Vanuatu after Cyclone Pam: the economic impact

Written by Matthew Dornan

Cyclone Pam - Photograph by Roderick J Mackenzie - New Zealand Defence Force via GettyThe emergency response in Vanuatu will continue for some months, such was the breadth and intensity of Cyclone Pam. Most households have been affected, with the Office of the Prime Minister claiming that up to 70 percent of Vanuatu’s 277,000 population may have been displaced. Food security, shelter, immunisation and access to clean water have to date, quite rightly, been the focus of the Vanuatu Government and humanitarian partners. Gradually, however, emergency response efforts will be replaced by reconstruction and recovery efforts, aimed at re-building Vanuatu’s infrastructure, housing stock, and agricultural and tourism enterprises. Indeed, reconstruction and recovery activities are already underway.

What is likely to be the economic impact of Cyclone Pam in the medium run (the next three to five years)? There has been little written about the economic impact of Cyclone Pam to date. For those in Vanuatu, such analysis is no doubt too soon – the focus has to date been on the immediate response. There is also limited data on which to base any analysis. The first comprehensive damage assessments will not be finalised for another few weeks. The World Bank and UNDP have been tasked with preparing a Post Disaster Needs Assessment by the Vanuatu Government, and will report back to government by 23 April, ahead of a donors’ conference.

Despite the current lack of data, experience with disasters in the Pacific and other parts of the world can provide us with some guidance on what to expect. Estimates of the damage to infrastructure, housing etc. caused by Cyclone Pam will probably be available by the end of the month. It is clear that such damage will be significant. To illustrate, Cyclone Evan in 2012 was estimated to have caused damage equal to approximately 30 percent of Samoa’s Gross Domestic Product (GDP). We can expect similar, and probably more significant, damage to have resulted from Cyclone Pam.

The impact of Cyclone Pam on future economic output is less clear. There is a substantial body of empirical literature on the lasting economic impact of disasters. Cross-country econometric studies have – perhaps unsurprisingly – reached mixed and often conflicting conclusions. Such empirical work is made difficult by the fact that disasters come in many forms. Vanuatu, in addition to being at risk of cyclones, is also affected by earthquakes, tsunamis, and volcanic eruptions – each of which has different economic impacts. Disasters impact the various economic sectors (such as agriculture and services) differently, and often affect specific geographical areas, not the entire country (Cyclone Pam was unique given the breadth of its impact, but even in this case some islands such as Santo were not severely affected). It is no wonder that cross-country studies are so problematic.

One of the most rigorous efforts to ascertain the lasting economic impact of disasters was commissioned by the World Bank in 2009. Loayza et al. (2009) control for a range of factors that also affect growth (education, institutions, trade openness etc.) when assessing the economic impact of various disasters on the economy as a whole, as well as three economic sectors: agriculture, industry and services. They find that a ‘typical’ (median) natural disaster has a negative impact on future economic growth over the medium run, but that the effect differs according to the type of disaster and the sector being discussed. In some cases, disasters are found to have positive economic impacts. Economic output in the industrial sector, for example, is found to be positively affected by floods, earthquakes, and storms (including cyclones), but not droughts – presumably due to the reconstruction activities that follow such disasters.*

That result differs when severe disasters – such as Cyclone Pam – are considered. The economic impact of severe disasters is more pronounced, with severe storms/cyclones negatively impacting future GDP, as well as future output in the agricultural, industrial and service sectors. In addition, a survey of the literature by Cavallo and Noy (2010) [pdf] concludes that the medium and long run economic impact of a disaster is influenced by a country’s “ability to mobilize significant funding for reconstruction”. Poor countries, they argue, suffer more in the medium and long run as a result of natural disasters, given that reconstruction and recovery efforts are not as effective.

In Vanuatu, this suggests that Cyclone Pam is likely to depress future economic output. The immediate costs to agriculture and tourism – the two most important economic sectors in Vanuatu – are already apparent. Crops used for both cash income and household consumption have been devastated. Although some crops will recover quickly, other crop plants such as kava (which comprised 10 percent of Vanuatu’s merchandise exports in 2014) can take several years to mature. The impact on agricultural producers will therefore be felt for some time.

Tourism arrivals have also collapsed as a result of the cyclone. Although some accommodation operators may be buoyed for the time being by the influx of aid workers, the majority of these visitors are soon likely to leave. Experience in Asia as well as the Pacific suggests that it typically takes several years for a country’s ‘brand’ to fully recover from a disaster, and for tourism arrivals to reach their pre-disaster heights (this article provides practical suggestions for Vanuatu’s tourism industry). In Samoa, tourism numbers remain below their levels prior to the 2009 tsunami. Vanuatu competes with Fiji for tourists from Australia and New Zealand. It is therefore likely that, until the Vanuatu ‘brand’ fully recovers, many tourists that would have travelled to Vanuatu will instead go to Fiji.

