AS A POSSIBLE DESTABILIZING FACTOR FOR WORLD ECONOMY
1.1. STATISTICS OF ECONOMIC INDICATORS
It is quite evident that natural disasters have a devastating impact on the stable development of the world economy, causing enormous economic damage to countries in which they occur.
Not every country is able to cope with economic losses from natural catastrophes independently. Therefore, the international community provides such countries with large-scale humanitarian relief, including financial aid. Damage caused by strong earthquakes, volcanic eruptions, tornadoes, floods, tsunamis and other natural disasters can amount from tens of millions to hundreds of billions of dollars.
Here are several examples in order to illustrate the potential economic damage from strong earthquakes.
Early in the morning of April 18, 1906, a series of underground shocks measuring over 8 on the Richter scale turned the city of San Francisco and its environs into a heap of ruins within a minute. Calculations have showed that the economic damage from the earthquake was nearly half a billion dollars (equivalent to about $8 billion in 2010 dollars). http://www.forbesrussia.ru/mneniya/opyty/26841-zdes-byl-gorod
A powerful magnitude 6.7 earthquake occurred in the Northridge area of Los Angeles, California, U.S.A. on January 17, 1994. The damage inflicted by the earthquake was nearly 20 billion dollars. http://en.wikipedia.org/wiki/1994_Northridge_earthquake
On 26 December 2004, a catastrophic magnitude 9.1-9.3 earthquake struck the Indonesian island of Sumatra. The earthquake brought about a series of devastating tsunamis along the Indian Ocean coastline, claiming the lives of nearly 230,000 people in 14 countries. The sum allocated as humanitarian relief to affected countries alone amounted to 7 billion U.S. dollars. http://en.wikipedia.org/wiki/2004_Indian_Ocean_earthquake
One of the strongest earthquakes ever in human history occurred on Feb. 27, 2010 off the coast of Chile causing human casualties, destruction, and the formation of a tsunami. The Biobio and Maule regions were the areas most affected by the magnitude 8.8 earthquake. According to a U.S.-based international group for earthquake consequence assessment, EQECAT, the estimated losses from the Chile earthquake vary from 15 to 30 billion dollars. The disaster left about 2 million people homeless; 1.5 million houses were damaged, with 500 thousand of them suffering irreversible damage.
Fig 3. shows a graph for total economic damage caused by natural disasters worldwide between 1950 and 2009. As seen from the diagram, the total economic loss from all natural disasters from 2000 to 2009 approached one trillion U.S. dollars.
Fig. 3. Graphs showing numbers of natural disasters and economic damage
inflicted by them for the period between 1950 and 2009
(According to data by K. Y. Kondratiev et. al., 2005, with additions
by E. N. Khalilov, 2010 http://www.viems.ru/asnti/ntb/ntb502/oboc5.html )
Damage from floods, tornadoes, hurricanes, storms and volcanic eruptions may vary in different time periods. However, in all cases the general trend of economic damage from natural disasters rises from year to year, even taking into account global economic inflation (Fig. 4 and Fig. 5).
For instance, the total damage from floods that occurred in the United States in 1993 amounted to 26 billion dollars, reaching $125 billion in 2005 (mostly due to the damage caused by Hurricane Katrina and the accompanying flood) http://www.weather.gov/oh/hic/flood_stats/Flood_loss_time_series.shtml
The most destructive large-scale hurricane in the U.S. history – Hurricane Katrina – occurred in August 2005 off the coast of Florida and caused 110 to 150 billion U.S. dollars in damage, according to different estimates; 125 billion dollars is thought to be the most plausible figure. The U.S. President declared the states of Louisiana, Mississippi, Alabama, and Florida a disaster zone.
In the Gulf of Mexico, Hurricane Katrina destroyed the offshore energy infrastructure and led to evacuation of more than 75 percent of the Gulf’s 819 manned oil platforms. Two days before the hurricane approached the coast, American energy companies estimated that the nearing storm had already reduced oil production in the Gulf of Mexico by more than one-third.
Hurricane Katrina caused power failures affecting vast areas. A great number of animals and birds died; livestock and poultry farms located in the disaster zone were suffering from the damage caused to roads and communication links; the technical infrastructure was completely destroyed virtually throughout the entire disaster area. Conventional vehicles were not effective for evacuation and relocation of people and goods. Along with rescue services, military units were involved in fighting the disaster.
