Nepal is struggling to cope with the worst earthquake in a century. The death toll has climbed on 8,000 and more than 14,000 injured were being treated as of May 4, 2015. The effect of the tremor has been felt over a mountainous stretch of 120 kilometers from Gorkha to Sindhupalckowk.
It is too early to draw any detailed conclusion on the economic impact of the earthquake. But we can review some important literature and evaluate the available information about the damage so that the reconstruction roadmap can be devised.
There is little doubt to be found in the literature that a natural disaster such as earthquake has negative impact on the economy in the short run. But the long run impact on the economy is at least ambiguous.
Short run slump
The economic costs for its 19 billion dollar economy could be as much as 10 billion dollars, according to US Geological Survey estimates. As opposed to 5.5 percent growth rate expected for 2015, Asian Development Bank has said that it could be depressed to as low as 3 percent.
The case of Haiti earthquake can be a good example for us to study. Before the earthquake, the average growth rate of Haiti was 3.5 percent. After the earthquake in 2010, the growth rate was negative 5 percent. After almost 2 years, the country was able to achieve economic growth rate of 5.5 percent.
According to Emergency Events Database (EM-DAT), local capacity of the economy is going to be overwhelmed, necessitating national and international level of assistance.
Uninterrupted even by the 10 year long Maoist insurgency, GDP of Nepal has been consistently growing at the rate of 4-5% per year since 1990. The low growth economy is due to its high reliance on subsistence agriculture production, which rarely relies on modern infrastructures.
Earthquake by nature has much bigger impact on manufacturing sector because of the reliance on infrastructure such as transportation, power plants and factories. Manufacturing sector constitutes less than 10 percent of the GDP. As of now, there have not been reports of significant damage to major highways and power plants. Whether the industrial sector will be able to contribute their share in the economy depends on the level of damage done on factories.
With most of its world heritage sites destroyed, tourism sector is going to be hard hit in the coming months. Education sector is closed for almost three weeks. Given that Kathmandu alone contributes to 25 percent of GDP and manufacturing, education and tourism sector being shut for at least three weeks, the total effect on GDP is going to be major.
As more than two hundred thousand homes have been totally decimated by the magnitude 7.6 earthquake, much of the stored food and electronics have become useless. Nepal is unable to produce both of these items in the short run. This will put upward pressure on import and price.
Milk production in coming months is going to be at reduced level because many thousands of cattle have been killed by the disaster.
We are yet to know the full effect on rural highways. This can pose challenges on the distribution resulting into higher prices. Higher demand for reconstruction workers will also invite wage rate inflation.
With all these slowing economic activities, GDP is likely to suffer significantly in 2015. The already amplified inflation is likely to go up even higher.
Long run prospects
In the long run, the economy might have some good prospects because of the earthquake. A study of 89 countries in 2013 by Chul Kyu Kim of University of Michigan suggests that there is a positive correlation between long run economic growth and the frequency of disasters.
For years to come, this region will be in a dire need of construction raw materials such as bricks, cement and iron rod. Nepalese industries in the unaffected areas can have huge potential for growth in coming years in these sectors.
As more than ten thousand government buildings are destroyed, the service in the short run is going to be severely affected. But this will also draw huge government investment and hence higher economic growth in the long run.
After the disasters like this construction sector try to incorporate the risks in their investment decisions. This can have negative impact on the construction investment. The earthquake is likely to have negative impact on the demand for high rise buildings thus discouraging investment in this sector.
In the long run, Nepal has the opportunity to import newer technology and take bold investment decisions.
Schools and hospitals might be looking to move on the outskirts for more space. This will reduce the cost of schools and health service.
With regard to tourism sector, in the long run, entrepreneurs will identify new destinations and rely less on heritage sites. This will make the future growth of tourism sector more robust.
With increased spending requirements on reconstruction and anguished internal revenue due to economic slump, fiscal health of the economy is likely to deteriorate further.
On the darker side is the labor market. Nepal is in a dire need of construction workers on the aftermath of the great earthquake. But more than 3 million Nepalese youths working abroad have no plans to return home under current economic circumstances. The earthquake is likely to accelerate the emigration further. Even if sufficient capital supply is ensured, both the industrial and construction sector is likely to face substantial hurdles to recovery due to the lack of cheap semi-skilled labor.
Information Handling Services (HIS) estimate the reconstruction cost exceeds 20 percent of Nepal’s GDP. If we assume that the reconstruction work is going to take 5 years, 4 percent of Gross Domestic Product (GDP) has to be allocated every year for next 5 years. That means we need extra 1 billion dollars every year. This is likely to negatively affect the construction of other projects of national priority such as highways and power plants.
Earthquake has not only brought short run challenges but also long run opportunities to the economy of Nepal. Nepal immediately needs to address the issue of labor and capital shortage. Capital can be imported from international community with some efforts. But inadequate labor supply is going to be the most difficult challenge for Nepal in the rebuilding process.