Japan quake: Does capitalism hasten recovery?

Growing up in Southern California means always knowing that "The Big One" could come any minute. I spent most of the first 34 years of my life in earthquake country, and that means having both a heightened awareness of — and an insouciance about — large earthquakes. California amended its building and fire codes on several occasions in order to make large quakes survivable, the last of the major quake revisions enacted during Ronald Reagan's governorship. Californians often profess an equanimity about temblors, but the significant quakes rattle even the most fatalistic — and serve as a reminder about that Big One that awaits the Golden State.

If we needed an example of what this could mean outside of a bad Hollywood film, we have the tragic dimensions of the catastrophe in Japan. At a magnitude of 8.9 on the seismic scale, the quake that hit Northeastern Japan is more than 100 times more powerful than the 1994 Northridge, Calif., quake that killed 65 people and did billions of dollars in damage. Japan will spend years and a significant part of its wealth recovering and rebuilding from this catastrophe. We cannot even conceive of the scale of that effort at this point; the devastation has been so widespread that even Japan’s laudably rapid response has not yet catalogued the deaths and destruction. It may take months to know what needs to be rebuilt, and years to do so — all while their nation mourns the thousands upon thousands lost in the quake and the tsunamis that followed.

Eventually, though, Japan will rebuild and recover, and a study from 2007 suggests that its recovery time will be relatively short, thanks to the nature of its national economy. Economic researchers Mark Skidmore from the University of Wisconsin and Hideki Toya from Nagoya City University in Japan partnered on a study of disaster responses and recoveries in 151 nations — including the Japanese response to 1995’s magnitude 6.8 quake in Kobe — and determined that wealthy nations recover more quickly from disaster, and that their economies recover more quickly as well. (In part, this is because the study based its measures on gross domestic product, which naturally increases as economies replace capital assets destroyed by the disasters, and not on capital itself, which gets depleted by disasters.)

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Reuters and other news agencies picked up on this study as a harbinger of hope in the hours after the tsunamis receded, given Japan’s secure status as one of the world’s wealthiest nations. Their report over the weekend offered the "reassuring conclusion" from the study: "Human resilience and resourcefulness, allied to an ability to draw down accumulated wealth, enable economies to rebound quickly from what seem at first to be unbearable inflictions."

It's far too early to apply this to Japan as a means of predicting their recovery, but it's still worth considering in other contexts, especially when it comes to aid and how those wealthy nations might better assist the developing world, both in disaster response and in general.

Reuters offers the example of the September 11 attack in New York City and that 1994 quake in Northridge that caused $40 billion in damage as examples of massive application of wealth in recovering from disasters. In these examples as in others, the massive application of wealth occurred in systems that already had competence in private management of capital. Japan's recovery from the Kobe quake falls into the same paradigm, where an expected drop in GDP never occurred. California expedited its recovery in 1994 by privatizing the repair of Interstate 10, a major artery that would normally have taken years to repair. Instead, Pete Wilson, then the governor, outsourced the job and established performance incentives, and the freeway was reopened in two months, boosting the region’s economy.

Thanks to systems that allow for private management of capital, the application of wealth to disaster works because talent exists to apply it efficiently, and the wealthy nations have political systems that promote accountability. Capitalism rewards those who use capital efficiently and successfully, while other systems reward other behaviors more. That isn’t to say corruption doesn’t occur in wealthy democracies, but it’s hardly as ubiquitous or as entrenched as in countries with less wealth, less accountability, and less freedom. In the past ten years, Americans have learned that lesson the hard way through investments in Iraq and Afghanistan, where fledgling democracies and economic systems based on private property had yet to take root.

Furthermore, as the study also notes, wealthy nations develop secondary political systems to protect their capital investments from disaster, or at least shield it the best they can. In California and in Japan, building codes allowed perhaps hundreds of thousands of people to survive what would have otherwise been a fatal earthquake in years past. Hurricane Katrina’s death toll climbed over 1,800, far below what a similar storm would have killed in a population less prepared for disaster, despite the disarray in New Orleans. The Gulf states routinely survive storms with little or no loss of life thanks to overbuilding that would create humanitarian disasters elsewhere.

Let's look at massive applications of capital in other disaster areas. In December, 2004, tsunamis in the Indian Ocean killed more than 200,000 people in Indonesia, 167,000 alone in Aceh. Despite an overwhelming financial and humanitarian response, Aceh failed to recover appreciably, which the Asian Development Bank Institute blamed on poor coordination with the government. A 7.0 earthquake nearly leveled Haiti last year, and at least 250,000 people have died as a result. More than one million survivors were homeless, and the massive international aid response has barely been able to gain traction — thanks to a dysfunctional and corrupt government and the lack of infrastructure for dealing with disasters.

Western nations have had that experience for decades in Africa as well. The post-colonial period has been marred by one disaster after another, many of them created by dysfunctional political systems ruled by tyrants and kleptocrats, and few of them with economic systems that develop or reward talent in capital management. The wealthy democracies have poured fortunes in aid into states with heartbreaking poverty and famine, just to see the money disappear and the poverty and exploitation continue. Not only does this result in wasted capital, the sudden infusion of wealth tends to benefit the existing power structures directly, as well as squelching homegrown pressure for reform.

Wealthy nations recover more quickly in part because of their wealth, to be sure, but also because they have developed and rewarded the talent to use capital and built systems to protect it to the extent possible. Rather than just dumping aid in disasters, the focus of wealthy nations should be to promote these economic and political models not merely for ideological causes, but because they save lives – and eventually reduce the need for massive interventions when nature strikes.