Posttsunami lessons from Asia: economics of reconstruction

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Post-tsunami lessons from Asia economics of
reconstruction
Sisira Jayasuriya (La Trobe University,
Melbourne) Peter McCawley (ANU,
Canberra)
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Main issues

• What happened?
• Need for an evaluation
• Response activities
• Response funding
• Construction (and Dutch Disease)
• Some lessons

3
Main issues

• What happened?
• Need for an evaluation
• Response activities
• Response funding
• Construction (and Dutch Disease)
• Some lessons

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Key facts

• Date 26 December 2004
• Died over 220,000
• Aid 14 bn (foreign) 3.5 bn (national)

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Dead and missing

• Deaths
  Other human impact
• Indonesia 167,000 gt 500,000 displaced
• Sri Lanka 36,000 800,000 displaced
• India 16,000
• Thailand 8,000 gt 2000 foreign
  tourists
• Maldives 108
• As of population, highest in Sri Lanka (0.18),
  but as of region, highest in Aceh (4)
• Female deaths disproportionate

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Economic costs initial estimates

• Damages Losses Damage Losses
  (D L as ( billion)
  of GDP)
• ----------------------------
  -----------
• Indonesia 2.9 1.5 4.4 (2.0)
• Sri Lanka 1.1 0.3 1.4 (7.6)
• Thailand 0.5 1.7 2.2 (1.4)
• India 0.6 0.6 1.2 (0.2)
• Maldives 0.4 0.1 0.6 (83.6)
• Local impact much larger e.g. Aceh 97 GDP
• Source Telford, Cosgrave and Houghton (2006)
• Add psychological trauma, environmental
  impact.
• Pre-existing problems of unemployment, poverty
  etc., aggravated by tsunami

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Main issues

• What happened?
• Need for an evaluation
• Response funding
• Response activities
• Construction (and Dutch Disease)
• Some lessons

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Main steps in an evaluation

• Define objectives
• Collect facts
• Conclusions lessons and recommendations

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Compare Indonesia, Sri Lanka, Thailand

• Impact of the tsunami on 26 December 2004
• Delivery of relief assistance and reconstruction
• Effectiveness
• Speed vs targeting
• Coordination multiple agencies, multiple agendas
• Social consequences
• Resettlement, restoration of livelihoods, trauma
  and stress, social cohesion
• Lessons preparing for natural disasters
• Early warning systems, community preparedness
• education and organisation
• Insurance private and public
• Reconstruction and economic recovery

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From relief to reconstruction

• Restoring livelihoods restoring markets, credit,
  basic equipments etc
• Housing main concern of most households
• Infrastructure essential to restore local
  economy

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Main issues

• What happened?
• Need for an evaluation
• Response activities
• Response funding
• Construction (and Dutch Disease)
• Some lessons

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Immediate relief

• Immediate community response then national
  government then later, international assistance
• Problems with poor coordination among agencies,
  some bungling, inequitable distribution etc. ...
  but,
• Food, water, basic shelter, medical assistance,
  clothing, basic household utensils and other
  necessities provided
• No break down in law and order (contrast with
  Katrina)
• No major health/disease problems
• A reasonable response in the circumstances

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Progress uneven, targets not achieved, several
common problems

• Performance
• Sri Lanka The Tsunami Emergency Reconstruction
  Program I (TERP I) ended on March 31, 2007. At
  completion, there are still about 15,000 families
  in need of permanent housing
• Indonesia 30,000 houses remain to be built
• Thailand better performance
• Spending low
• e.g. U.S. Government Accountability Office
  concluded that only 20 of funds allocated to
  USAID for reconstruction activities in Indonesia
  and Sri Lanka spent by end-2006
• Similar low figure for Australian assistance to
  Indonesia
• Paradoxically, funding gaps emerge!

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Tsunami aid optimism and euphoria

• If the level of commitment demonstrated by the
  international community is maintained, the
  tsunami will be remembered as a model for
  effective global disaster response, not just as a
  disaster. we give the overall aid effort a
  grade of A.
• The Tsunami Report Card, Foreign Policy,
  December 2005
• Karl F. Inderfurth, David Fabrycky, Stephen P.
  Cohen

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Main issues

• What happened?
• Need for an evaluation
• Response activities
• Response funding
• Construction (and Dutch Disease)
• Some lessons

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How much additional aid? What was the real value?

