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  • Mathieu Provencher

Creative Destruction of natural disasters?

That was a good earthquake we just had a few seconds ago (Lima, Peru)... What could be the macroeconomic consequences of a destructive earthquake? We are supposed to get a very serious one that may end up destroying most of Callao I was told... since we have earthquake mock practices fairly often, let's have an econ-practice of such events!

PS: I hope no one was hurt...

If the government re-constructed everything exactly the way it was, potential output would be lower than it would have been without the earthquake. That's because of the lost improvements that could have happened if the economy did not have such a shock... in other terms, the economy could go back to what it was before the earthquake, which would be lower than what the economy would have been without the earthquake (in which case the economy would have continued to grow).

However, a destructive earthquake could actually give a very good opportunity to the Peruvian Economy to update itself with much more modern and efficient infrastructures. Since most would be destroyed (in this scenario), why replace it with the old inefficient things of a poor country? Public and private investments could be made to completely re-organize and re-plan your city to make it an intelligent, efficient, and eco-friendly place (none of which is the case right now, as you probably all know very well)!!!! In this case, potential output could end up being much higher than before and you guys could be on your way to being a developed country!

Given the current political and cultural context in Peru, that looks very unlikely to happen...

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