Earthquake in Chile on economic growth - Essay Example

The recent article in the Economist en d “Chile’s Earthquake: Counting the Cost,” seeks to assess the economic distress levied on the Chilean economy by the recent earthquake in that country. On February 27th 2010 an earthquake struck in Chile that hit 8.8 on the Richter scale. Though the capital of Santiago was for the most part left undamaged, other regions such as Maule and Bio-Bio experienced widespread and massive damage. Approximately 800 people, according to the Chilean government, died as a result of this destructive act of nature.

Myriad tidal waves, following the earthquake, struck many other villages and towns and victimized “fisherman and farm workers…as well as campers and backpackers (Chile 2010). In comparison to the governmental response to the earthquake in Haiti a few months back, the Chilean government was better able, albeit imperfectly, to respond to the disaster and help the people. In response to widespread looting in the days that followed, the government of Michelle Bachelet dispatched the army to keep the peace.

The task of rebuilding the country will be immense. The earthquake “caused $15-30 billion in damage, or up to 20% of Chile’s GDP” (Chile 2010), an amount that may still climb once a more accurate picture of the damage emerges. Affected sectors of the economy include both the timber industries and viticulture. With approximately $11 billion held in a sovereign fund, the government at least has some resources to draw on in order to help rebuild the country. Developed by Roy F. Harrod and Evsey Domar during and after the Second World War, the Harrod-Domar model seeks to explain economic growth as not being linear but rather as being chaotic.

It asserts that “even” growth is neither a reliable event nor a naturally determined one. Popular in the 1940’s and 1950’s it has probably influenced the historiography of the reasons for the Great Depression ending and the economic expansion of the 1950’s. The war brought the economic growth that ended the Great Depression. Furthermore, it is commonly held that when the troops came home they had a large amount of unspent savings. When they started to spend these savings, the economy took off.

Thus the Harrod-Domar model would hold that a high level of savings, or available capital, is an engine of growth. Investment forces capital to build up thus spurring economic expansion. In developing economies, like Chile for example, a great amount of available labor can help increase output without causing inflation. Moreover, this model means that output growth is directly linked to expansion in capital (and thus savings). The problem in developing economies is that though there is a surplus of available labor, there is often a paucity of available capital.

This can hinder growth. Earthquakes have a serious effect on power distribution. Power and communication lines are an essential means of carrying out commerce. This type of effect is in the short term as far as one considers the time required to remedy it. But it must be fixed immediately so as to allow the allocation of resources both by the government and by private firms and businesses. If left unchanged, it can have a detrimental effect on growth. In the case of Chile’s earthquake, some one million homes were destroyed or damaged (Chile 2010).

This not only means that many people are homeless, but also that capital will have to be found to build them. Capital that might have been spent on another area of the economy will now have to go towards house rebuilding. Since many people often invest their savings into their homes, their capital has been greatly reduced. According to Harrod-Domar, this means that short-term and possibly long-term growth in the effected regions will be greatly hindered. The timber industry is another are that was affected by the earthquake.

“It accounts for around 8% of exports and is centered in the worst-hit regions…” (Chile 2010). With such a large area of the economy hurt by the earthquake, the economic consequences will surely be hard-felt. This represented a large investment and capital source for the country. The Chilean government at least has the $11 billion in reserves it can draw on to help with repairs and perhaps even spur growth. It faces an uphill battle. Works Cited“Chile’s Earthquake: Counting the Cost.

” Economist 4 March 2010. Retrieved at http://www.economist.com/world/americas/displaystory.cfm?story_id=15607488