Impact of Natural Disasters on the Growth of Economy - Essay Example

Running Header: Impact of Natural Disasters in Economy Growth Student’s Name: Lecturer’s Name: Course: Date Submitted: Introduction According to Lindstrom et al. (2011), recent natural disaster in Australia is the flood in Queensland which affected approximately 60% of its population. This unexpected severity of the floods in Queensland took many lives with a great number of citizens recorded as missing due to the event. The cost of human lives lost because of the floods cannot be measured in terms of dollars but there is no doubt to the amount of trauma associated with the destruction, loss and grief caused by the floods in families and the whole community. Homes, businesses, infrastructure and agricultural crops were destroyed in all natural disasters in Australia. In the process of rebuilding Queensland, politicians claim that the recent floods have been very expensive in the history of Australia and new policies will be implemented to raise the economy and living standards of the citizens of Australia. The social impact of the natural disasters has improved because people work together to rebuild their lives while the economic impact has declined. The estimated damage to government roads, waste facilities, water supplies, airports and buildings amount to $2 billion in Queensland (Lindstrom et al., 2011). Australia has incurred an economical loss of $ 5-$6 billion due to the floods. This has been caused by disruptions in production especially in the mining sector while the costs of businesses and household level have increased. The damage caused by the recent floods are been assessed and rebuilding processes initiated in homes and buildings which have or do not have insurance (Lindstrom et al., 2011). In a research carried out by Matrix Planning Solutions (2011), the recent cyclones, extreme weather and floods in Japan and Australia have caused the loss of many lives and economic decline in both countries hence affecting the global economy and rise of the cost of living. In Japan, the death toll of the earth quake and tsunami is approximately 10, 000 while the cost of rebuilding homes, buildings, infrastructure and hospitals is $200 billion (Matrix Planning Solutions, 2011). Short-run Effects of Natural Disasters on the Economy The floods in Australia in 2011 have caused disruption in production at ground zero. This is the place which was mostly affected by the floods and everyday services were halted. The most important destructions were loss of land for crop production, damage of roads, power and transport shortages in Australia (Matrix Planning Solutions, 2011). The great floods in Queensland and the Cyclone Yasi reduced production of agricultural products such as bananas. This lead to the rise of bananas in the market and consumers buy 1 kg of bananas at $15 (Matrix Planning Solutions, 2011). The Cyclone Yasi destroyed banana plantations in the most fertile fields in Australia but this is a temporary situation because full production is expected at the end of this year because new crops have been planted. Farmers who harvested their grains before the floods are unable to sell their produce because important ports have been closed due to flood damage and risk (Lindstrom et al., 2011). Livestock transportation from flood affected areas is minimal and this will impact greatly on the production of meat in Australia because few animals will be slaughtered while the rest will be stuck in flood risk areas that have poor transportation. Japan is faced with short-run economical effects due to the earth quake and tsunami in the factories and equipment (Matrix Planning Solutions, 2011). This country is known for its large production of industrial products to first world countries and also other developing countries. The natural disasters caused a decline in production of cars, cell phones, computers and other devices that are important in the contemporary society. This decline caused a decline in global economy which in turn raised fuel prices, decreased mortgages and the raised cost of living globally. Other short-run effects in Japan are power and transport shortages, road damages and damages in major airports. Homes and commercial buildings were also destroyed but the country is in the rebuilding process to restore the economy and lives of its citizens. Long-run Effects of Natural Disasters on the Economy Long-run effects of natural disaster in both Japan and Australia depend on availability of institutions, human capital and the finance reserved for natural disaster in large scale reconstruction (Matrix Planning Solutions, 2011). Human capital is very important in rebuilding homes, hospitals, roads, fixing sewage system and water system. Although many people lost their lives, these two countries require the support of strong and healthy workforce, volunteers and private companies for the rebuilding process to be successful. Advanced technology is being used in the countries affected by natural disasters to construct strong infrastructures that will withstand future disasters. Financial position of Australia and Japan has enabled these two countries to commence recovery process because they had a money reserve for such disasters. Haiti was affected by natural disaster in 2010 but it still has a crippled economy even after receiving financial and human from developed countries. This situation in Haiti is because of lack of disaster management plan, adequate finance and human capital. The tourism sector in Australia is included in the long-run effects of the natural disasters because of damaged tourist attraction sites and risky zones. The Great Barrier Reef which is an attraction site has been partially damaged while the tourism industry is struggling because of the high exchange rate of the Australia dollar. Tourism revenue has been approximated to fall by 0.7% which is $590 million to a low value of $83.6 million before 2012 (Lindstrom et al., 2011). Commercial projects in Brisbane have been halted because of damage of infrastructure, properties, and roads hence affecting productivity. According to Lindstrom et al. (2011), a new NAB business survey observed that the revenue for medium-sized and large-sized firms across Queensland dropped by 9.8% and utilization capacity fell by 13.8%. Businesses experienced full closure or major disruption in human capital, equipment and production. Such businesses will take years to recover and employ competent employees while still attracting potential customers. Consequences for the Capital Stock and Productivity Australia’s capital stock and productivity fell due to rains and floods. According to OECD (2011), unemployment rate fell to 4.9% after the floods in Queensland while fruit and vegetable prices rose to 3.25% because of reduction of stock. In Japan, the first day of disaster saw Nikkei fall by 20% because of the fear driven by uncertainty in financial markets. Productivity also decreased because of deaths and fear of other disasters (Matrix Planning Solutions, 2011). Queensland was faced with damaged roads and buildings which made it impossible for people to go to work. Productivity in such conditions will be very low because people are emotionally impaired by the fact that their families, friends or colleagues are either dead or missing due to the floods. The next factor to low production is shortage of