The human impact of the Asian tsunami that hit on 26th December 2004 was devastating. Business responded immediately with corporate donations on a scale that had not been seen before. Never has it been more obvious that the corporate world is made up of citizens, and that business is not emotionless. Now that analysis of the economic impacts of the tsunami is starting to emerge, its impact on the economies of the countries affected, and on businesses, seems to be much less severe than expected. There are lessons to be drawn from the economic impact of the tsunami, and the impact of other major shocks to Asian economies, such as the monetary crisis of 1997-8 and the SARS outbreaks in 2001.
A seismic shift on the floor of the Indian Ocean off the island of Sumatra in Indonesia on the morning of December 26th 2004, set off a giant tidal wave, a tsunami. The oceanic earthquake measured 9.0 on the Richter scale and created a giant wave that swept up beaches and destroyed houses, boats, ports, hotels, shops, roads and railways. By the second week in January the number of dead was estimated to be more than 165 000, but with collapsed infrastructure in the affected areas, water borne diseases, together with malnutrition from the loss of income and food supplies, may have taken the death toll up to 300,000.
The countries physically affected were: Indonesia, Sri Lanka, India, Thailand, Maldives, Somalia, Kenya, Tanzania, Seychelles, Myanmar, and Bangladesh.
The table below summarises how gross domestic product, a measure of the economic activity in a country, is expected to be affected. Indonesia was hardest hit in terms of human and physical damage. In the Seychelles, where half of the national economy is dependent on tourism, damage is assessed at $30m, which may appear to be a small absolute figure, but is in fact 14% of the government’s national budget.
2004 GDP growth
2005 GDP growth forecast
Tourism earnings as % of GDP
6.0 – 6.5 %
5.5 – 6.5%
6.0 – 6.5%
No information is readily available for the Andaman and Nicobar Islands, Myanmar, or Somalia.
The smaller economies of the Maldives and Sri Lanka are dependent on tourism and these are the ones affected most. The Maldives, in particular, is dependent on international aid for recovery. In Sri Lanka, while the port of Colombo was only slightly damaged, roads and railways along the south coast were destroyed, along with 100 000 homes and 150 000 vehicles.
So, despite the unprecedented scale of the loss of human life, homelessness and displaced populations, it seems that the macro economic impact of the disaster is marginal. The businesses affected were small, local and often part of local subsistence rather than global supply and this reflects, to a large degree, the economic mix of activities and companies in those coastal, often rural, areas. The damage occurred in rural areas rather than urban or industrial centres. The economic impact appears to be that the poor will become poorer, and development for the majority is little affected. Aceh accounts for only 2% of Indonesia’s’ vast GDP and population, with oil and gas contributing around 50% of Aceh’s economic activity. Equally, in India, the size of the country’s economy means that the macroeconomic impact is minimal.
UK importers of goods such as furniture from Indonesia have had little disruption to their supply chains because areas of production are some way away from tsunami areas.
Retailers who rely on suppliers in the region, particularly textile manufacturers, have also reported that it’s been business as usual. While some ports were affected, the main ports used for international shipping have operated without a glitch. The BBC reported that most retailers were optimistic about their supply chains.
Tourism activities have been severely, and negatively, affected in areas directly impacted where resorts were washed away. In the Maldives, 29 of the country’s 87 resort islands were damaged, more than 42 islands were flattened and the entire infrastructure in 13 of the 202 inhabited islands was wiped out. But countries are reporting no overall change in tourism volumes as some travellers choose to go to countries affected by the tsunami as a way of showing support. In Phuket, Thailand, 3000 hotel rooms were damaged or completely washed away, but 70% of the islands hotels were fully operational only a few days after the giant wave hit.
What can be taken from this? Location matters, reliance on infrastructure matters, deep links into local communities matter, if business is both to cope with unpredictable change, and be a beneficial force in helping people cope with unpredictable change. The nature of the tsunami meant that its impact was focussed on two particular business sectors: tourism and fishing.
There are some interesting points for businesses to note in comparing the effects of the tsunami with some of the other massive changes that have hit the Asian economies. The financial crisis of 1997-8 in South East Asia, and the SARS outbreaks and epidemic of 2002-3 were both events which spanned several months. The duration of these events meant that there was a great deal of uncertainty and loss of confidence which induced a negative spiral of investment and business. The tsunami’s impacts, while massive in human terms, could quickly be evaluated and understood so that government and business were able to prepare a response.
There is also some irony in the fact that while tourism and fishing revenues have been negatively affected, the aid and reconstruction process itself brings new investment. Because GDP measures all economic activity without considering whether that activity is overall positive or negative, then all the aid expenditure on food, water treatment, medicine buildings, clothing, transport and communication services goes to boost GDP. While it’s still not clear how many of the pledges of financial aid made in the immediate aftermath of the tsunami will actually translate into real investment, the international community had pledged US$ 5 billion by the middle of January.
There has also been some speculation that one outcome of the disaster could be to foster greater international co-operation between Asian nations, perhaps providing added impetus to the leapfrogging pattern of development those nations can follow.