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Economic Consequences of Earthquakes: Preparing for the Unexpected


by Barclay Jones

Cornell University

The Meeting

The papers in this volume were commissioned to be presented at a public meeting held on September 12-13, 1995, and organized by the National Center for Earthquake Engineering Research, a consortium of universities with headquarters at the State University of New York at Buffalo, and sponsored by the National Science Foundation and the Federal Emergency Management Agency. The title of the conference was The Economic Consequences of Earthquakes: Preparing for the Unexpected, and it was concerned with the impact of damage to physical facilities on social and economic systems.

The papers are intended to be of interest to individuals and organizations which hold major stakes in and are dependent upon buildings and other facilities vulnerable to damage or disruption by an earthquake or other natural disaster in large metropolitan regions. Stakeholders in New York and other great financial centers, such as investors, owners, insurers, managers, and operators as well as designers and builders of this urban infrastructure, have concerns beyond the specific city in which they are located.

The Alaska Earthquake of 1964 and it Aftermath

The focus of the papers is timely given the tremendous economic effects of the two earthquakes which struck megacities in the past three years: Northridge and Kobe. It is also timely in terms of recent response to these societal impacts in New York through the adoption of the seismic building code in New York City and recent hazards mitigation summit meetings of New York State in Albany.

Our concern with the economic and social consequences of earthquakes dates just over three decades since the Great Alaska Earthquake struck the Prince William Sound area at 5:36 pm on Good Friday, March 27, 1964. The magnitude 8.3 earthquake, the most violent ever recorded in North America, devastated a large area containing about two thirds of the population and most of the economic activity. The highways and railroads were inoperable, the port facilities unusable, and water and sewerage systems out of operation.

It was a landmark event in many ways in addition to its seismic severity and the enormous land deformations which resulted. It represented a turning point in United States' approach to reconstruction following large scale disasters. The very short construction period that lay ahead before the onset of the severe and lengthy winter made it seem unlikely sufficient rebuilding of the extensive damage could be done quickly enough to avoid mass evacuation of the residents to the west coast states.

Alaska was a brand new state having been admitted to statehood five years before in 1959. The country was in the midst of the Cold War, its involvement in the Vietnam War was escalating, and Alaska was of enormous strategic importance. Evacuating the state and shutting down the economy was not an option. The concern of the Federal Government was with the impact on the social and economic system and its restoration in as short a time as possible.

President Lyndon B. Johnson concluded special organizational arrangements would have to replace the existing federal machinery to achieve the results required. He convened his cabinet in a disaster policy role into the Federal Reconstruction and Development Commission for Alaska under the chairmanship of Senator Clinton P. Anderson and appointed Dwight Ink, of the Department of Housing and Urban Development, executive director as operational coordinator of the rebuilding effort. The title emphasized the objective was more than restoring what had been destroyed and was to use the disaster as a means to promote future development.

Nine task forces were immediately established to deal with different aspects of the reconstruction. They operated so effectively that reconstruction was basically completed and all major public facilities were back in operation before the construction season ended, setting peacetime records. In spite of the time pressures, facility standards were upgraded and mitigation was given far more attention than in any previous disaster reconstruction.

Post-earthquake reconnaissance and studies were carried to new heights. President Johnson wrote to his Special Assistant for Science and Technology, Donald F. Hornig: "It is important we learn as many lessons as possible from the disastrous Alaskan earthquake. A scientific understanding of the events that occurred may make it possible to anticipate future earthquakes, there and elsewhere, so as to cope with them more adequately." The National Academy of Sciences was requested to establish the Committee on the Alaska Earthquake. The result is that, in the words of the Chair, Konrad Krauskopf of Stanford, "the Alaska earthquake became the best documented and most thoroughly studied earthquake in history." The central questions addressed by the Commission were: what was the impact of damage and destruction on the social and economic system; how could the system be restored to operation as rapidly as possible to contain further loss; and how could steps be taken during that reconstruction to make the system less vulnerable to future events. At various points over the last thirty years our attention has seemed to wander from these prime concerns to focus on other aspects, but we appear to be regaining the perspective we had with the Alaska experience.

Current Levels of Preparedness in Light of the Alaska Earthquake

Considering the Commission's questions is the purpose of the papers in this volume. Since the Alaska event, we have experienced numerous earthquakes that have caused extensive damage and resulted in great economic losses. We have done a great deal of research and learned much about the scientific aspects of earthquakes, the engineering response of all manner of elements of the built physical environment, and the social and economic impacts of seismic events. Our experience and knowledge have informed us about the potential hazard we face and what its effects are likely to be. In spite of this there has been an inadequate demand for protection to contain these losses, not only in regions of low seismicity such as the Atlantic seaboard, but also in regions of higher seismicity such as the Pacific coast (Kunreuther). Wider adoption of protective measures such as strengthening and retrofitting existing structures, adopting building codes and land use controls, and purchase of insurance need to be promulgated through interaction between owners, builders, financial institutions, insurers, and local, state, and federal government agencies, in other words all of the stakeholders in an area stricken by a natural disaster.

