Friday, September 10, 2010

Gems in the rubble: economic process is dynamic not static even after earthquakes

A number of economists (me included) have pointed out that while there will be a lot of increased construction and related activity generated by the “re building” of Christchurch, this does not necessarily make up for the loss nor add to economic output because of the opportunity costs involved in glaziers being diverted from what they were already doing, profits lost while re construction takes place and all the other cost mayhem imposed.

That is true – and intuitively it feels as if it should be true – otherwise we could generate GDP growth heaven simply by smashing things and repairing them.

Clearly we can’t. So “net” we don’t want earthquakes thank you.

BUT – this is also a static analysis. Life – and economic processes -  are of course dynamic. By thinking about the dynamic aspects of re construction we do start to see some net benefits. Consider:

  1. New buildings and reconstruction will involve today’s materials not yesterday’s – they likely last longer, deliver better performance, and, are likely more earthquake proof,
  2. New techniques and improved productivity practices are likely to be used in the re build meaning things will get done faster and more efficiently and likely more safely,
  3. There are multiple opportunities to consolidate building spaces, replace air conditioning, improve heating, better adapt, re fashion, customise and improve so as to fit the “new” fabric of the CBD to today’s conditions,
  4. Various weaknesses, vulnerabilities, temporary solutions and deficiencies in local infra structure, networks and like assets will no doubt be discovered and put to rights.

The improved technologies, work practices and materials available for the most part at lower cost per unit than when the “originals” were installed means that these improvements will be able to be implemented – as a matter of course (“we wouldn’t do it that way if we were doing it today” is the concept here) at a cost likely to be less than originally incurred and one which offers better value for money.

No doubt other opportunities to add value will arise – the chance to lay more fibre, lay very long lasting plastic pipes instead of shorter lived environmentally less sound lead and metal – and an ability to get all of this done without the costly, time consuming and debilitating impost of the various regulatory regimes which often strangle progress.

Does this mean we should celebrate this event? No of course not – the costs have been and will continue to be disturbing and horrendous. It does mean though that there are silver linings.

The major costs which are difficult to bear are the transition costs – supermarket workers cannot turn into fibre optic telco technicians over night.  Ghosts and fears cannot be laid to rest easily and trauma impacts do not always yield well to economic progress.

For this reason the enormity of the volunteer and charitable efforts of those helping reduce adjustment costs and offer succour in numerous forms are both vital and to be admired.

Even where transition costs are tough though, dynamic market processes help. The scope for Foodstuffs in Kaiapoi for example to build their reputational capital, turn their considerable skills and experience to helping their workforce and franchise owners while calling in the assets in the rest of the country which their owners investments have helped build generates hope and assistance.

So – it is true that we cannot vandalise our way to heaven and that mother nature playing vandal is neither helpful nor pleasant – but it is also true that opportunity abounds in building new ways forward for communities which are likely stronger not weaker than they were.


  1. Like Napier & the Art Deco period it grew from it's EQ experience .ChCh has the opportunity to arise the most modern city in NZ. Strong , EQ resistant the opportunity's are endless ... embrace the situation .... That it will never come again is what makes life so sweet ....

  2. Only 5% of the buildings in the CBD are damaged so dont hold your breath. Vacancy rates are already pretty high and there are numerous empty buildings that havent been renovated in years. One would guess a lot of owners will take the indemnity cheque and flog off the land in time.
    I have never seen an economic situation grind to a halt so quickly when Bollard starting hiking a few months ago.

  3. Note that the good Govenor has put a moritorium on OCR increases for a while.

  4. Thank god for that, not sure what inflation he was worried about.