globalEDGE Blog: The Cost of a Disaster?

The Cost of a Disaster?

File under: Economics, Japan,

With articles starting to surface saying that the recent Japanese earthquake could cost the Japanese people over $300 billion in economic damage, I thought it would be pretty interesting to try to put that number into focus. In other words, while $300 billion is a lot of money no matter how you put it, is it really that much damage if a typical hurricane does about $350 billion in damage? Thankfully, the people at The Economist have created this graph that shows the world’s costliest natural disasters so we can put the Japanese earthquake into perspective. What the graph shows is very intriguing.

First off, I should mention that the official cost of the earthquake has not been calculated yet and is likely to be much higher in the next couple weeks, however, even using just the estimated cost it is clear that the current earthquake in Japan is by a large amount the costliest disaster thus far. This current earthquake cost Japan up to 4.1% of its GDP compared to the second costliest disaster which was 1.9% of GDP (ironically, that was in Japan as well so the percent of GDP measure is a fair comparison).

There are a couple of other things the graph shows that are very interesting. One is that disasters in the US tend to have much higher insured losses then other countries. I would theorize that the reason for this is because the US relies on a privatized system of insurance for the most part, while other countries (specifically China and Japan) are welfare-states that rely on the government for most of their risk-management needs. Another thing that is worthy of note is that disasters tend to affect poorer countries especially hard when measured as a percentage of GDP. The most expensive disaster was the Kalimantan forest fires in 1982 Indonesia which cost Indonesia 9.3% of its GDP at the time.

Take a look at the chart and please comment on any thoughts you may have about how costly disasters really are. Regardless, this chart certainly shows the devastation that is currently going on in Japan – and it doesn’t even factor in the radioactive meltdown.

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