Impact of earthquake damages on economy of Albania in short term period

Previous studies on the impact of natural disasters (including earthquakes) on the economy can be grouped into estimates of short-term impacts and long-term impacts. A typical way to detect this impact is to compare the ex post level of economic development to its level before a disaster. When examining country-level data, several studies have found that disasters have little to no effect in the long run, with wealthy countries which need short time to go in their long-term equilibrium, while poor countries, as well as small states show less resilience.

Short-term impacts of disasters are the main focus of this discussion, and more valuable to be an open dialogue between government and citizens. To have a better view we have to use some statistics and also the arguments using a simple before-and-after comparison of variables, including Gross Domestic Product (GDP), the growth rate, and inflation rate up to 1 – 3 years before and after disaster.

Economic growth of Albania has slowly gained momentum over the years following the European financial crisis, and a slight slowdown as a consequence in last two year of big European economies.

Economic indicators for the period 2016-2019 show that Albania has not transitioned to a new high growth trajectory, but there is some indication that a slow transition to a more sustainable growth model is underway.  

Real GDP growth for last three years is estimated at above 3% and Albania has seen moderate yet consistent growth across sectors and a gradually falling rate of unemployment since mid-2014, when in 2019 it was the two decades historical low level rate of unemployment at 11.9%.  

The level of growth analyzing the period of 8 years ago should be seen as an achievement if not forgotten, when Albania embarked on a fiscal stabilization program supported and assisted by IMF financial resources as well as the impact with consequences in both years after the fall in oil prices fell sharply 4-5 years ago.

While inflation has fallen substantially in the latest years, as projected by the Bank of Albania. The Bank of Albania estimates that the monetary policy will continue to provide a positive contribution to the progress of the Albanian economy by targeting an inflation rate around 3.0%.

In the case of natural disaster of Albania, in November 2019 is yet early to put the figures and make comparisons of periods, but we can use the conclusion of other studies and arguments to bring in our attention and to have a clear picture of what tracks is better to be followed.

So, Albala-Bertrand (1993)[1] looked at statistics of 28 natural hazard-induced disasters in 26 countries for the period 1960–1979 and he found that GDP is not affected, and GDP growth is slightly positively stimulated by these disasters.

Meantime, Noy (2009) undertook another multicounty study using the Emergency Events Database (EM-DAT) data for a panel of 109 countries for the period 1970–2003. The results show that in developing countries natural disasters have a negative impact on GDP growth of approximately 9%.

For Organization for Economic Cooperation and Development countries, there is a slightly positive impact of less than 1%.

Hochrainer (2009) took an approach that developed a counterfactual projection of GDP and then compared this to the actual value of GDP after disasters. Based on his sample of 225 large natural disaster events from 1960 to 2005, he found that the negative impact of disasters on GDP lasts for up to 5 years, with a median reduction of 4% compared to a baseline of 5 years after disasters.

Is true that earthquakes cause an initial drop in output because of the destruction of both human and financial capitals. Due to the incentivized inflow of external capitals and investment and the higher return on post disaster capital, the output trajectory of the year can return to the year before.

Different natural disasters could create different macroeconomic impact scenarios. This is related to the mechanism of damage caused by disasters. Compared with earthquakes, meteorological disasters occur more frequently and often at specific times of the year, which makes them easier to predict[2].

Chhibber and Laajaj (2008) considered that an earthquake is more likely to result in ‘‘build-back’’ or ‘‘build-back-better’’ because considerable reconstruction might trigger prosperity and eventually lead to technological change. Conversely, a drought may not bring much effect on economic growth because the loss is generally restricted to annual or seasonal production.

The high correlation between development levels, types of disaster, and country economic growth challenges our understanding of the disaster management behaviors of governments.

Compared with the earthquake in Albania, in the Turkey earthquake in 2020, the positive effect takes a longer time (to the later one) on implementing reconstruction investments, possibly due to financial and technical dimensions of absorption of damage done in industrialized countries like Turkey, which maintain higher standards of reconstruction than developing countries.

It should be borne in mind, however, that financial constraints are another major reason for Albania, which can be confirmed to guarantee a response to the rebuilding situation only through international financial transfers, which may not be able to fill the gap left unfulfilled from country finances.

Also, technical constraints (including knowhow) are driven by the imbalance between excess demand for certain skills and limited supply.  Albania faces a unique knowhow constraint that is deeply rooted in its closed-off past[3]. 

However, the positive impact of earthquakes on reconstruction for countries such as Albania, which have experienced the same natural catastrophic situation, has increased and has been instrumental in public finances in terms of revenue generated by post-earthquake processes. Overall, short-term economic development scenarios are still robust in every point of view.

Earthquakes will have a longer impact in the case of earthquake in Albania in 2019, because it will still enjoy the positive stimulus of reconstruction investment until the end of the second year, because of the difficulties in implementation of ‘mechanism of reconstruction”.

Right now the Albanian government has high expectation that post disaster will be followed by a huge worldwide effort to help citizens and economy, with a lump sum around a billion of dollars, including the government funds and citizens and local donor’s funds.

In the difficult year following the 2019 earthquake, the Albanian economy nevertheless is expected to record a stronger growth, if the all the mechanism of central and local government and sectors of economy and businesses will be synchronized together with the civic demand.

It’s a tough exercise!

However, even if not stronger growth what will be needed in the future is the readiness to be reduced significantly unemployment and poverty. This will require progress on a number of priority reform areas, including ongoing reforms to Albania’s system of economic governance, which is more important than everything in this country.

Loss compensation is the driving force of the post disaster recovery, and social productivity and sustainable economic development are the economic basis of compensation for disaster losses. To this end, economic development is the most effective way to compensate for disaster losses.

Economy is the first!

[1] Impact of Economic Development Levels and Disaster Types on the Short-Term Macroeconomic Consequences of Natural Hazard-Induced Disasters in China, September 2019, www.springer.com.13753

[2]Skidmore and Toya 2002

[3] https://growthlab.cid.harvard.edu/files/growthlab/files/alb_growth_diagnostic_report.pdf