With Queensland experiencing an unprecedented flood, “biblical” according to Treasurer Andrew Fraser, and with an estimated cost now in the billions of dollars, it’s timely to review what we know about the capacity of communities to recover from natural disasters.
There is a nice piece at the Library of Economics and Liberty on Disaster and Recovery, written by the late UCLA economics professor Jack Hirshleifer, who refers to the classic example of the recoveries of West Germany and Japan after the devastation of World War II. These recoveries were remarkable even taking into account the substantial assistance provided by the US and other western nations.
Much depends on having the resources to repair the damaged infrastructure, but Australia is a rich country and we will be able to repair the damage, and the long-term consequences for economic growth will be negligible. Of course, the Queensland and Commonwealth Governments will have to endure temporarily higher budget deficits, and it may take longer for Queensland to get its AAA credit rating back.
In his article, Hirshleifer cites a brilliant passage from the great 19th-century philosopher and classical economist John Stuart Mill, who notes that destroyed infrastructure would have to be replaced or refurbished eventually anyway, and that, as long as the population is intact with all its skills, recovery is pretty much guaranteed.
Regarding the relative ease of replacing destroyed infrastructure (capital) – compared with replacing skilled people, that is – Mill makes the following observations (from Chapter 5 of Book 1 of Principles of Political Economy):
This perpetual consumption and reproduction of capital affords the explanation of what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.
What the enemy have destroyed, would have been destroyed in a little time by the inhabitants themselves: the wealth which they so rapidly reproduce, would have needed to be reproduced and would have been reproduced in any case, and probably in as short a time. Nothing is changed, except that during the reproduction they have not now the advantage of consuming what had been produced previously. The possibility of a rapid repair of their disasters mainly depends on whether the country has been depopulated. If its effective population have not been extirpated at the time, and are not starved afterwards; then, with the same skill and knowledge which they had before, with their land and its permanent improvements undestroyed, and the more durable buildings probably unimpaired, or only partially injured, they have nearly all the requisites for their former amount of production.