Offsetting these declines will be future economic activity associated with reconstruction. Clearly, there is a lot of infrastructure that needs rebuilding. President Lonsdale was quoted after the disaster as saying:

After all the development we have done for the last couple of years and this big cyclone came and just destroyed… all the infrastructure the government has… built. Completely destroyed.

Construction activity is therefore likely to prop up the Vanuatu economy in the coming years as its two main sectors – tourism and agriculture – suffer a downturn.

The ADB has recently revised its estimates of future GDP growth in Vanuatu as a result of Cyclone Pam. These estimates factor in the initial downturn caused by a decline in agricultural output and tourism numbers, followed by an increase in economic activity associated with reconstruction. Economic growth in 2015 is now forecast by the ADB to measure negative 0.5 percent of GDP, compared to the 4 percent growth forecast before the disaster. This would mean that the economy’s output in 2015 is $4 million USD lower than in the previous year, when it had been forecast to be $33 million USD higher. In other words, Vanuatu’s output in 2015 will be $37 million USD lower as a result of Pam than would otherwise have been the case.

But such forecasts, by the ADB’s own admission, are preliminary. In my view, a decline in economic activity of 0.5 percent is probably a conservative estimate. The Samoan economy shrank by 5.2 percent after the tsunami in 2009, although in that case, collapsing remittances caused by the Global Financial Crisis and job losses at the largest private sector employer were also responsible.

Economic growth in Vanuatu

Economic growth in VanuatuWhat is more certain is that the economy is likely to rebound as reconstruction of key infrastructure comes into full swing. The ADB forecasts growth of 4 percent in 2016. This is significant, and higher than growth in any year since 2008. However, it is slightly lower than the pre-Cyclone forecasts of the Vanuatu Government. The impact of Cyclone Pam on future economic output, relative to what would otherwise have taken place, is therefore likely to be negative – even when looking ahead to when reconstruction is at its peak.

The extent of the reconstruction and its associated economic impact will also depend on the availability of finance. Reconstruction will be expensive given the scale of the damage. Funding from development partners will certainly be important in meeting these costs. But experience around the world tells us that increases in development assistance never fully funds reconstruction. Indeed, in the case of the three cyclones that hit Vanuatu in 1985, damage was estimated by the World Bank at 127 percent of GDP. The ensuing aid ‘surge’ measured just 4.5 percent of GDP. In the more recent example of Cyclone Evan in Samoa, donor grants increased by less than 5 percent of GDP (damage, as noted above, was valued at 30 percent of GDP).

If we assume for a moment that damage in Vanuatu does equate to approximately 30 percent of GDP (I believe it will be higher), this is equivalent to $248 million USD. Add to this lower economic growth in 2015 to the tune of $37 million USD, and we have a total economic cost associated with Cyclone Pam of $285 million USD. This figure dwarfs the response from development partners. A typical major donor in Vanuatu has to date announced approximately $5 million USD in humanitarian assistance.

The key question for the Vanuatu Government in the coming years will therefore be how to finance the reconstruction effort. This and the policy implications of reconstruction will be the topic of another blog post.

Matthew Dornan is Research Fellow at the Development Policy Centre.

*It is important to stress that these studies, in examining economic impacts, are concerned with the economy’s (or sector’s) output. They are not concerned with economic welfare. Despite the frequent conflation of Gross Domestic Product (GDP) with well-being, they are not the same – a point repeatedly emphasised by Simon Kuznets, who established the first GDP indicator in the USA. A disaster illustrates this point well. The destruction and subsequent reconstruction of a house generates economic activity and thereby positively impacts GDP. Few would argue that this makes the owners better off.

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Matthew Dornan

Matthew Dornan is Deputy Director of the Development Policy Centre. He heads our program of research into Pacific development. His research focuses on aid flows, regional integration, energy, and broader infrastructure challenges in the Pacific islands region. Matthew has a PhD from ANU, and previously worked for the Australian aid program in the Pacific.

8 Comments

  • Hi Matt,

    One very late comment.

    It has to be noted that ever since 2009-2010, the government has been financing some of its expenditure through new domestic borrowing. This is reflected on the increase of ‘RBV’s claim on Government’ (Table 1) and the increase in ‘Outstanding Government Bond’ (Table 25) in this Quarterly Economic Review by RBV.
    These are old data but the trend should be considered when analyzing the economic loss from Pam.

    Tanna Coffee is probably the major agricultural exportable products affected.

    -Simon

  • Hi Matthew,

    The analysis is certainly useful.

    According to the Merchandise Trade Statistics (VNSO, 2015), Luganville contribute to 70 % of export and Port Vila 30% in 2014. Luganville represends the 4 northern provinces and Port Vila represents the 2 southern provinces. Pam damaged the 2 southern provinces. So the impact of Pam on agricultural export may be disqualified in your analysis. Tourism may be impacted. But tourism has is always been fragile. The inflow of Pam Aid should certainly alleviate some loss, at national level.

