there is considered a part of growth. This is not a footnote to the calculation but the main calculation itself.

All the land, labor, capital and enterprise that is used to rebuild the broken infrastructure is added to the production of that year thereby causing a spur in the GDP numbers. Hence countries like the United States which may have the resources to rebuild the broken infrastructure see a rise in the GDP when these disasters occur whereas the less developed economies who cannot muster such resources at a short notice experience a fall in their GDP numbers.

The irony of the situation is the asymmetrical treatment to losses and gains. Losses are simply omitted from the calculation whereas gains are fully accounted for. A fair and logical calculation would either account for both or account for neither. However, GDP is not a fair and logical system.

Common Sense: Natural Disasters Equal Public Loss

The common people are at a loss of words when they find out about this calculation. Most people cannot decipher how destruction can be good for the economy and in turn start considering economics as a scare mongering science which creates growth at the expense of human happiness. This certainly is not the case. True economic fundamentals, when considered expose the fallacies. Some of the fallacies have been listed below:

Fallacy #1: Construction or Reconstruction:

All the resources, natural as well as human, which are spent on rebuilding the economy post the disaster, are accounted for as construction expenses. Now, under normal circumstances, construction would imply that something new has been built. In this case, if we were to take a picture of the economy pre-disaster and post reconstruction, nothing would have changed! The enormous amounts of money spent actually just make good the loss. It is like losing a $100 bill in the hurricane and then working hard to earn the same $100 back. It is truly absurd that the losses are simply ignored and the gains are recorded as growth!

Fallacy #2: Opportunity Costs:

Probably the biggest mistake made in this calculation is omitting the fact that resources are always scarce. Hence when a natural disaster occurs, scarce land, labor and capital is used for rebuilding. Since all these resources are scarce, they also have alternative uses. Thus, if the disaster did not happen, the resources would have been used for some alternate purpose and hence the economy would have been better off!

However, the calculation of opportunity costs is always omitted from the GDP system. The viewpoint adopted makes you believe that the underlying resources are infinite. In many countries overutilization of these natural resources in the present cause scarcity in the future and this can be largely attributed to the GDP system.

Fallacy #3: Ignoring Loss of Human Lives:

Also, labor is one of the prime resources of any economy. Natural disasters cause displacement, deaths and disabilities by the thousands. Hence the productivity of labor is severely affected. True that other means of production are also affected but labor is the worst hit.

Once again the GDP system makes no account of the lost labor potential i.e. the lost hours of work and the units which were not produced because the people producing them are not in a position to do so.

People are the most important factor in social sciences and labor derived from people is the most important factor in economics. Hence both the sciences are truly aligned. The GDP system being based on confused pseudo economic principles hijacks this fact and creates distortions.

Hence, when a truly accurate economic standpoint is considered, the conclusion is that natural disasters are human disasters and therefore by definition are economic disasters too. It does not matter whether a country is rich or poor, a disaster can never be a favorable economic scenario!