The Disaster Profiteers: How Natural Disasters Make the Rich Richer and the Poor Even Poorer

by John C. Mutter

  Detroit is supposed to be the safest place in the United States for people who fear natural disasters. Perhaps the auto industry would not have taken off in Detroit had it been in Tornado Alley or an area prone to earthquakes or flooding. The decline and bankruptcy of Detroit has nothing at all to do with natural disasters but rather with the disastrous decline of the US auto industry and other economic factors. Apart from occasional winter storms that cause a few days of disruption, New York, the financial and cultural capital of the United States (of the world, most New Yorkers would say), has a fairly benign climate.

  The idea that societies could prosper from disaster in the long run, as some econometric studies suggest, is, not surprisingly, quite controversial. Mark Skidmore and Hideki Toya first put the idea forward in an article in Economic Inquiry in 2002 with the provocative title “Do Natural Disasters Promote Long-Run Growth?”5 They used the standard tools of econometrics to show that for meteorological disasters like floods and hurricanes, disasters have positive returns. That is, climate disasters were found to be good for the economy—the more disasters the better, in fact. Not so for what they call geological disasters, meaning earthquakes for the most part. They are negative in their effects. Note that the article described “long-run” effects, and the authors studied economic growth over many years in quite a few countries. Often during the rebuilding phase a boost mainly benefits the construction industry (and not necessarily the local industries, which may be damaged by the disaster), but that boost should be short-lived. Skidmore and Toya say, however, that the effect is lasting.

  The explanation for a positive return draws on the work of the Austrian economist and political scientist Joseph Schumpeter (1883–1950), who was on the faculty at Harvard University from 1939 until 1949.6 The idea goes under the somewhat disarming term creative destruction. Schumpeter also called it “industrial mutation” and wrote that it “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.”7 Schumpeter wrote about the creation of new businesses rather than the effects of natural disasters, which he never once mentioned. One of the most commonly cited examples of creative destruction is the rise of personal computers, which harmed many mainframe computer companies and put several out of business. What is new is far better than what is old, but the new does harm the old.

  It is easy enough to map the thinking behind Schumpeter’s theory—the gale of creative destruction, as it is sometimes called—into the analysis of disasters. It is posited that rather than destroying old businesses through new business innovations, disasters destroy old, inefficient capital, clearing the ground for new, more productive capital development. Old capital stocks are replaced by newer, better capital. Disasters force technology upgrades that benefit many businesses and the economy as a whole. But does this really happen? Who really rides the gale to a better life?

  There is, in fact, some evidence that creative destruction does happen, sometimes. Two months after the 2008 Sichuan earthquake, journalist Drake Bennett, writing in the Business section of the New York Times, quoted a Chinese government source as saying that the rebuilding would boost the economy by 0.3 percent in GDP growth.8 Bennett also quoted one of the earliest findings of this type by Douglas Dacy and Howard Kunreuther. In Dacy and Kunreuther’s Economics of Natural Disasters, they reported that government loans and grants for rebuilding after the 1964 Anchorage earthquake meant that many Alaskans actually benefited overall.9 This is more than getting back on your feet quickly; it is an actual improvement in welfare compared to where Alaskans would have been had they not been knocked off their feet by the earthquake.

  Betty Hearn Morrow claimed in a book titled Hurricane Andrew: Ethnicity, Gender and the Sociology of Disaster that many homes were improved in the reconstruction and that people often made comments like “come see the new bathroom that Andrew built.”10 Restored public housing was often of better quality, and some people were able to become homeowners for the first time.

  This can work, and it would be wonderful if it would always work. No one with insurance would replace a kitchen that burned in a house fire with the exact same appliances as the ones they had before. Since it is a chance to upgrade, you would get new models—a forced technology upgrade. But the only way this could happen in a poor country would be if the World Bank and other donors acted quickly to build new structures before people simply replaced the old with replicas of what came before. As we’ll see later, Haiti is the perfect example of such replacement.

  It is plain enough to anyone that disasters do bring harm, so the fact that we can construct imagined scenarios in which they don’t must, at some level, be a ruse or a flaw in economic logic or methods.

  How, exactly, in real situations, can disasters operate as agents of social change, and how will they do so in the future? Do disasters accrue benefits to some while bringing harm to others?

  If we are to understand what impact natural disasters have, we need to define what exactly they are. The word disaster is used to describe so many different incidents, many of which are completely trivial and, objectively, not disasters at all. Quite a range of definitions can be found in dictionaries, but most include some sense of suddenness and loss. For example, the Oxford Dictionary defines the word as:

  Dis•as•ter 1. A sudden event, such as an accident or a natural catastrophe, that causes great damage and loss of life. 2. Denoting a genre of films that use natural or accidental catastrophe as the mainspring of plot and setting. 3. An event or fact that has unfortunate consequences. 4. A person, act, or thing that is a failure.

