Reconstruction after earthquake

Dawn, October 22, 2005
The cost of reconstruction
By Kaiser Bengali


THE October 8 earthquake will be long remembered as a cataclysmic event in Pakistan’s history for a very long time to come. The sweep of death and destruction across a vast swathe of territory from Kashmir to Hazara and Swat and Islamabad is heart-rending. The calamity has affected rich and poor, ministers and ministered, men and women, and old and young indiscriminately. More than a week after the calamity, news and images of the devastation and mangled bodies do not fail to shock. Adding to the trauma are footage of heaps of children’s bodies trapped under the debris of collapsed school buildings.

In the parts of the country that have been so affected, the standard question and discussion among the survivors is who among them is alive and who is not. In the parts of the country that have not been affected, there are many who have lost someone they knew. And not a day passes without coming across someone who has lost someone in the tragedy. The sense of personal loss is widespread.

Questions arise about the state of preparedness and the efficacy of response by the state machinery. These questions are, however, inappropriate at this point of time, with bodies still being dug out and burials taking place but they will and should be raised and answered at an appropriate moment in the next few weeks. The issue is not one of playing the blame game and resorting to witch-hunting, but of holding those occupying public offices accountable and ensuring that any future calamity anywhere in the country is handled more effectively and efficiently.

This is important in view of the undocumented lessons of the disastrous May 1999 cyclone in the Badin and Thatta districts of Sindh, where storm warnings were not conveyed to the people at large, relief work was patchy and geared more for the benefit of television cameras, rehabilitation and reconstruction work was never undertaken in earnest and the affected population was all but forgotten and abandoned.

Relief work in the earthquake affected areas is currently underway and, given the scale of the human tragedy, will have to be maintained for a length of time. Survivors will need direct, active and continuing provisions in terms of temporary housing, food and medical care for up to a year at the least. Among the survivors is a class of long-term dependents, i.e. thousands who have been widowed, orphaned and disabled and who no longer have the extended family support because of the extensity of deaths. Included in this category are the elderly, who have lost their supporting sons. And particularly vulnerable are teenage girls and young women who have lost their extended family members. This class of dependents will need to be supported, looked after and cared for over a decade or two.

Beyond the massive relief effort that will have to be undertaken over a length of time, there will also be the need to deal with the impact on the economy. In this respect, three kinds of statements have appeared from responsible elements at the highest level of officialdom. One, that there will be no impact; two, that sufficient foreign aid will begin to flow in; and three, that the reconstruction work will spur the economy on account of enhanced demand for construction related materials.

All the above presumptions are incorrect. First, statements denying any impact are downright irresponsible. Second, statements to the extent that sufficient foreign aid will flow in to mitigate the impact betray a mindset that thrives on living off the spoils that come as a result of human tragedy. The generals and their collaborators under Ziaul Haq prospered from the travails of the Afghan people for over a decade and the current dispensation under General Musharraf has benefited from the largesse that came by way of the tragedy of 9/11. The latest catastrophe in Pakistan itself now appears to have rekindled their hopes for more manna to drop from heaven.

Third, statements relating to the boost that the economy will receive from the reconstruction activity are conceptually erroneous. For an underdeveloped country, the purpose of economic development activity is to increase the size of the economy. Reconstructing a part of the economy that has suffered damage implies that scarce resources that could have been used to develop the economy further will now be devoted to rebuilding what has been destroyed. There is, as such, no efficiency gain and net growth cannot be expected to be necessarily higher as a result.

Furthermore, it is certainly likely that cement manufacturers in Punjab will profit from enhanced cement sales as a result of the losses suffered by home owners in Muzaffarabad or that FWO or NLC will profit from the NWFP government’s road rebuilding expenditures. For the economy as a whole, however, the respective profits and losses cancel each other out. Benefiting one part of the country or one sector out of the costs suffered by another part or sector is not what defines growth and development.

