The Asian tsunami disaster

— the prospects for recovery

First and foremost the Boxing Day Asian tsunamis represent a human tragedy: the massive loss of human life and livelihood and subsequent risk of disease and destitution for large segments of the surviving population in the affected areas. This article considers this question in the context of the economies of Thailand, India, Indonesia and Sri Lanka. Will this tragedy lead to devastation comparable to the Asian currency crisis of 1997-98 when the economy of Indonesia, for example, shrank by more than a tenth in the space of a year followed by only slow if sustained recovery?

Professor Raghbendra Jha is the Rajiv Gandhi Chair Professor and Executive Director of the Australia South Asia Research Centre at The Australian National University.

For Thailand and India it appears that with sustained international aid and some luck, the chances of a crisis are remote. Sri Lanka and Indonesia, however, will need considerably more support to insure that their economies do not slip into a tsunami-induced slowdown.

Thailand is a middle income country with per capita Gross Domestic Product (GDP) of US$2000 and healthy economic performance in the recent past. The tsunamis are expected to reduce Thai GDP growth rate by 0.1 per cent this year with little longer-term affect, although the damage to the Thai tourist industry (estimated to account for 5.4 per cent of GDP and 8.9 per cent of employment in 2004) has been substantial. The extra infusion of funds for reconstruction and supply bottlenecks might lead to short-term inflationary pressures.

In the case of India, the loss to infrastructure has been most severe in the Andaman and Nicobar Islands. Major ports on the eastern coast suffered little damage.

In 2004, tourism in India accounted for 2 per cent of GDP and 5.6 per cent of total employment. Tourism is well dispersed through the country so that the impact of the tsunami on this industry has been small. After some initial hiccups in the relief work, the pace of reconstruction accelerated. Further, India, like Thailand, has substantial international reserves to cope with the foreign exchange component of the reconstruction effort.

The prospects for Sri Lanka are of a different order. In 2004, as much as 10.8 per cent of Sri Lankan GDP and 8.8 per cent of total jobs came from tourism, much of this concentrated around the now devastated eastern and southern beaches. Sri Lankan economic performance, although picking up in the last few years, has been below potential and international reserves are low. Such considerations have led some observers to conclude that as much as 1 per cent of Sri Lanka’s potential annual growth in 2005 may be lost.

Similar comments hold for Indonesia. The devastation there has been general — extending across a wide range of economic activities — as well as the most extreme. Although Indonesia recently posted a revival of economic growth, such widespread destruction of infrastructure and economic activity has the potential for adversely affecting growth prospects for 2005. Indonesia weaned itself off a massive International Monetary Fund (IMF) bailout package in 2003 and now has low reserves. Any pickup of growth prospects would depend substantially on how large and sustained the flow of international aid is and how governance structures in Indonesia respond to these challenges.

Despite these problems, analysts expect the economy of the region to bounce back fairly quickly, particularly given the spectacular amount of international aid. However, no one should underestimate the scale of this problem. Earthquakes have often caused considerable devastation — but typically of a localised variety. This time, the damage stretches across thousands of miles and involves millions of people, creating a huge logistical challenge for international organisations, aid agencies and participating governments — both donors and recipients. The massive aid inflow (in foreign exchange) may cause the Indonesian and Sri Lankan currencies to appreciate, thus impacting their export growth. As the Thai Prime Minister has suggested, a less demanding, yet effective and complementary policy would be for OECD countries to lower tariffs against the goods and services exported by these countries.

Also in ANU Reporter Autumn 2005:

Living with fire

Exploring a small world

Buried bounty

Broadening horizons

Bradman: $35million not out

Market rates physics

Learning environment

Water, water everywhere...

Real men uncovered

From the Vice-Chancellor's desk

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