Measures to protect us against the effects of earthquakes must be taken. The economic consequences of seismic events are becoming greater every year. The accumulation of investments in buildings, equipment, and infrastructure such as highways, bridges, gas, water and sewer pipelines, electricity, telephone and cable wires are mounting at enormous rates. The growth of the economy means that business disruption is more costly. Urbanization is occurring throughout the world, and there are more extremely large metropolitan agglomerations than ever before. Potential losses are becoming greater than ever before at an enormous rate. In one decade four of the twenty-five largest agglomerations in the world, each with a population over ten million, have experienced earthquakes: Mexico City in 1985, Cairo in 1992, Los Angeles in 1994, and Kobe-Osaka in 1995.

The Hanshin-Awaji (Kobe) Earthquake of 1995

The most significant earthquake in the last half of the twentieth century was the Mw 6.9 Great Hanshin Awaji earthquake that struck Kobe, Japan, on January 17, 1995. It occurred directly under a modern industrialized urban area causing such destruction that the urban function was severely impaired if not completely disrupted. More than 150,000 buildings were destroyed, major highways and bridges failed, railroads and subways were made non-operational, and water, sewage, gas, electric power, and telephone systems were extensively damaged and out of service for varying periods of time. Kobe was one of the six largest container cargo ports in the world and the major one in Japan. It was practically destroyed and the rebuilding will require about two years. Its relative importance as a major hub and transhipment point in Asia had declined over the past decade, and there is question that it will ever regain its former importance since patterns of shipping have had to be rearranged during its reconstruction. Total damage and destruction is estimated at more than $100 billion, or about 2% of the GNP of Japan (Scawthorn et al.).

Seismic Risk in the Central and Eastern United States

Japan and California seem remote to populations in the eastern United States, and the threat of earthquakes is easy to dismiss. However, that is not necessarily prudent. Earthquake hazard assessment in the eastern United States presents problems because of the quantity and quality of data available, and different assessments result in different evaluations of the hazard (Algermissen). The seismic hazard in the eastern United States is significant but low compared to the west. There are longer recurrence periods for the same magnitude earthquakes. The recurrence periods are so long and the history of settlement in the east so short, there is greater uncertainty in hazard assessments. There are larger damage areas in the east than in the west for earthquakes of the same magnitude. It is possible, however, to develop design guidelines for specific facilities using annual exceedance probabilities for ground motions. Scenarios for metropolitan areas can be devised for different magnitude events with epicenters at different distances to assist facility design and develop construction codes (Jacob).

The eastern United States has experienced numerous damaging earthquakes and a vast number of minor ones, many devastating hurricanes, and the full range of natural disasters, and it is vulnerable to repetitions of those events. The damaging earthquakes that struck Boston in 1755, New Madrid, Missouri, in 1811, New York in 1884, Charleston, S.C. in 1886, and current seismicity in the New Madrid and Saint Lawrence Valley Seismic Zones certainly attest to the seismic hazard. However, much of the population is unprepared, does not consider these hazards, and takes no action to reduce its vulnerability. A small portion of the population is concerned with these threats, including scientists, engineers, public officials, and stakeholders who own, manage, finance, or insure properties that are subject to potential damage. The Federal Emergency Management Agency is directing much of its attention to heightening awareness, increasing education, and working with others who are concerned to encourage mitigation measures so as to reduce loss of life, injuries, property damage, and economic disruption (Moore). Earthquakes and other disasters will continue to occur. Those who will survive are those who have prepared.

Governments, especially at the state and local levels, have two responsibilities in protecting their populations from earthquakes and other disasters. First, since social and economic systems are so vulnerable to the infrastructure largely owned, maintained, and operated by state and local governments, they must see to it that these facilities have been retrofitted and appropriate mitigation measures taken to protect them to the greatest feasible extent. Second, they have powers to regulate buildings and facilities built by others, both new and existing ones, and ensure that they are constructed to some specified level of protection.

