Taal’s fury and the economy

So early in the year, we are beset with a major natural disaster yet again. Two major typhoons just ruined the Christmas season for large numbers of our fellow Filipinos, and now this—and the disaster isn’t even over. A major explosive eruption is still anticipated from Mt. Taal as of this writing, and based on the nature of the expected “magmatic” versus the recent “phreatic” or steam-induced eruption, it could well be that the worst is yet to come. What do all this hold for Filipinos in general?

The question I tend to get asked as an economist is what impact Taal’s eruption would have on our economy. People seem to be after a number that measures the impact, with interest usually on economic growth, especially given the ups and downs our gross domestic product (GDP) growth has seen in the past year. But it’s actually a misplaced question because GDP is hardly the right yardstick for assessing the cost of calamities, even taking “cost” in its narrow economic sense—and we all know that the negative effects are much more than economic. There’s no question that the economic costs could be staggering. Damage to crops and food production alone would run into the hundreds of millions, possibly billions, of pesos. Earlier this week, the Department of Agriculture put out the number P577.59 million as an estimate (with remarkable precision) of crop damage. But damage to lives, property and infrastructure is likely to be far beyond that, and the orders of magnitude involved are anyone’s guess.

The true extent of economic costs alone cannot be readily seen in the GDP data that official statistics will report later. This is because the GDP data will count the remedial economic activities that will be spurred by the calamities along with those that have been curtailed by it, showing why GDP should never be looked at as a measure of well-being. Higher GDP does not imply more happiness, and more misery can in fact be associated with higher GDP. It’s perfectly possible, even likely, that the value of economic activities in disaster remedial measures would more than offset the reduction in regular economic activities, such that a net positive effect on GDP could actually result. For example, I’ve checked the data for the periods corresponding to past major typhoons “Ondoy” (September 2009) and “Sendong” (December 2011), and the Habagat floods (August 2012). As I suspected, GDP growth actually speeded up in the aftermath of those calamities!

Much of the economic activities spurred by disasters lie within the part of the economy called the informal sector, better known as the “underground economy,” because transactions therein are not captured in official statistics. During such calamities and in their aftermath, many economic activities not seen in more normal times tend to flourish. In past instances of prolonged flooding, for example, “water taxis” and toll footbridges sprouted all over. In the aftermath of Ondoy in 2009, I remember seeing ads for inflatable boats and rafts coming out in the papers, hinting the emergence of a growing industry in small-scale water transport—over floodwaters.

Carpenters and construction workers suddenly find themselves in great demand for home repairs. Enterprising groups and individuals have offered home clean-up and recovery services for hire. I even saw ads for restoration of precious photographs damaged by floodwaters. Vehicle repair services in both the formal or informal sector suddenly find great demand for the thousands of motor vehicles submerged in floodwaters, and now, damaged by ashfall. And then there are the substantial economic activities associated with respiratory and other illnesses and deaths, from sales of common medicines to funeral services. The list goes on and on.

All told, every natural calamity is different, with their own peculiar impacts on the economy and people’s well-being. The last similar disaster we had was the 1991 eruption of Mt. Pinatubo, but the geography of Mt. Taal makes its eruption very different from Pinatubo’s. Putting any number to the economic impact of Taal’s eruption at this time would be nothing more than speculation, even irresponsible.

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