Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) LSE RSS Contact Us YouTube Twitter

In any economy in which most economic activity is based on market transactions, it is to be expected that a natural disaster leading to large scale physical and human casualties must inevitably result in severe market dislocation. Following such an exogenous shock demand for some goods will decline sharply, while for others it will increase dramatically. A shortfall in supply may result not just from destruction of stocks and productive facilities, but from inadequate transport infrastructure, problems in the informational infrastructure and lack of organisation capacity. Central to any recovery process, therefore, must be the restoration of some stability in market transactions and the infrastructure that supports their operation. Notwithstanding the acknowledged importance of understanding the economic impact of such calamities and how economies and societies can recover from them, it is perhaps surprising that economists' understanding of this process of market stabilisation remains limited. Scholarly analysis of disasters of this kind has tended to focus on short-term relief and reconstruction, obviously a crucially important area for disaster research, rather than on the prospects for longer term stability, particularly given a number of analyses that suggest that the macro-economic effects of most natural disasters are relatively short-lived.

My research takes up this issue of market stabilisation and explores it in the specific case of the Great Kanto Earthquake of 1923, the greatest natural disaster experienced by Japan in modern times, an event in which earthquake, fire and tsunami laid waste to much of the Tokyo/Yokohama capital area, causing well over 100,000 deaths and tens of thousands more casualties. Contemporaries were aghast at the scale of devastation but also explicitly looked beyond that to the issue of market dislocation. While market transactions, they argued, could help to alleviate immediate suffering, they also had the potential to spread the negative effects of the disaster well beyond the devastated area. With domestic markets comparatively integrated and centralised (on the Tokyo area), and Japan itself increasingly integrated into the international economy, the impact of the shifts in supply and demand, or the damage inflicted on market infrastructure and institutions, was bound to have an effect much further afield. These concerns were borne out in the reality of what followed. A similar impact has been graphically demonstrated in more recent Japanese disasters, including that of March 2011, when destruction of plants producing crucial car components disrupted the global supply chain stalled the production of vehicles in assembly lines across the world.

figure 1
Figure1. Click to see larger image

Using the 1923 disaster as a case study for research in this area has a number of advantages. Firstly, the exceptional scale of the devastation and its location at the focal point of an integrated market system allow us better to trace the ways in which its impact was diffused across a wider geographical area. Secondly, the Japanese authorities, then as now, maintained extensive record keeping, and, notwithstanding the destruction of some records during the Pacific War, there exists a mass of statistical and qualitative data. For example, it is possible to map in some detail and for different localities the availability and prices of a range of goods over the months following the earthquake, allowing us to see how far demand and supply shocks in Tokyo were spread to different regions of the country. There is also a wealth of qualitative information from central and local government, from journals and newspapers, and from business organisations, indicating the problems caused by the disaster and the measures that might alleviate those problems. These data shed light on the institutional parameters of market stabilisation, and provide insights into the psychology of how individuals and groups responded to the shifting incentives consequent on a disaster situation. It is apparent, for instance, that the disaster provoked both national and international sympathy, not least because within Japan itself, at least, every single individual knew that it could just as easily have been them. At the same time, this did not prevent many from seeing the catastrophe as an opportunity to make a quick and unforeseen profit. Thirdly, these data can be used to shed light on economic geographical aspects of disasters, showing how disaster for one region could become opportunity for another. For example, total destruction of Japan's main export port, Yokohama, meant that all exports had to be shipped from the country's main import port, Kobe, several hundred miles to the West, as shown in the figure above giving the value of exports from Japan's top-ranking ports in the months after the disaster.

Both Yokohama and Kobe saw the disaster as having the potential to bring about major structural change within Japan’s economy, and as a consequence fought bitterly in defence of their own local interests.

Finally, although we now think of Japan as one of the world’s richest economies, in 1923 Japan was still a developing economy, with an average income level way below those of the industrial economies of Western Europe or the United States. Research has shown that on balance richer economies are more likely to recover quickly from devastating natural disasters than are poorer ones. And yet Japan, despite its low income level and the massive scale of the disaster, recovered relatively rapidly. In understanding better how short term devastation and panic was translated into longer term recovery and growth, this case study perhaps also has something to say about how the world’s poorer economies can prepare themselves against natural disasters, and better respond to them.