Significance of Secondary Losses

One of the major lessons learned from the earthquake that struck Kobe, and reinforced lessons learned from Northridge, was that failures of infrastructure systems can cause the most disruption to the social and economic system. Research on aseismic design was originally focussed on buildings, but over the past twenty-five years it has become increasingly concerned with infrastructure systems, particularly transportation facilities, water supply and distribution systems, gas and electric distribution, and telephone and other communications. Infrastructure systems are extremely vulnerable and their failure can result in failures of other lifelines and losses from disruption of activities that are much greater than the cost to repair damage. Mitigation measures can reduce risks at costs that are relatively modest (Eguchi). A type of infrastructure that is often not considered is that of port facilities even though they may play major roles in providing supplies for and exporting the product of the regional economy. Ports are particularly vulnerable by their nature because they have to be located next to harbors, often on soft soils and fill. Port facilities have been damaged in other earthquakes including Alaska in 1964, Niigata in 1964, Chile in 1985, San Francisco and Oakland in 1989, the Philippines in 1990, and, to a minor extent, Los Angeles in 1994. However, the devastation of the port facilities in Kobe was the major event of its kind (Werner, et al.). The impact of such loss can be serious because major ports are centers of commerce, handle not only regional but international trade, and are linked with other sectors such as land transport, finance, banking, insurance, and sophisticated business and professional services. New York surpassed Philadelphia as the major city in North America at the beginning of the 19th century because of the superiority of its harbor and location of its port. Port Newark is still the major container port on the east coast.

Developments in New York City

New York City, as a few other local and state governments in the eastern United States, is starting to assume both responsibilities. For example, the 900 city-owned of the 2200 bridges in the New York Metropolitan Area are assessed for seismic vulnerability and priorities are assigned for upgrading or reconstruction (Yanev et al.). Regarding regulation, over a period of a decade after 1984, a seismic code committee drafted an Earthquake Code which became part of the New York City Building Code in 1995 (Nordenson, Miele). Much remains to be done to meet both responsibilities in New York, but even more so in other eastern cities which have not even started to confront their hazards.

Economic Consequences

The major economic consequences of earthquakes result from damage to elements of the built environment that are essential to the operation of the economic activities in the impacted region. Some economic sectors are by their nature more vulnerable than others. Some sectors will even find an increase in their activity because of demands placed on them by the disaster. Some activities will be winners while others will be losers. From the perspective of the market analyst, impact is gauged by product line, the specific good or service a business offers (De Voe). Statistical and economic analysis deal with sectors of economic activity that group a number of products together (Tierney, Cochrane). There may be both winners and losers in a particular sector. Factors that will cause businesses to lose include the direct damage they entail to their facilities because of their location in the area that was stricken. Other factors include their dependency on damaged or destroyed support systems of transport and communication for workers, customers, supplies, shipments, water, electricity, gas, telephone, and other services. Businesses that may benefit are ones for which there is an increased demand for their products or services for relief, clearing and removing debris, repair and restoration, and reconstruction. In total, to an extent depending on flows of external assistance from other regions and local accumulation of resources, the regional economy may experience an increase rather than a decrease in income. However, regardless of the level of specificity of analysis, whether product or sector or region, there is agreement that the funds that are spent will be diverted from other uses for which they were intended. Whether or not a business loses will be greatly influenced in addition to its sector, by the extent to which the managers have planned, taken precautionary preparations, and necessary measures to mitigate the impact of a seismic event.

Insurance Impacts

There is agreement the insurance industry would be devastated by a catastrophic event such as Kobe and many companies would fail. The population of the country, and the facilities that house and accommodate it, are increasingly concentrating along the coasts where they are more exposed to both earthquakes and hurricanes. These are the same geographical areas from which premiums are collected so that the opportunity for distributing risk is limited. Potential losses are rising above the capacity of the insurance industry to accommodate major disasters within a short time frame (Lecomte). Solutions must be found to the structure of the industry, if insurance coverage for natural disasters is to remain available. The claims paid after Hurricane Andrew and the Northridge earthquake were enormous. But these seem to be a small share of the total cost. In Northridge only about one in five businesses carried earthquake insurance for either damage or business interruption, and only slightly more than a quarter of those filed claims (Tierney). Most losses seem to have been covered by the businesses themselves and insurance payments are but a fraction of the total. What needs to be done is to increase the asset value of the industry far beyond what the present structure and mode of operation permit. One possible and promising solution would be to make insurance a capital asset and permit selling shares like stocks and bonds in the financial market (Dwyer). This would permit large investors such as mutual funds and pension funds as well as smaller holders to participate, adding enormously to the asset value of the insurers.


In summary, the economic cost of earthquakes and other natural disasters is continually rising and the potential future losses are staggering. The existing Federal machinery for providing assistance after disasters is reaching the point where it will no longer work. It needs to be completely overhauled and new mechanisms devised. The insurance industry also needs to be completely overhauled, since the way it is currently structured it will not be able to cope with a series of major events or a catastrophic one. More effort on the parts of individuals, organizations, and businesses to be better prepared and take mitigating measures before the event can help a great deal to lessen future costs. While the protection provided to individuals and organizations by reducing their vulnerability through mitigation is essential, its effects cannot begin to keep pace with escalating future costs. Such measures are no substitute for complete revision of the ways we deal with the losses from disasters. These are matters of great concern to everyone, not merely those who live in hazard prone areas. Post-disaster assistance results in complex interregional, interorganizational, interpersonal, and intertemporal redistribution of resources. As a consequence, in the last analysis we are all losers from earthquakes and other disasters, wherever they occur.

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