    -Simon Tiwok

    PS: I’m currently studying an MPP programme at VUW. I used to work at the Reserve Bank of Vanuatu. All views expressed here are my own.

  • Hi Matt,
    Thanks for producing this first assessment of the numbers involved. I think you rightly identified and highlighted a few key issues: (1) the disaster’s financial damages will be very large; (2) aid is not going to be sufficient to plug the funding-for-reconstruction gap (if we can rely on past experience); (3) tourism sector is very vulnerable to both damage to infrastructure and changes in perceptions – experience seems to suggest the sector takes years to recover from similar shocks (see for example Christchurch in NZ or the Hawaiian Island of Kauai).
    You have included in your assessment the financial damage to stocks (the immediate destruction of assets), and flow (the decrease in GDP growth), but you have not included the direct impact on people, in terms of their well-being and livelihoods. As a classic example of the Broken Window Fallacy (from Bastiat’s 1850 essay), disasters do result in short-term boost to economic activity during the period of reconstruction, but human welfare is clearly decreased by the need to spend precious resources on the reconstruction of physical assets. Research shows that in poorer countries and households this need usually comes at the expense of spending on non-food expenditure, such as education and health. As such, it can lead to long-term adverse impacts that can indeed “take Vanuatu back a decade of development.”
    The key to preventing that, it seems, is externally-supported aggressive and rapid reconstruction. The Pacific Insurance Pilot Program (PCRAFI) and the mostly in-kind bi-lateral assistance from Australia and New Zealand are clearly vastly insufficient for that to occur. The international community’s attention span is typically quite short, so it is also essential to speed up this process.

    • Hi Ilan,

      Thanks for the comment.

      Your points are well taken. I’m glad you emphasise the distinction between impacts on GDP and well-being It’s an important point to make, as I intimated in the footnote. Your more specific argument, that spending on infrastructure reconstruction comes at the expense of spending in other areas, I think emphasises the important role that donors could play in supporting reconstruction. Even where funds are not directed specifically to reconstruction activities, broader support from donors to government – such as in the form of budget support requested recently by the Vanuatu Govt – can useful support reconstruction. We will have a better indication as to the resources Australia will provide in support of reconstruction in about a month when the 2015-16 Australian budget is released.

  • Thanks for this Matt, it is a thoughtful and important piece of work that will form part of the basis of what will need to be serious thought about the longer term future of economic development in this country. It is important that the people who actually know about Vanuatu contribute to this debate as it unfolds, not least so we can be of use to those people who don’t have any understanding of the country’s political climate, economic trajectory to date, cultural diversity, etc (a lot of whom seem to be here right now) but who are going to be making some very important decisions and seeking to advise and/or influence the Natuman government (and successive governments no doubt). Although the disembarkation of passengers from the cruise ship that docked in Vila on Wednesday was greeted with joy (by everyone even those of us who normally complain about cruise ships as we sit in gridlocked traffic) the impact on tourism more widely is already being felt. Staff at 2 of Port Vila’s resorts have already been laid off – one of those properties will not reopen till December and the other has yet to disclose when it will reopen. Both Air Vanuatu and Virgin have revised their schedules, reducing the number of flights between here and Australia. There is a long road ahead.

    • Tess, it is really is frightning to comprehend now figures are involved. Life is all about figures and thanks for sharing your analysis. I would very much hope the government take this much in depth analysis to their grasps. I would hate to think the countries future potentially appears to be shady for the economy.

      JB

  • Good write-up, Matt.

    Some people with a close view of the situation have suggested that we will move from about 2.5% growth to ‘strongly negative’. As such, I suspect the RBV’s prediction is too rosy, and the ADB’s post-Pam estimate may be too modest.

    Govt. revenues are going to drop through the floor in part because of lower levels of activity, but also because of the tariff and tax holiday that GoV has announced on all materials and equipment needed for the rebuilding phase.

    A mitigating factor, however, is the speed with which the private sector has coped with the disaster. Digicel, TVL, UNELCO and other utilities/service providers are pretty much back in top gear, and retailers are benefiting from a short-term boom in hardware and related goods. Even wholesalers have benefited as GoV bought out pretty much the entire stock of foodstuffs in the country. None of this takes away from your point about the impact, but it will be interesting nonetheless to see how quickly the ‘bounce’ starts.

    • Thank you Dan and Tess,

      It is great to hear stories of businesses getting back on their feet from those in Vanuatu. Thank you also for your efforts to publicise the impact of Pam – the various blogs written by Tess (one less than 24 hours after the cyclone hit), and photos taken by Dan that were featured by newspapers around the world (Dan’s photo essay is available here).

      Dan – just to clarify one possible misunderstanding: the RBV forecasts were made prior to Cyclone Pam and have not been updated. So I’m sure the RBV will also downgrade its estimates of future growth (as done by ADB), but those revised estimates have not yet been made public.

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