Wednesday, 27 April 2011

Say what??

Shamubeel Eaqub of the New Zealand Institute of Economic Research has a short comment on the "Economic Impacts of the Christchurch Earthquake: Lessons from Napier", in 'Asymmetric Information' the newsletter for members of the NZAE. In this comment Eaqub writes,
Despite the human and economic costs, there are some positives. In particular, the earthquake provided the catalyst to invest in infrastructure and new technology.
But wait! What catalyst is needed? Wasn't there incentives enough to invest in infrastructure and technology before the quake? And if the earthquake distorted infrastructure and "old" technological capital, how is this good? If it is good should we not go around distorting capital every few years in all cities in New Zealand to gain the payoffs from "the catalyst" on an ongoing basis?

And you have ask, Is it good? No being the answer is at least two reasons. First the owners of capital will have an optimal time to replace that capital and unless the earthquake occurs exactly at that time replacing capital at the time of the quake will be sub-optimal. Second the investment in "infrastructure and new technology" has an opportunity cost. The resources now going in infrastructure and technology would have gone into something else, which we now have lost.

As I have noted before, the literature on the economic effects of natural disasters like earthquakes show there are no long term increases in growth because of a quake. So where are the gains implied by Eaqub's claim?

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