transport and power in affected areas. Many companies use electricity for production either in manufacturing or in service based businesses and shortage of electricity means that many businesses will close. Japan’s productivity was very low in the first few weeks of disaster and this is because many people who worked in the factories were displaced, missing or dead. When the factories declined, the productivity also declined because the workforce did not have a work premise. In the process of Japan’s disaster management process, people were busy trying to find safe places to live before looking for places to work because their basic needs had been destroyed. Capital stock is low especially when it depends on production. Agricultural produce in Australia fell when the cyclone and floods affected major cities. Arable land was washed away and farmers are waiting for new crops to be ready by the end of the year which in a long period of time before price of products in the markets are reduced because of availability and security. Consequences for the Economic Growth and Inflation Japan’s earthquake and Tsunami caused major decline in global economy because the industrial products from Japan were part of major companies in the US and Europe. There are companies in Europe and the US that closed because of Japan’s disasters. Cars, cell phones and computers and their accessories all originate from Japan because of improved skills and cheap labor. This decline in Japan’s economy affected the global market where prices other products started to rise. Inflation due to natural disaster is a common occurrence: oil prices began to rise while decline in global economy contributed to decline in mortgages and some finance companies are offering bad credit mortgages. In Australia, the effects of floods and cyclone Yasi did not contribute to a larger decline in economic growth because the country had a disaster management plan in place with financial capacity to back it up. According to Lindstrom et al (2011), the cost of flood damages is between five and six billion dollars while that of the cyclone is $800 million which is relatively small as compared to the GDP of Australia which is approximately $1, 300 billion. The economic growth was slow as of March because of production disruptions but as from June 2011, the economic growth began to increase in relation to recovery and reconstruction efforts. Mining is also on the rise after the floods and cyclone because people are rebuilding Australia in ways that will ensure more economic benefits as compared to before the disasters stroke. Lindstrom et al. (2011) further explains that the GDP of Australia will return to approximately the same or even higher level as before the cyclone and floods. This is because the infrastructure will be more advanced hence increasing economic growth while minimizing future damages caused by natural disasters. Inflation is evident in Australia especially agricultural products that are in short supply. The State Budget of Queensland Government has shown an increase in the inflation from 3% before the floods to 3.25% after the floods (Lindstrom et al., 2011). Implications for Monetary and Fiscal Policy According to Herr and Kazandziska (2011), the Stability and Growth Pact allows countries affected by natural disasters such as floods, cyclones, earthquakes and tsunami to have a budget deficit that exceeds 3% of its GDP. During Australia’s and Japan’s natural disaster, the monetary and fiscal policies are determined by economic growth. This is because the economic slowdowns decrease tax revenues hence shrinking the tax base while there is a rise in expenditure for unemployment benefits. Natural disasters have caused a decline in budget surplus thus an increase in budget deficit. When this occurred, both Australia and Japan were forced to implement policies that could ensure an increase in revenues. To increase revenue the Queensland Government and Japan changed tax laws and government expenditure. Fiscal policy in times of economic crisis is very important because it stabilizes the economy development of affected country. A functional fiscal policy with the combination of macroeconomics policies not only stabilizes business cycle but also ensures long term economical development. Strict monetary policies should be avoided during natural disasters by reducing demand in inflationary roars. When the economy is shutting down due to natural disasters, corporate tax, value added tax, government revenues and income tax drop drastically due to a dwindling tax base. Tax base shrinks while there is a rise in important expenditure. In such a cyclical phase, increasing the budget deficits of both Australia and Japan have to be accepted for them to stabilize demand endogenously (Herr and Kazandziska, 2011). According to OECD (2011), the exchange rate has appreciated in Australia giving monetary policy a vaguely restrictive stance. Current monetary policy in Australia seems appropriate but the inflation pressure is emerging due to increase in oil price and second-round effects of climate conditions will disrupt production. In 2010, Australia’s public sector deficit rose to 6% of GDP a level worse than expected because of a weakened economic growth. The floods in Queensland and cyclone have generated additional costs in the budget of 0.5 of the GDP. There is temporary increase in income taxes on people in middle class and those in high-income households while there is a deferment or cancellation of certain government spending to increase revenue. Conclusion Natural disasters in Australia and Japan have caused a lot of negative effects in human lives and the economy growth. The number of deaths was derogatory while the number of people missing due to the events caused a lot of panic, loss and grief in affected countries. Homes were destroyed leaving many people homeless while the shortage in power and water system contributed to poor living conditions. Shortage of transport to businesses and health institutions lowered production which in turn reduced economic growth. These two countries are however in rebuilding process because of availability of funds reserved for natural disasters and improved technology. The natural disasters in Japan contributed to a decline in global economy and gave rise to inflation where the price of oil increased hence rising the costs of living globally. The monetary and fiscal policies are implemented to stabilize the economy of affected countries. Australia’s agricultural stock was destroyed by the cyclone and floods but the country is in the recovering process and new crops are planted. Inflation in agricultural products is evident in Australia because of low supply and unavailability. Japan and Australia are moving towards recovery because of a stable disaster management plan, international aid and adequate finance to rebuild its cities. REFERENCES Herr, H, & Kazandziska, M. (2011). Macroeconomic Regimes in Western Industrial Countries. UK: Routledge, Taylor and Francis Publishers. Lindstrom, P, Fenton, C, Lawn, C. & Thorpe, J. (2011). Economic Impact Of Queensland Natural Disasters. Price Water Coopers Official Report, 1-5 Matrix Planning Solution Limited. (2011). When Nature strikes - The Impact of Natural Disasters. Retrieved on 24th June 2011 from OECD. (2011). OECD Economic Outlook. Volume 2011, Issue 1. Queensland: OECD Publishing Read More