  Sometimes the definition includes business failures. Many dictionaries list airplane crashes as examples. The root of the word is the Italian disastro, meaning “ill-starred.” The sense is astrological, of a calamity blamed on an unfavorable position of a planet.11 The sense, then, is of something far outside of what human societies can be considered responsible for.

  The Oxford definition is general to all disasters but encompasses the elements of what we mean by a natural disaster. The scale of natural disasters is usually measured in human losses—deaths—and economic losses. Neither is simple to estimate, and they are poorly correlated—a large death toll does not imply large economic loss; nor is the reverse true.

  There is no agreed minimum number of deaths required for an incident to qualify as a disaster. The defining factor here is really the number relative to our expectations of what the number should be. If a traffic accident kills a dozen people, it probably would be considered a disaster because we don’t expect everyday traffic accidents to claim so many lives. A dozen separate fatalities one at a time would not be a disaster, even though the total number of deaths is the same. A school shooting is a disaster, whatever the number of deaths. One death makes it a tragedy because we rightly expect the number to be zero. When more than 300 schoolchildren die in a ferryboat accident off South Korea, it is a disaster. It is the simultaneity and the unanticipated nature of disaster deaths that tell us that something unusual and unusually bad has happened.

  For an event to qualify as a disaster, the number of deaths does not need to be large relative to other causes of death. Globally, more people commit suicide and harm themselves in suicide attempts than die or are injured in natural disasters. Suicides almost always happen one at a time and are, for the most part, carried out in private, so they don’t draw a lot of attention unless the victim is a celebrity, a well-known political figure or similarly prominent person, or, most distressingly, a young, distraught college student. There are many causes of death that, aggregated globally, far exceed natural disaster deaths. As of 2014 in the United States, influenza takes around 36,000 lives each year, also one by one. Those cases, though relatively small in number, have sometimes triggered forced quarantining and massive searches for anyone who might h
ave come into contact with the victims. Thousands have died in West Africa from the Ebola virus, but it raised little concern in the United States until it appeared in the United States, because we simply didn’t expect it. We read of the deaths in West Africa, and although most of us were distressed by the numbers, we tended to think that the virus belonged in Africa, so we somehow felt those deaths, though tragic and disastrous, were expected for that continent. But when two people in the United States caught the virus, it became a front-page news disaster. It was even suggested that all flights from West Africa be banned from landing in the United States.

  Nor is there a minimum extent of damage that has to occur before an event is declared a disaster. Disasters are worse as urban phenomena because people and assets are concentrated in a city, but does a whole city have to be flattened? It would be very hard to determine a minimum damage level for an event to qualify as a disaster, and the level must be relative also. The market value of a poor person’s home may be almost nothing, but its loss would be consequential to the person. When disasters are ranked by “economic” losses, those in poor countries often come out on the lower end of the scale because they appear to be low-loss events, when in fact they are high-consequence events for those affected.

  All true natural disasters can be analyzed in three phases. The phases are common to earthquakes, cyclones, and floods, regardless of whether they happen in rich countries or in poor ones, how many die, or how much the economy suffers. Even so-called manmade or industrial disasters, such as the explosion of the Deep Water Horizon oil rig in the Gulf of Mexico, can have these phases, as can social disasters, such as a school shooting. A trivial personal “disaster”—an embarrassingly bad haircut—doesn’t exhibit these phases.

  The important thing is to recognize that disasters are processes, not single events, as they are usually considered. The event—the quake, the storm, the flood—is the second of the three phases. Although our System 1 thinking tempts us to believe that this is the phase that matters most, it is, in fact, the least important.

  The first phase takes place before the event occurs. It’s the time when societies should be preparing for disasters that will surely come, but typically they do not prepare or do not prepare adequately enough to avoid costly damages and multiple deaths. By analogy, this is the phase when the oil rig operator should have been more careful or the school system or health system or someone should have identified the isolated, troubled youth who later ended so many lives. There are scholars who study this phase and try to measure social vulnerability—the variable likelihood that societies will suffer from disasters, by how much, and the factors that might determine the disasters’ impact.

  The second phase is the event itself. Although a flood and an earthquake and an oil rig explosion are quite different, each event is characterized by media coverage that is similarly intense and frenzied, sometimes ghoulish. The second phase actually has two parts to it, both media driven. In the first part, the media covers the spectacle of the disaster: the damage, the heroic efforts of first responders, the tragedy of people trapped in collapsed buildings or buried in rubble or stranded on rooftops. But that becomes repetitive fairly quickly, and in the second part of this phase, the media switches its attention from chronicling a terrible mishap to investigating the inevitable claims of antisocial behavior, like looting and rape, or failures on the part of agencies, such as the Federal Emergency Management Agency (FEMA), the local police, and government officials or autocratic rulers. If blame can be assigned, the media will assign it. More often than not, it is the media that first designates an event to be a disaster. It’s in this second phase that the effect disasters have on societies—they kill people and destroy property—is most blatantly on display.

