COMMENT: Tsunami impact still growing

by Canadian Shipper

The relative tranquility of the closing weeks of 2004 was shattered by the Asian tsunami of December 26. Perhaps because the epicentre of the earthquake was close to the epicentre of world economic growth, the shock has attracted considerable economic analysis.

That analysis presently indicates that the economic consequences will not be large or far-reaching. According to a consensus of economists, growth in the region should be reduced by only a few tenths of a percentage point, less than during the SARS crisis, for example.

While these figures are reassuring, they should be interpreted cautiously, for a couple of reasons. First, economists’ calculations are based on assumptions about the damage. They take the contribution to a country’s GDP of the affected region (a fact) and combine it with an estimate of that region’s lost GDP (a guess an educated guess, to be sure, but a guess nonetheless). To illustrate, the southern region of Thailand contributes about 10% of Thailand’s GDP. Hypothetically, then, if 15-20% of southern Thailand’s annual GDP were lost, then 1.5-2.0% of Thailand’s annual GDP would be lost but we can only guess at the 15-20%, for now.

Second, the shock itself is still increasing in both magnitude and dimension. On the magnitude of the shock, recall that the early reports estimated that there were as few as 12,000 deaths. Today, that number is over 150,000 and still rising. If the economic impact is related to the number of deaths, then it is still growing. With regard to the dimensionality of the shock, relief agencies are now focusing on the risk of a massive outbreak of disease. If this risk were realised, the economic disruption would be greater than current estimates a whole new shock could be on the horizon.

All to say that we should not take too much comfort from these early estimates of the economic fallout. But there are positives, too. The level of aid is now in excess of $3 billion and still growing. Some of this money will go to immediate everyday needs. However, the bulk will be available for the bigger clean-up and rebuilding. Rebuilding means investment, and the quickest way to get an economy up and moving again is an injection of new investment, particularly in infrastructure.

Canada has risen to the occasion in terms of aid, not surprisingly. Beyond the usual outpouring of support for people in trouble, Canada has strong cultural linkages to the region, and significant business interests, too. Although our goods exports to the affected countries (India, Indonesia, Malaysia, Maldives, Sri Lanka and Thailand) are only about $2.2 billion per year, our imports from the region are about $6.6 billion. Of this, we estimate that some 15-20% represents intermediate goods in other words, various companies in the region are embedded in Canadian companies’ global supply chains. Canadian companies have over $7 billion in assets on the ground in those countries, with about three-quarters of that total in Indonesia. So far, these interests look secure.

The bottom line? The Asian earthquake and tsunami were disasters of the first order. The human costs have been enormous and are still growing. Although early estimates of the economic costs look reassuring, we should at least be prepared for the risk of a worse outcome.

Stephen S. Poloz is Senior Vice-President and Chief Economist , Export Development Canada. His column appears weekly on www.ctl.ca

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