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Evan Davis on disaster recovery

Updated Thursday, 24th March 2011
The Open University's Leslie Budd asks Evan: What would happen if a major disaster struck London, England?

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Leslie Budd

Evan, it’s ten days since the tragic events in Japan.  Many people are puzzled that there is a view that the Japanese economy will recover strongly after this natural disaster.  I wonder what your thoughts are.

Evan Davis

Well you need to distinguish between two different things, and people often blur the two and it creates confusion.  There’s the amount of activity that will go on in Japan over the next year, and there’s the welfare loss to the Japanese population on top of the human suffering, the economic welfare loss.  Let me explain the difference. 

If you destroy somebody’s house, you have a lot of activity when you rebuild it so the GDP figure may not suffer, the GDP figure could conceivably over some period actually go up because you’ve now got to build an extra house that is no longer there.  So the GDP figure doesn’t tell you everything that’s going on.  But of course, there’s still been a welfare loss, that somebody was without a house for a period, and at the end of the whole thing when you’ve rebuilt the house they're only back to where they'd started.  So what you’ve got is you’ve got to think about what is the damage that’s been done to people’s material welfare and what is happening to the activity going on in the economy, and those are not the same thing. 

And my own expectation is that what you'll see is a huge dip in Japanese economic activity because work stopped in a large part of the country for several days, work has been affected by other parts of the energy industry and the energy sector, so you'll see a huge dip in Japanese activity followed by an enormously strong rebound as the reconstruction work starts.  There’ll be lots going on, the Japanese will be very busy.  That won't mean that the Japanese economy in some way is delivering higher living standards or better lives for Japanese people, because of course there’s been a huge welfare loss to the Japanese population through the destruction of their property.  So you must separate out activity levels, that’s quite interesting, but what really matters to people is how well they're living, and the activity levels will be showing a much better picture than how people are really living I think.

Leslie Budd

There’s a great deal of uncertainty about the global economy, I wonder what you think about the Japanese rebound will contribute to rebalancing the global economy?

Evan Davis

I think it’s going to have a rather small effect, to be absolutely honest.  I think - here’s what I think it does, is it does contribute and it contributes as follows.  The Japanese - think of the world economy as being these two halves, countries that are saving a lot and exporting a lot and countries that are not saving so much and haven’t been exporting very much.  Britain and America are the big if you like, the borrowing importing countries; Japan, Germany, China are on the other side, they're the saving, exporting countries.  And the great mission for the world economy, over the next as many years as we can take over this, is to rebalance the two.  We can't have one half of the world doing the producing and the other half consuming, we need to have everybody doing a little bit of each.  And so if we see that job of rebalancing as the great task, what the Japanese earthquake does is aid that process, and it does it because for the next two years, three years, ten years, Japan has to look inwards a little bit to devote resources that might have been exporting away, towards rebuilding the corner of its country that has been so badly affected.  And that means Japan probably becomes a bit more like a spending nation than a saving nation, a bit more like an importing nation than an exporting nation, so that, to that extent, what happens in Japan probably does somewhat ease the rebalancing that the world needs.  But I don’t think we should exaggerate the overall effect, and these effects can be exaggerated, because the sheer volume of destruction that one sees, the human misery that one sees coming out of these things, can lead one to overstate the economic effects, that the area that’s been destroyed, the prefectures that have been damaged amount to about 7% of the Japanese economy.  Those entire prefectures have not been destroyed, so even if you're looking at half of them being destroyed, you're saying, you know, you're talking about 3% of the Japanese economy having to be rebuilt from scratch, and so you're talking about a relatively small proportion of the global economy that is being directly rebuilt or affected by this tsunami and earthquake, and I think that means that by and large I suspect that sort of in the big global picture it’ll end up being quite modest in effect.

Leslie Budd

Closer to home, there’s a real challenge for the authorities in rebalancing the UK economy in the aftermath of the financial crisis, but there was a report suggesting that London could be flooded in the future.  Are there some perverse outcomes from that if that occurred?

Evan Davis

I mean I think first of all it’s worth saying that one thing the tsunami and earthquake tell you is to think about disaster preparedness, and for the really unexpected disasters, could you survive?  How badly affected would you be if you had to take a 20% cut in income?  I mean what resilience do your systems have?  I mean I'm sure people all over the world, particularly in nuclear power stations, are asking themselves questions like that at the moment. 

What would happen if London was flooded?  Now I think an interesting feature of the service industries, and remember London is a service economy, most of the UK’s manufacturing is outside of London, the interesting feature of service economies is they're predominantly about the human capital rather than the physical capital.  When we look at some of our big manufacturing businesses it’s the physical equipment that is doing a lot of the hard work, and indeed you can go to some factories and you hardly see a person around. Service businesses are predominantly about the people and the systems.  So I think if you had a flood in London that didn’t kill people but simply destroyed buildings, I suspect the activity would be back up and running more quickly than it would if it was in other parts of the country where you have things that really matter, where you have factories that will be damaged and would need replacing. 

So I think sometimes around the BBC, which matters more to the BBC, the buildings and the equipment or the people involved at the BBC?  I'd like to think it’s predominantly the people that matter, and even if you took out all the physical operations in London, you know, we could probably buy quite a lot of the equipment, hopefully with a bit of good insurance, we could go and buy on the world market a lot of that equipment, replace it and be back up and running quite quickly.  Now this is perhaps a very optimistic point of view and I'm not sure it’s right, but in some ways I think the human capital businesses tend to be more resilient than the physical capital ones. 

In terms of the rebalancing of the UK economy, goodness what happens if London is badly, badly destroyed?  Obviously you’d get a more egalitarian UK economy because at the moment it’s highly lopsided, so London suffers, the rest of the country relatively suddenly looks much better, but again that’s going to mean more resources pouring into London for the next five years while the rest of the country has to face for example higher taxes to pay for the reconstruction of the capital, so it may not be a huge benefit to the rest of the country to see one part of the country suffer.

Leslie Budd

Thank you, Evan.




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