  The third phase, which is talked about the least, is what happens after the disaster, in the weeks, months, and years after the storm has passed and the floodwaters have receded. The media has packed up and left. Losses have been tallied, the death toll has been estimated. It is the period of time when individuals try to get back on their feet and societies try to function in some semblance of the way they did before the disaster. Here is where we find BP at fault for the oil rig explosion and seek damages. Here is where more stringent gun laws are discussed. No one has a formula for how to recover quickly, effectively, or completely. Some societies succeed very well and might even prosper from the experience; some don’t. Just as there are scholars of vulnerability, there are scholars who examine societies for their resilience—their ability to withstand disaster events and recover quickly. Vulnerability and resilience are more or less opposites and have become the lingua franca of many disaster studies.

  The media has a passing interest in the first phase, especially if the disaster points up some lack of preparation that might be scandalous—failure to maintain levees, say. The media has almost no interest, or merely a rapidly dwindling one, in the third phase, except perhaps to return to the scene of the disaster on anniversary dates to see how things have improved (or, more likely, to show that things have not improved as fast as they should have). But even that runs out of steam after a while. What happens in phase 3 is largely out of sight. Phases 1 and 3 can be quite long and uninteresting. Phase 2 is typically short, exciting, and terrifying. Droughts can be prolonged, but the transition from drought to famine can be very rapid. Phase 2 makes for the best media stories.

  That’s not to suggest that the disaster phases are absolutely distinct and separable. Lack of preparation in phase 1 will make phase 2 of a disaster worse than it need be. Failure to reassemble societies in phase 3, after a disaster, will make the societies more likely to experience other disasters, just as failing to build a strong postconflict peace can actually induce a new conflict. Phase 1 can even been seen as the tail end of phase 3—the period after one disaster becomes the period before the next.

  Very bad things can happen in the second phase. Whole families can be lost, workplaces destroyed, entire villages swept away, hospitals ruined, schools demolished. Here the human tragedy is most evident and social ills are revealed. This is where we hear of murders, looting, and rape. It is where we see that so many of the victims are poor and neglected. This is where the military may be called in to keep peace, not to help victims, and where victims are criminalized.

  The physical damage resulting in phase 2 is, at least in principle, simple to restore. People constructed everything in the first place and should know how to replace it. That reconstruction often happens more quickly than might be expected. In restoring damaged structures, we could and should make them stronger if we can; build back better is the rallying cry that motivates this objective. It simply means that we should replace old structures with ones that are more resistant and build protective structures (such as seawalls) that might reduce the scale of future damage. That happens, too, but mostly in wealthy countries; the poor have less capacity to do the better building, and, too often, to meet basic needs, they just put things back the way they were as quickly and as best they can with whatever materials are at hand.

  Phase 3, I argue, is where social ills are concealed. The media has almost completely lost interest, and what is left is both physical and social damage. While the physical damage can be handled, the social damage cannot so easily be addressed. In fact, the very idea of social restoration is elusive. You can’t bring the dead back to life, but you can certainly build back better when it comes to structures: using bricks and steel beams, et cetera. But can a whole society truly be built back better?

  According to newspaper reports, most societies experience long, miserable struggles back to some semblance of their predisaster states and are permanently set back by these events. You would assume that the more often a society is hit, the more often it experiences a setback, and the setbacks accumulate into permanent penalties. But that assumption, too, is a System 1 reaction (to a System 2 problem), and with a little more deliberative thinking,
the opposite conclusion can be reached.

  The idea that societies suffer losses but get back up and running fairly quickly after crises is controversial, too, as is the notion that societies sometimes profit from disasters. As early as 1896, philosopher John Stuart Mill mused, “What has so often excited wonder, is 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.”12 Tellingly, Mill writes “what has so often,” as if the “great rapidity” of recovery were common knowledge in the late nineteenth century. His musings applied more to “the ravages of war” than to disasters, but when he says it has “excited wonder,” he is saying that the swiftness of recovery is counterintuitive. System 1 thinking would lead us to imagine that recovery will be long and hard, but in many instances it is not. We need System 2 thinking to understand why.

  People readjust to new situations quickly, no matter how dreadful those situations are. The formal term for this is “hedonic adaptation.”13 It is the idea that people deal with shocks, both positive and negative, and then settle back to their previous state of happiness. Most people are not vastly happier when they gain wealth or vastly distressed if they suffer a loss—not for long, anyway. This phenomenon echoes an observation attributed to Dostoyevsky that “man is a pliant animal, a being who gets accustomed to anything.”

  In The Other Side of Sadness: What the New Science of Bereavement Tells Us about Life after Loss, George Bonanno, a professor of clinical psychology at Columbia University’s Teachers College, challenges the common notions that for most people, grief is a long, hard slog to be worked through in well-defined stages and that many people never get over the loss.14 Most of us are actually fairly good at dealing with tragedy. It seems to be a built-in feature of our psyche, something we must have to keep going.