Fig. 5. Economic damage from U.S. floods from 1903 to 2009(in billions of 2007 dollars)(by E. Khalilov, 2010, according to HIC NOAA data)http://www.weather.gov/oh/hic/flood_stats/Flood_loss_time_series.shtml
1.2. HOW DO GLOBAL CATACLYSMS INFLUENCE THE ECONOMIC SITUATION?
The data given in the previous section are based on the assessment of direct economic damage caused by natural disasters in the period of their manifestation. Meanwhile, it should be noted that the real economic damage caused by natural disasters is much larger in scale and manifests itself over a long period of time after the catastrophe. Let us consider, by the example of Hurricane Katrina and the resulting flood, which economic and social consequences global natural disasters may lead to.
Katrina’s impact on the economy and social sphere of the flooded areas was devastating and long-lasting. Between August and September 2005, the unemployment rate in the disaster areas doubled from 6% to 12%, mostly affecting the states of Louisiana and Mississippi (http://en.wikipedia.org/wiki/Hurricane_Katrina). Wages in Louisiana, Mississippi, and Alabama dropped approximately by 1.2 billion dollars in the third quarter of 2005. A sharp nationwide increase in gasoline prices dealt a special blow to living standards in the distressed communities and in the U.S. in general. The hurricane led to temporary closure of most crude oil and natural gas production in the Gulf of Mexico. The oil production between August 26, 2005 and January 11, 2006 was some 114 million barrels less than usual, accounting for one-fifth of the annual oil production in the Gulf of Mexico.
The hurricane devastated the regional administrative infrastructure. Approximately 2.5 million customers in Louisiana, Mississippi, and Alabama lost electrical power (http://en.wikipedia.org/wiki/Hurricane_Katrina). A lot of communication lines across the disaster areas sustained great damage. Over 3 million phone lines were damaged in Louisiana, Mississippi, and Alabama, along with radio communication systems since about 50% of the radio stations and 44% of the TV stations in the affected regions were destroyed.
Initially, widespread destruction and numerous fatalities inflict serious financial damage on insurance companies that are unable to pay insurance indemnities simultaneously to large numbers of people and businesses affected by natural disasters.
A second blow is delivered to banks that are bound to ensure payments for insurance liabilities to large numbers of people and organizations at the same time. But that is not the only factor to cause problems for banks. All at once, huge numbers of people bereft of shelter and livelihood try to retrieve their bank deposits. The banks delay returning of deposits and payments to insurance companies, causing panic among depositors. The panic mood is then communicated even to those who do not need additional funds but then try to retrieve their deposits from the banks in order to save their money in case the banks go bankrupt. Economists are well aware of this chain reaction. As a rule, if this process is localized within one or several countries, then international financial support makes it possible to rectify the situation and prevent the distressed countries from falling into a full-scale financial crisis.
But if we imagine that natural disasters become widespread in many countries, the global financial system may be unable to cover the formed shortage of funds, which will definitely lead to the necessity of putting new funds into circulation, causing global inflation and a resulting global economic crisis. The newly emerging crisis may prove to be deeper and more widespread than ordinary crises as large-scale natural disasters can cause financial problems for many countries simultaneously.
Let us consider the 2010 eruption of the Icelandic volcano Eyjafjallajökull.
The eruption began on the night of 20/21 March 2010 and went through several stages. Eruptions and powerful atmospheric emissions of volcanic ash interrupted the volcano’s temporary lulls. The main negative consequence of the eruption was the ejection of volcanic ash clouds that disrupted air traffic across Europe.
The financial damage from air traffic disruption in Europe as of April 25, 2010 has been estimated as ranging from 1.5 to 2.5 billion Euros, according to a report by European Commissioner for Transport Siim Kallas. The crisis affected 29% of world aviation, with some 1.2-1.5 million passengers suffering from it every day. According to estimates by the International Air Transport Association, the airlines’ daily losses from canceled flights amounted to at least $200 million.http://www.vesti.ru/doc.html?id=353994
Losses suffered by European tourism are estimated at about 2.5 billion Euros. It is hard to calculate the losses of numerous companies whose commercial shipments were not delivered to destinations in time. The total damage from the Eyjafjallajökull eruption may exceed 10 billion Euros.
Meanwhile, Eyjafjallajökull is not even in the list of the most dangerous volcanoes. According to some calculations, the damage that the Mount Vesuvius eruption may cause to Europe is estimated at $24 billion.
CONCLUSIONS AND SUGGESTIONS:
- This brief analysis of natural disasters’ statistics and impact on the economic situation of countries and regions has demonstrated that economic damage from natural disasters increases in proportion to their number and scale. Thus, further increase in the number and scale of natural disasters may lead to world-wide economic destabilization and a new, deeper global economic crisis.
Appropriate action must be taken to stabilize the economic situation in case global planet-wide natural cataclysms occur. For that purpose, UN-sanctioned development and adoption of international legal norms and laws is proposed to effectively manage and coordinate the provision of financial support and humanitarian aid to countries and regions affected by natural disasters.