John Rapley
THE LAST year has produced more frequent, and more intense storm activity in the Atlantic than we have seen in a long time. This has refocused the popular imagination on the impact disasters have on development. Here in Jamaica, we often lament how storms can set back our economy.
Surprisingly, though, the impact of disasters on human development is not always so straightforward. Throughout history, natural disasters have often precipitated rather than retarded growth. The great plague that swept through Europe in the 14th century wiped out a third of the continent's population. But many historians also argue that it transformed society and initiated the development of modern capitalism.
What goes for natural disasters can also be said for the man-made variety. World War II decimated the European economy, but it was followed by a quarter-century economic boom. In recent years, wars have been followed by dramatic economic rebounds in countries as diverse as Uganda and Mozambique.
Not that this is any cause to celebrate tragedy. Once in a while, someone will in fact argue for the cleansing effect of war.
The more important point is a common bit of wisdom that economists have known for a long time: what really drives development is not so much the natural environment as human ingenuity.
For its part, the US has usually managed to recover from natural disasters promptly. The rule of thumb is now that hurricanes, no matter how destructive, cause only temporary dislocation to the U.S. economy, and that within a year things return to normal.
FLEXIBLE MARKET ECONOMY
Exponents of the 'American way' credit a flexible market economy, in which entrepreneurs can quickly respond to opportunities and price incentives with a minimum of government restraint. Indeed, this was the very tune Federal Reserve Board chairman Alan Greenspan sang this week, when he suggested that Katrina and Rita would do little harm to U.S. growth prospects.
However, some observers are cautioning that this time around, the bounce-back might not come as soon as expected. In principle, the U.S. economy still has the flexibility needed to recover quickly. But this time around, it is arguably stretched by imbalances, and so more vulnerable to exogenous shocks.
We have been hearing for some time about these imbalances - the fiscal deficit, the current account deficit, a saving rate near zero - and the dangers these pose for the future. But what I think may be really problematic is a story that has only recently begun receiving much attention, namely, the rising rate of inflation.
On the surface, the US licked its inflation problem in the 1980s, and the problem never seriously returned. This enabled interest rates to drop to historic lows, driving the economic boom of the 1990s and the quick rebound from the recession of 2000-2001.
Yet for a variety of technical reasons, inflation has been building up in the "pipeline." The surge in housing prices gets plenty of attention, but labour costs themselves have been rising steadily. Sooner or later, these will either eat into corporate profits, or bump up inflation. The latter eventuality seems to me the more likely one.
By bumping up food and gas prices, even if only temporarily, Katrina and Rita could fan this inflationary fire. That would then drive up interest rates. But the American economy seems currently to be operating on the expectation that low interest rates are here to stay.
Mr. Greenspan himself has been dropping heavy hints that this optimism could be misplaced. Investors seem to be ignoring them. But if interest rates continue rising well into next year, their weight on the US economy could be heavy. Then Americans, like we are doing, might find themselves still feeling the effects of a storm long after it has passed.
John Rapley is a senior lecturer in the Department of Government, UWI, Mona.