While some sections are likely to profit in various ways from the plight of the earthquake victims, the economic aftershocks will have to be managed. The economic impact will occur over three levels: household, regional and national. The impact on the economy of households in the affected areas has been direct and immediate. Most households have lost earning members of the family and assets that provided them with their livelihood. Landslides have obliterated or eroded agricultural land on mountain and hill slopes, and the owners of these lands have been rendered landless.

Orchards have been uprooted, requiring land to be levelled and new trees planted; however the trees will take a number of years to bear fruit. There is a low likelihood of income from tourism resuming in the immediate future until hotels and other power, transport and communications infrastructure are rebuilt. Individual shops can be constructed by private means relatively quickly, but sales are likely to be low on account of weak overall purchasing power.

The regional economy has suffered extensive damage in terms of physical infrastructure. The cities of Muzaffarabad, Rawalakot, Bagh, Balakot and other towns and villages have been razed to the ground. Roads, bridges, local hydropower units, power and telephone lines, urban water supply and sewerage facilities, etc., have been destroyed. The same holds true for public buildings housing government offices, university facilities, schools, hospitals and medical centres as well as defence installations. If the reconstruction effort is uncoordinated, it will lead to the ‘slumification’ of the entire region.

There is thus an urgent need to prepare a five-year Redevelopment Plan, with four overarching objectives: one, to attempt to erase the physical traces of the earthquake in five years; two, to rebuild the main cities and towns in a planned manner, keeping in view earthquake-resistant parameters; three, to develop the regional infrastructure for a tourist economy; and four, to ensure that the entire population is economically rehabilitated at least to the point where they were before the earthquake struck.

The national economy is not likely to be affected significantly by the earthquake in terms of loss of output; given that the area is not a major producer of either agricultural or manufactured products. Localized shortages of fruits and vegetables, and the consequential price rises of these items, are likely to occur and affect areas up to Islamabad, Peshawar and Lahore. However, the fiscal and macroeconomic impact on the economy will certainly be adverse and substantially so and bear heavily on inflation. Given that international oil price rises and the ill-advised excessively liberal credit policy of the past three years have already generated an inflationary spiral, a third source of inflation will be detrimental to macroeconomic stability as well as to household economies.

The rescue and relief operation that has been undertaken so far has cost the public exchequer a significant sum. This expenditure is continuing and relief expenditures are likely to continue for several months. These expenditures will disrupt the budgetary allocations as determined in June 2005. Furthermore, the reconstruction work as outlined above will demand several hundred million rupees each year for the next five years at least. Necessary costs will also have to be borne to repair the damage to defence installations along the Line of Control.

The sum of the above expenditures will increase the budget deficit. There are four means of financing this deficit: printing money, borrowing, enhanced taxation, and reallocation of existing expenditures. Printing money, or deficit financing, will increase money supply and directly impact on the price level. Borrowing will increase interest rates and, consequently, the cost of capital, as well as raise the national debt. Enhanced indirect taxation will raise production costs and contribute to inflation. Re-allocation of development expenditure will hurt areas from where development funds are being diverted.

However, there are two non-inflationary options: one, raising direct taxation through a surcharge on non-salary incomes and the reintroduction of wealth tax and capital gains tax, and two, reducing non-development expenditures. There are several possibilities on the non-development expenditure front. The federal ministries and related divisions and departments related to the concurrent list subjects can be abolished or at least substantially downsized. There are two agencies dealing with coastal security — Coast Guards and Maritime Security Agency — one of them can be abolished.

The ministry of defence is building a new GHQ in Islamabad, the cost of which has not been made public nor the amount sanctioned by parliament. Questions of legality apart, the construction can stop and the designated funds transferred to reconstruction in the quake-affected areas. After all, the people of Pakistan and the people and governments of foreign countries cannot be asked to contribute when resources available with the government continuing to indulge in unnecessary and wasteful expenditures.

A restructuring of public finances is also important for economic as well as political reasons as well. The failure of General Yahya Khan’s regime to respond adequately to the East Pakistan cyclone in 1970 played a significant role in driving the final nail in the coffin of the erstwhile province’s relations with Islamabad. The lessons of history are stark and painful and cannot be ignored.