• Headline figure of around 14 billion not a
  very accurate indicator however
• Timeliness and timeframe
• Grants (cash or in kind?) or loans (terms?)
• in kind - often very expensive
• Conditionalities slowed down disbursement, by
  passing government exacerbated coordination
  problems
• Additionality somewhere between 3.5 billion
  to 14 billion
• Rhetoric and Reality
• Humanitarian objectives not only or even most
  important driver of assistance

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International response -- promises

• Tsunami recovery represents the largest ever
  mobilisation of donor funds for an emergency and
  reconstruction effort. ...NGOs and the Red
  Cross movements alone raised over 5 bill,
  alongside 8 bill pledged by governments and
  others for recovery and reconstruction."
  (Schwartz 2006)
• Headline figures for total international
  assistance in range of 13-14 billion range
• About 3.5 billion also expected from domestic
  sources
• Attention focused on international assistance but
  large, often unrecorded, assistance from domestic
  sources
• Initial promises from multilaterals, governments,
  international NGOs - appeared more than adequate
  to cover reconstruction costs

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Not quite an A grade performance

• some international agencies managed well
  but many did not. .Local contexts, institutions
  and contributions were frequently neglected.
  Affected peoples will and capacity to move from
  reliance on handouts to rebuilding their lives
  were inadequately exploited . They were
  marginalised, even undermined, by an overwhelming
  flood of international agencies controlling
  immense resources.
• TEC Joint Evaluation Report, July 2006

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Main issues

• What happened?
• Need for an evaluation
• Response activities
• Response funding
• Construction (and Dutch Disease)
• Some lessons

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Building costs expected versus actual

• Indonesia
• Housing cost figures from surveys - are 80-90
  higher than initial estimates
• Road costs higher by gt 75
• Sri Lanka
• Housing costs increased 50 over initial
  estimates by August 2005, and by year end 80-100
  higher
• Thailand
• Cost increases were mild

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Cost increases, delays, cuts in size of
reconstruction

• Although both of its signature projectsone in
  Indonesia and one in Sri Lankaare under way,
  USAID has increased initial cost estimates,
  reduced or canceled some project activities, and
  may extend completion dates. .In Indonesia,
  estimated construction cost per mile increased by
  75 percent USAID reduced the length of road to
  be built by over one third
• United States Government Accountability Office,
  Report to Congressional Committees, February 2007

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Cost of capital asset replacement

• How much reconstruction/capital asset
  replacement is possible per unit of foreign
  assistance (per ) depends if nominal exchange
  rate does not change - on extent of cost
  increase
• the higher the costs, the smaller the amount
  that can be built

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Cost Increases and funding gaps

• International and national agencies cost
  estimates off by wide margin
• far too low cost inflation factored into
  estimates
• Unanticipated funding gap ? wider fiscal deficits
  and related macroeconomic problems, assets not
  fully replaced ? long term growth ?

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From tsunami devastation to building boom

• Reconstruction is concentrated on construction
  sector in affected areas
• ? building boom in disaster areas
• The building boom raises demand for building
  inputs (materials and labour)
• Some materials are easily imported importables
  - at more or less given prices, but others are
  domestically sourced - in relatively constrained
  (inelastic) supply
• ? construction materials prices and skilled
  construction wages ? ? - by (much) more than
  general inflation

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Supply factors

• Aceh
• wages increased although moderated by labour
  inflow due to peace
• But material costs increased quickly
• Sri Lanka
• cost increases were driven primarily by higher
  wages for skilled labour
• Thailand
• No increases why?

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Cost increases imply diversion of funds away from
reconstruction

• How much reconstruction/capital asset replacement
  is possible per unit of foreign assistance (per
  ) depends if (nominal) exchange rate does not
  change - on extent of cost increase
• higher the costs, the lower the amount of
  reconstruction
• Windfall gains to owners of scarce construction
  inputs,
• at expense of disaster victims and public
  infrastructure

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Over time, more construction inputs become
available

• Staggered reconstruction reduces construction
  cost increases
• But delaying reconstruction means continued loss
  of capital asset services
• Optimal pace of reconstruction (and optimal
  sequencing of building) must balance these
  factors
• Depends on the degree to which inputs become more
  elastic over time
• In more open economies, more inputs are tradeable
  (hence more elastic supply)
• Fastest possible pace of reconstruction is NOT
  economically optimal
• Inefficiency in spending - blessing in disguise!

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Main issues

• What happened?
• Need for an evaluation
• Response activities
• Response funding
• Construction (and Dutch Disease)
• Some lessons

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Tsunami experience lessons and issues

• Immediate assistance
• Mode cash vs kind
• Scope targeting vs universal
• Coordination
• Reconstruction and rehabilitation
• Physical private (housing) and public
  infrastructure
• Cost escalation
• Market vs state balance

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Reconstruction lessons for large-scale
post-disaster recovery

• Dont assume all promises of aid will be met
• Expect sharp increases in building costs plan
  for them in estimates of financing needs
• Formulate staggered building program, prioritize
  construction activities by social needs and
  payoff
• Build back better?