Wayne Henry, Contributor
THE JAMAICAN economy is still in the process of assessing the overall economic impact of Hurricane Ivan. The Prime Minister and the Minister of Finance and Planning, using initial estimates of the costs imposed by the hurricane, have made presentations outlining the plans and projections of the Government for the recovery of the economy.
The assessment process will continue. Individuals and entities continue to do their estimations, make and submit claims and applications, and take measures to rebuild, restore and recover. While this is ongoing, some aspects of the impact of the hurricane may not be immediately apparent, and some effects can linger and be long-lasting. For example, as the hurricane negatively impacts on individuals' capacity to service and repay debts, the impact on loan portfolios may take some time to manifest, and can have long-term effects.
The traditional economic impacts of a natural disaster such as a hurricane can be many, some of which are:
REDUCTION OF GROWTH
Economic growth can be simply defined as the increase in the productive capacity of an economy whereby there are more goods and services available to persons there. With the onslaught of a hurricane there is typically a reduction in the productive capacity of the economy. This loss in productive capacity can result from the injury of or death to workers, from damage to productive infrastructure (land, buildings, machinery), or from damage to transportation infrastructure (roadways, shipping ports, airports). This reduction in the production and/or supply of goods and services in the economy will serve to bring a reduction in its economic growth levels.
INFLATION
As these goods and services become shorter in supply, with no attendant reduction in demand, their prices will increase. Thus, there is typically inflationary pressure created by the shortage of goods and services in the economy. If the central bank of the economy moves to curtail this inflation by increasing interest rates, this would exacerbate the recessionary environment of the economy, as higher interest rates, among other things, represent increased costs of borrowing and lead to a reduction in investment. If the central bank does nothing to curtail inflation, interest rates can still increase. Money demand typically increases in response to higher prices. If there is no accommodating increase in the money supply, this condition of excess money demand will drive up interest rates. If the central bank accommodates the increased money demand by increasing money supply, interest rates should remain unchanged, but this could worsen inflation levels.
FISCAL BUDGET DETERIORATION
The fiscal budget is the Government's plan of expenditure and revenue collection. With the occurrence of a hurricane, a government will typically increase its spending to assist in the relief and reconstruction efforts of the economy. If, in seeking to facilitate reconstruction efforts, the Government does not increase overall spending but rather reallocates monies from other intended applications, it may incur opportunity costs in doing so. There may be productive losses, welfare costs or general inefficiencies associated with those areas from which budgetary allocations were withdrawn or reduced.
On the revenue side, a hurricane will typically lead to a fall in revenues accruing to the Government due to production losses. All this will have implications to the ability of the Government to service any debts it may have outstanding, or the need to even increase its debt burden to help in the recovery efforts of the economy.
BALANCE OF PAYMENTS (BOP) DETERIORATION
A country's balance of payments is a record of its transactions with the rest of the world. Most notably it includes the current account, which lists the country's exports and imports of goods and services. Typically, and particularly for a small open economy such as Jamaica, there will be an increase in importation of goods and services into the economy following the hurricane. These imports will consist of supplies associated with reconstruction and recovery efforts, as well as goods and services required to make up for any shortfall that may exist in the domestic supply.
Simultaneously, with the reduction in the productive capacity in the economy, there will be a decrease in the level of exports of the economy. All the above-mentioned impacts can be offset by the extent to which relief assistance comes into the economy in the form of grants, concessions and private inflows (including remittances). However, if such inflows into the economy are sufficiently large, they can serve to generate economic activity at levels even above those that characterised the economy before the hurricane.
JAMAICAN SITUATION
Jamaicans have much to be thankful for, in that the eye of Hurricane Ivan did not enter the island. Seventeen persons reportedly died during this time, which is a significant loss. While we empathise with those who suffered great loss during this time, collectively we breathe a sigh of relief and gratitude as we realise that the impact of the hurricane could have been much worse. One need only look at the experiences of other affected countries.
Reportedly, the agricultural sector in Jamaica has been hardest hit by the hurricane, estimated to cost billions of Jamaican dollars. We have also heard of the fallout in the bauxite and alumina industry, with damage to ports and the delay of alumina shipments. And of course, there is the visible and widespread evidence of flooding, damage to housing and to roads.
Reconstruction and recovery will be an involved process, and its success will depend on the collaborative effort of the stakeholders in the economy, and the prevalence of the indomitable Jamaican spirit.
Wayne Henry, Ph.D lecturer UWI, Mona Campus Email: wayne.henry@uwimona.edu.jm
